More and more entrepreneurs and startups are complaining about their businesses being “copied”. While complaining and potentially even suing “copy cats” might be one option, I claim that entrepreneurs and startups should take a pro-active approach towards copy cats and build more competitive companies that survive the attacks of upcoming competitors. Having worked with multiple startups and company builders – companies that are often seen to create copy cats – and having followed the global online startup scene closely over the last few years, I have put together my 5 most effective strategies for startups to prevent copy cats from taking over even if patents or hard to copy technologies don’t exist.

  1. Have a non-obvious idea. Every business venture starts with an idea. Some ideas are very obvious – no matter how innovative or disruptive. The problem with obvious ideas is that as soon as the “original” venture has launched, other entrepreneurs will take notice of the startup, understand the potential of the idea, and consider launching their own ventures modeled around the same idea. Obvious are especially ideas that are B2C focused and don’t require any specific industry understanding to “get” the idea. Take the example of eBay which fulfilled a previously served end-consumer need in a new and meaningful way. eBay’s initial service made it possible for people to sell their pre-used products online – a process that was traditionally done offline in small auction houses or on flea markets. The idea behind eBay was extremely disruptive to the existing structures but at the same time the idea behind eBay was very obvious. That partly explains why eBay faced so many copy cats soon after launch and had to purchase local companies in Latin America and Europe when they wanted to expand. The same is true for Groupon and the same will be true for Lyft. On the flip side, obvious but innovative ideas often lead to quicker markets success and higher valuations, and entrepreneurs often will have to make a choice between the potential for lots of competitors and a smaller market opportunity.
  2. Team up with great people & execute with excellence. If an idea is obvious and there are no patents or hard to copy technologies that prevent competitors from entering the market, execution is key. Basically, an idea is worth nothing if it is not executed well and the wrong people are working on it. A key strength of the company builders I have worked with are its people and the ability to execute fast and with excellence. A strict focus on hiring people from high quality industries like consultancies, investments banks, or leading tech companies, has enabled the leading company builders to expand fast while ensuring excellence in execution. Further, an ever growing pool of transferable skills and knowledge – for instance in online marketing – within company builders helps to execute fast and in high quality, even if the business model is new.
  3. Grow fast & go international early. Speed is critical to fight copy cats. Companies that grow fast and are leading in their categories will attract more venture capital and, hence, have the ability to grow even faster and outperform competition. The best investors often partner with the best companies which creates often an unbeatable team for the followers in the industry. From all global daily deal companies, only Groupon went public and only Groupon has a global reach. Even Google could not do anything so far against Groupon’s success although they launched multiple similar programs or bought Groupon competitors. Groupon was faster than anyone else. Another great example of a company that has an easy to copy business but managed to outperform every copy cat so far is Tinder – a location based dating platform. Tinder didn’t wait for local competitors to establish themselves outside the US but immediately launched in London and other places in Europe and most local competitors did not manage to attract any venture capital and have closed their businesses already. A similar strategy can be seen with Uber and Airbnb.
  4. Differentiate your product & build a brand. Another critical way to make a venture more competitive is to build a differentiated product that goes beyond the basic “idea” and to build a brand that sticks with consumers. For instance, while the basic idea behind Zappos is to sell shoes online, the actual success of Zappos is to a big extend connected to the great customer service that exceeds customer expectations. The benefit of a differentiated product is not only the immediate value it creates for customers, it makes it also harder for competitors to copy the business as more subtle and less obvious factors become more relevant. Closely connected to offering a differentiated product is the need to build a strong brand. Establishing a positive relationship with customers, creating a brand preference, and creating an emotional connection with customers, will make customers stay with a company even if a strong competitor enters the market. A great example for a startup that managed to create a strong brand and prevent copy cats from taking over is Fab.com. Fab.com went beyond being a pure retailer and positioned itself as an interior design expert. This positioning resonated with customers and created a brand preference for Fab that made customers chose Fab despite the existence of competitors.
  5. Create network effects. Last but not least, network effects help to drive stickiness with a specific startup and prevent copy cats from taking over. Another reason why it was so difficult for Tinder competitors to succeed was the very fact that Tinder already had a critical mass of people using the dating service, and while it might look difficult to create global networks effects given the location based idea behind Tinder, it turned out that Tinder users travel so much between San Francisco, New York, London and Berlin, that it was difficult for any local player in Europe to take over. While network effects seem to be obvious in businesses that drive their primary value through connection people e.g. social networks, every startup should think about the creation of network effects. For instance, part of Amazon’s success can be connected to the existence of network effects. A key driver for customers to go on Amazon are the reviews & ratings of products. The more users Amazon has the more reviews & ratings can be written, and the more new users Amazon will attract. At the same time, more users will attract more brands who want to sell on Amazon and want to see more reviews & ratings for their products which in turn will attract even more customers. In essence, every startup should think of how to create network effects – should it be through reviews & ratings, social components, or completely new approaches. Valuable network effects will make it more difficult for copy cats to take over and will drive the success rate of new ventures.

I am excited to hear if you share my learnings and what your personal experiences are!


