Startups have always loved being First Movers. It’s time to change that.
The First Movers
There is something enticing about new unoccupied markets. It’s uncharted territory with no apparent competitors and an opportunity to capture the market before others join the feast. Companies choosing this strategy are called First Movers. In the late 80s, the term “first mover advantage” was coined and soon became somewhat synonymous to success. However, just a few years later the strategy was found surprisingly dysfunctional, with a failure rate of 47% of companies choosing this strategy.
When you move first, you get to be the first to learn the real customer need, make all the mistakes, educate the customers, and burn all that money to prove the market demand. If you have deep pockets and the capability to build strong moats (IPR protection, exclusive access to scarce assets, vendor lock-in…), this strategy could work. However, that has very rarely been the case in the tech industry and even more uncommon within startups.
My personal startup experience is from being a First Mover: the digitalization of ships practically didn’t exist when our startup Eniram entered the marine industry in 2005. It quickly became apparent that most parts of the market were utterly benighted on the possibilities of data. We found our niche of early adopters from cruise companies (Royal Caribbean Cruises, Norwegian Cruise Line, etc.) and succeeded on building a strong foothold within that limited market. Merchant ship market, on the other hand, turned out to be a hard nut to crack. Considering the massive efforts we spent on educating the market, our results were far from flattering. Eventually, we managed to reach a tad over 10M€ revenue when Eniram was acquired in 2016. However, the majority of the shipping market still today awaits for the right product to appear. It seems the market is only now gradually starting to pick up but the adoption is still slow.
The desire for being the First Mover is clearly noticeable in the startup scene in general. Most startups are inventing something totally new, wanting desperately to be the first creators of new technology. However, these solutions often seem to be very distant from the current acknowledged customer needs. Hence, instead of just inventing a new product, they actually end up inventing new customer needs, as well. But that adds a totally new level of complexity and risk to the product discovery process. Oftentimes the risk of developing a better product is low as you roughly already know that it is doable. On the other hand, developing a new market is a very risky move, and the riskier it gets, the further you deviate from the existing proven customer needs, business models and validated markets. In a study conducted by CB Insights, the top reason for startup failure was “No market need”, with a whopping 42% of startups claiming it was the reason they failed.
The Fast Followers
The most successful disruptors have not been aiming at a new customer need at all. Instead, they have just invented a new way to meet an already identified customer need, albeit with a better product. These companies are called Fast Followers. Once the First Mover has done the dirty work of discovering the market, the Fast Follower arrives to reap the benefits of this hard work. When the First Mover has burned its cash to build some unfit and unnecessarily complex technology, the Fast Follower gets to develop a perfect and simple product to exactly meet the already discovered customer need.
Using an aviation metaphor, the First Mover is fixing a prototype plane in mid-air. The Fast Follower looks at the skies, sees how the prototype flies (it may actually fly, although poorly!), analyzes the issues, and starts building a shiny new plane while still on the ground.
Finding a big market where products are badly outdated and the development has stagnated, it typically is a good sign for a Fast Follower. It could mean that the players have become slow, lazy and arrogant (often this is the case with corporations) or that the existing technology has come to a dead-end with no opportunities for significant incremental improvements (like combustion engines). Or maybe the existing players are afraid of self-cannibalization?
A second good source of ideas for Fast Followers are complex products, possibly with an enterprise sales model. Occasionally, a piece of the solution can be turned into a mass market product that is easier to use and significantly cheaper — Salesforce vs. Pipedrive being one example.
It’s quite incredible how well the Fast Follower approach works. In the same study that concluded a 47% failure rate for First Movers, Fast Followers (they were called Early Leaders in this study) had a failure rate of only 8%. You are six times less likely to fail with the Fast Follower approach!
The Big Goal and The Minimum Sellable Difference
Being a visionary and being a Fast Follower are not mutually exclusive.
