Corporate King Makers
Why companies should bet on creating category kings
On July 6th 2017, Jawbone, the consumer electronics firm once valued at $3.2 billion, was reported to be going out of business.
According to CB Insights, it is the second most costliest startup death by a VC-backed company globally since at least 2009. To date Jawbone had raised over $929.9 million in disclosed funding, meaning plenty of institutional investors, including JP Morgan, Andreessen Horowitz, Sequoia Capital, Black Rock and even the Kuwait Investment Authority, got it wrong. There is plenty of analysis on why Jawbone failed but I want to point to one specific area — they were never kings.
In today’s technology-driven economy, new product & service categories are being constantly created and unchallenged monopolies such as Google, Facebook, Amazon, Netflix and Apple loom over the landscape. Having a unique competitive advantage is not enough; one has to dominate, which means one has to be first to scale.
Consider Jawbone’s categories: noise-cancellation headphones, portable speakers, wearable activity trackers. They developed proprietary patented technologies in all three categories, were the first movers in the first two, yet they never managed to dominate any of them. They were never kings.
Eventually they got squeezed out by similar alternatives, many cheaper or better designed, never able to leverage their technological advantage to generate above-average returns.
And now they are no more.
What does this mean for companies looking to partner with startups?
When companies evaluate startups for partnership or investment, just examining the base technology, market potential or the team’s technical expertise is not enough. Essentially, companies should ask themselves two questions:
- “Does this startup team have what it takes to be king?”
- “Can we accelerate them so they can be the first to scale?”
Startups need companies because they have the reach and resources startups need to get to market, get to scale faster. Furthermore, in the early stages of a category’s development, there are usually multiple startups vying for limited market share and investment capital. In such a case, corporations have the opportunity to be king makers.
Consider Square, the crowned king of the mobile POS space in the US. Alongside the fame of its founder, Jack Dorsey, Square’s market acceptance and credibility was boosted by investment from Visa and partnerships with Apple and Starbucks. Although its partnership with Starbucks was strongly criticized for its drain on profits, it supported Square’s reputation among merchants and consumers:
If Square’s payments processing technology was good enough for a chain like Starbucks, it would be good enough for any mom-and-pop store. And that is effectively what happened: Once-skeptical merchants flocked to Square’s platform.
By lending a startup their business expertise, established sales channels, and customer data, corporations can decide which startup to accelerate to scale and thereby crowning that startup as the category king. The key is being able to do this quickly, at the speed of a startup, absent all the bureaucratic red tape and multiple levels of decision making. This way, a corporation is not only betting on the right horse, they are giving that horse a significant head start in a race where only one startup wins BIG.
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