The Fallacy of the ‘Already Exists’ Startup Bias.
Why you shouldn’t not start a company because competition exists.
Starting a new company is a huge deal. The massive time investment required to start any new company, the personal and career sacrifices we make when we do so, and the uncertainty of starting a business are all huge risks to take. Sometimes when considering starting a company we have the tendency to tell ourselves various things — those voices in our heads tell us we should or shouldn’t jump off the cliff. Some of these voices are valid: how will I pay my bills when working for no salary? Will the company ultimately be successful? How will my company compete and how many years will it take to payoff? But other thoughts are not always based in reality. For instance: another company is already making a similar product therefore I shouldn’t start a similar one. This company has tried this idea and optimized their product such that there is no longer an opportunity for a similar but differentiated company. This thought has numerous implications: the incumbent has 100% market share and none can be taken from it. Another is all users that would ever use a similar product are already using it and no company could ever build something that is similar but improved in one or more ways. A Silicon Valley classic is a company tried to do this ten years ago and failed, therefore it’s not a good idea.
Let’s look at some counter-examples to illustrate how these thoughts are not based in reality. You will quickly see that similar to established cognitive biases, there appear to be additional biases that are specific to startups — we call this one the already-exists bias. Thankfully, there’s an easy way to correct these thoughts and the behavior they cause — stopping to think through the various conclusions we have reached and becoming aware of the assumptions our conclusions are based upon. We will immediately see that if the correct conclusion was to not start a new company just because competitors exist, many of today’s great companies would never have been founded.
Way back in 1936, the founders of GEICO could have said to themselves that because there are already hundreds of companies that sell automobile insurance that it would be a bad idea to start a company that sells almost exactly the same product. Even in what Warren Buffett refers to as commodity businesses such as banking and auto-insurance above - where the product is just a pile of money - not a single new bank or insurance company would have launched during the past two centuries if the founders of those that have believed they couldn’t be different or better somehow.
There are many modern examples of new businesses that entered an industry with strong competitors that later went on to thrive and eventually dominate. Google launched in 1998, years after the first search engines had been created and competed against multi-billion dollar market capitalization companies like AltaVista, Lycos, and Ask.com. Google distinguished itself from and became better than its competition in at least two ways. The distinction is one that is easy to forget about, and that’s that Google’s design was super simple compared to the portals of Yahoo and other sites.
Google also offered better features —namely that its search results were far and away better than the competition. This is obviously the killer feature of search engines. If your product does one thing only, you’ll either have to be superlatively better or drastically cheaper, if not free, to get people to switch from the version they are already using. And speaking of free, how did Google enter the smartphone market and become the most installed mobile operating system after only a few short years without a better product? It gave Android away for free (don’t try this at home unless you clearly have a synergistic, logical reason to give away a product for free like Google did). Google’s Android arguably reached feature-parity with iOS in a couple of years, but the software for Android was free for smartphone manufacturers, and they needed an OS. That’s how Android became the most widely used mobile operating system.
Another example is FaceBook. MySpace was the most visited Internet site until 2006. As we all know Facebook became the dominant U.S. social network, with 1000x the monthly active users MySpace now receives in visits. Thank you Mark for not deciding to never start or give up on Facebook because MySpace existed. I assume that never crossed your mind.
Yet another is Uber, a human transportation service that is incomparably better than legacy taxi-cabs (with ‘legacy’s negative connotation intended, especially in SF). The legacy taxi-cabs had solved a problem: they delivered us from one place to another in a short amount of time. But did the industry perform that service as well as it could have, especially after the Internet could be carried around in the palm of our hands? Of course it didn’t, and that’s why it is now being disrupted.
The example of Uber brings up an important lesson: technological and other environmental conditions can change, which could drastically increase the odds of success a new competitor may have competing against incumbents. Uber is a prime example of a new technology causing an environmental change to ripen an industry for disruption.
The flip side of don’t start something because someone else is working on the same thing is that you better be damn sure that at least one facet of your product or service is off-the-charts better than your competitors. It could be pricing, speed, convenience, design, selection, features or security and trust. To be successful your product or service will probably need to be better in more than one way. If the competitors can’t offer one thing you can or you can do it for a greatly reduced price, you might be able to carve out a large enough niche to build a decent-sized business. Another approach is to target a small niche initially, gain momentum, then expand and compete more directly and/or vertically when you are established. GEICO is a classic example of this approach. GEICO began with the insight that government employees have fewer accidents and that selling insurance directly, by phone and mail, could result in lower costs that could drive increased sales and consequent higher profitability. This was a niche the founders of GEICO identified and exploited, eventually becoming the second largest auto insurer in the U.S.
FOBO, a local marketplace company that connects buyers and sellers of electronics, actually has the chance to carve a decent niche away from Amazon, Craigslist, and eBay (ACE). If FOBO can get their users the items they want faster and easier than ACE, FOBO stands a chance. But we know FOBO won’t be able to beat ACE on price or selection, at least not for a number of years. FOBO can do things ACE doesn’t already do well, such as get the money or product to the users more quickly after a purchase without requiring the user to drive to the seller’s location, and removing the possibility of dealing with bad-faith actors on Craigslist and eBay, which FOBO is already doing well.
Digital Ocean, a cloud computing provider that grew 5084.64% in six months in 2013, is learning that if the user experience is an order of magnitude simpler and more beautiful than competitors you can compete with entrenched competition. We should add that Digital Ocean is also offering lower prices (especially for bandwidth) and vastly simplified pricing options.
.One type of business that you should almost never compete against is one that enjoys network effects. Fortunately for those considering starting new ventures, there are few businesses that truly benefit from network effects; however, there are a growing number of these businesses, as the sharing-economy continues to proliferate. Businesses that consist of users sharing, renting, or selling their goods, space, or time are all networks. It’s no mystery why there are an increasing number of these businesses: there is now a perfect platform for sharing and communicating from almost wherever we are - Internet-connected mobile devices. I can’t discourage you enough from starting a venture that will compete against network-effected businesses. Let’s think about Uber and its primary, formidable and well-capitalized competitor — Lyft. Say you wanted to start another one of these — how are you going to compete? What advantage over Uber and Lyft will you have? Are you really going to get drivers to work for you for less so you can charge your users less? Will you be able to charge less than Uber and Lyft, each of which have hundreds of millions of dollars sitting in the bank? How are you going to convince drivers to drive for you when you don’t have users constantly requesting rides. This last chicken-egg problem is probably the advantage investors see in Uber.
Don’t decide not to start a business just because there are already similar businesses.
Do spend much of your time prior to starting a new business identifying exactly how you will distinguish yourself and how your product or service will be better.