It’s OK to dream big and aim high. And not just OK, it is actually always imperative. However, instead of aiming for the big goal right away, you need to carefully plan your steps that will take you from an existing and validated market towards your big goal. So, you will start from a validated market as a Fast Follower and advance from there. This approach will ask for patience but it will surely pay itself back.
For example, if you are bold enough, you could imagine things like colonizing Mars (some do!). But it doesn’t mean that the first customer need you meet is a rocket to Mars, as there are no customers needing that (yet) and it’s excessively difficult. That would have been a First Mover thing. Instead, you would figure an existing need (e.g. send stuff to space) and build a product to do just that, but with a slightly improved value proposition for your niche (in this case, being a domestic service provider for NASA). OK, maybe I am making it sound just a bit too easy in this case, but you get the point.
In other words, one should rather look for the Minimum Sellable Difference (MSD) for an existing customer need. In this particular example, it was a domestic rocket that can launch stuff to Low Earth Orbit (LEO). It was the feature that was easiest to build but had a sufficient difference over the existing solution (domestic instead of Soyuz) still fulfilling the customer need (get stuff to LEO). There was no question as to whether someone would be interested in buying that; it was rather a question of whether one can build it.
Why am I coining a new term here? Wouldn’t Minimum Viable/Sellable Product (MVP or MSP) mean the same? No, not really. If you build an MVP or an MSP, there is no assumption that it resides close to an existing market where there is a previously validated customer need. MVP can be a tracer bullet in the dark, with no close connection to any previously validated market. On the other hand, Minimum Sellable Difference is a surgical strike right next to an existing product but with a simpler and better value proposition. With an MVP, you may spend ages trying to find the product-market fit but with no guarantee anybody would eventually buy it. With an MSD, this risk is significantly lower.
But here’s the catch: the Minimum Sellable Difference is the first embodiment of your big vision, it’s not yet the big end goal. It’s not yet necessarily going to be the biggest selling hit. It is your landing zone when you parachute right next to a crowded market. Maybe you will look for a niche in that market space and start growing from there, just to lower your barrier of entry.
But if the MSD was your ultimate goal, you would be in deep trouble and get squashed quickly by the competition. Instead, your secret weapon is in your back pocket: the grand vision and the mapped path that will take you there. Unlike the existing products that reside close to your landing zone, you are fresh in the field, and you have the direction where you are heading. You are agile with no extra burden of legacy and liabilities on your shoulders, ready to usher to an unexplored market space.
The Takeaways
Now back to Eniram, the First Mover in marine ecosystem digitalization. What should have we done differently, had we known about the MSD approach back then? In the cruise segment, probably nothing. What we did there, was pretty much an MSD, although the choice of strategy was rather intuitive than a conscious one. In the merchant ship market we were clearly the First Mover, and our initial strategy wasn’t too successful. Therefore, instead of trying to educate the market about the benefits of digitalization and a data driven approach, we should have built a Minimum Sellable Difference, a product that would have fulfilled an already validated customer need in a better way.
And that’s what we started to work on back then. There were plenty of problems where a limited set of data was already used in merchant shipping, and that could be used as an entry point to that market to build an MSD. One example is the use of noon reports, a report sent daily by a ship crew to tell about ship’s location, speed, heading and fuel remaining, among others. Overall, noon reports are used for example to assess the ship’s performance. But the process is slow, prone to errors and the analysis methods were close to pseudo science. The customer need existed and definitely required an improvement. By starting from a recognized need, we could gradually escort the shipping industry towards digitalization.
As fun as it is, being the First Mover is typically a hard strategy. Instead, you should be patient and play the long game, by first starting off as a Fast Follower from a validated but poorly served market, and then gradually making your way towards your big end goal.
Whether you are a First Mover or a Fast Follower, tackling any market is a hard endeavor and finding the right go-to-market strategy is essential. We at Superhero Capital absolutely love to ponder these topics with founders, identifying blind spots and challenging the chosen strategy to find the path of least resistance to make customers adore your product.