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Payment platforms for online and mobile businesses – current and future landscape

While most of the press around mobile payments has focused around B2C solutions such as Square and LevelUp, online payment platforms such as Zuora, Stripe and Braintree are also seeing robust growth, riding the tremendous growth in e-commerce and P2P mobile payments. Example client include Uber, LivingSocial and AirBnB (Braintree), box.net and zendesk (Zuora) and shopify and edmodo (Stripe).  Such platforms have a few key elements that all competitors in this space try to replicate:

  • A robust, reliable and scalable solution
  • Simple developer-friendly APIs
  • Excellent customer service
  • Quick (and in some cases “instant”) set up, including setting up a new merchant account for the client

A robust, reliable and scalable solution

Accepting payments for a new high-growth startup can be a very painful process if attempted on your own, but companies such as Braintree, Stripe and Zuora attempt to simplify the process as much as possible. The goal is to provide a solution that scales as your startup scales – from facilitating 100 transactions a week to a 1000 transactions a minute, all the while providing a reliable, secure and affordable service. Key to this space is supporting both desktop and mobile transactions, as a growing number of e-transactions occur on mobile devices. A number of startups also make international expansion a very early priority, as they attempt to be the first-mover in several markets. Payment providers try to stay one step ahead of the curve by expanding internationally and having a deep understanding of foreign legal and financial frameworks.

Simple developer-friendly APIs

Stripe is perhaps the best poster-child for having developer-friendly payment APIs. Stripe boasts having APIs “that get of your way” and also pioneered the “instant” setup features that were replicated by Braintree – which allow you to get started with a payment solution in under a day. The key here is to have API wrappers for various languages such as Ruby, PHP, Python and many more to make it incredibly easy to get started and integrate with your service.

Excellent customer service

Braintree seems to be leading here, and promises to always have a real person answer a customer service call. Customer service is key in this business, which is based on having reliable, trustworthy service with quick turnarounds if something goes wrong. Parts of the payments process remain tedious and high-touch. For example, setting up a new merchant can often involve multiple long-threads between the payment-solution provider and the client, where the payment-solution provider acts as the middleman (and underwriter) between the client and the bank. The client wants to have the account set up as soon as possible, while the bank wants to make sure that a proper risk assessment as done – companies like Braintree try to simplify the process by having excellent customer service and quick turnaround times.

Instant set-up

Now that Stripe and Braintree have instant setup (by eliminating the waiting period for a new merchant account or underwriting approval), startups can have a quick headstart in facilitating e-commerce transactions.  Through this process, companies such as Braintree also get more insight about the client’s business model and growth plans, and try to ensure that clients’ accounts are never frozen or shut down because of unanticipated activity.

Disruption and future landscape

While there are certainly scale benefits to serving many clients, I do not see any network effects associated with providing online payments. However, this could change as some of these providers attempt to get into the mobile P2P payments space, such as Braintree’s acquisition of Venmo.

On the other hand, the companies in this space are addressing an unmet need. For many high-growth startups, solutions such as PayPal, authorize.net are too expensive, slow, outdated and too hard to integrate with. I see solutions by Braintree and Stripe taking away a lot of business from PayPal. Switching costs are also high – it is usually hard to migrate customer payment information from one platform to another.

Although payment providers are seeing tremendous growth just because of the amount of growth in e-commerce and online/mobile transactions, all these solutions (except for Braintree’s Venmo business) are still reliant on the infrastructure provided by the credit-card networks. All the startups in this space seem to be playing the puppy-dog strategy – posing as small players who are friendly with the credit-card networks and are doing little to disintermediate them.

Competition is tough in the payment space, and more and more players (both large and small) are getting into this space everyday. Braintree, Stripe and Zuora seem to have carved out a niche, but need to remain innovative and competitive to stay relevant going forward. I’m looking forward to seeing many more innovate solutions come out of these companies to make payments for young, high-growth startups even easier.

 


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Maybe we should learn design instead

Upon so much as uttering the phrase “I’m thinking of doing a startup”, everyone from professors to the random person sitting next to you at [insert hipster coffee shop] will tell you that the first thing you need is a technical co-founder.  The next thing they’ll tell you, is that if you can’t find one, or are looking to attract one, then you’ll need to learn how to code so that you can hack together a proof of concept that will get investors excited. 

 With the recent rise of streamlined, easy-to-access tools for learning code, such as Code Academy, it would seem ridiculous not to follow this advice.   However, while I don’t disagree with the merits of learning code for anyone who is serious about pursuing their tech startup, I keep wondering if it’s code we should be spending our time learning, or if it could actually be design.

 There are two points that have led me to consider if learning design principles over basic coding skills might prove to be more valuable for non-technical co-founders.

 The first point lies in the fundamental difficulty and time investment needed to actually write and ship code that is of some value.  I don’t mean basic HTML and CSS for tweaking websites.  I mean proper, functional, this-is-what-makes-the-product-work, back-end code.  Sure, you could take introductory CS classes, or follow online tutorials, but the core problem remains – good developers have been coding for many, many years.  Far more years than the days or weeks that the average non-technical founder has to prove their idea and gain investor attention.  The coding skills needed to build even a rough MVP are beyond what can be learned in a few weeks or even months.

 The second, and perhaps most important, point has to do with emerging trends that are driving much of the innovation and success in the tech world.  One of the biggest trends is the rise of designer co-founders that have used their mindsets and skills to create innovative, differentiated products and services.  As the already mature consumer web startup world becomes more and more crowded, most ideas have already been thought of, built, and iterated on many times.  The ability to succeed will likely not come from the ability to solve a problem nobody has thought of yet, but rather, from designing a product that creates value through a unique, differentiated customer experience.

 These designer co-founders have built very strong design-centric cultures within their startups, which have driven both the look and feel of their products, as well as the way in which they’ve approached solutions to solving customer problems.  Companies such as Pinterest, Airbnb, Path, and Gumroad have taken already crowded product areas and rethought them from the ground up through strong design-led thinking and execution.

 As we think about where to allocate our time to create maximum impact for any venture we start or join, design principles may be an attractive alternative to the now standard prescription of learning how to code. 

 It might also be helpful to point out that design skills and principles aren’t constrained to just influencing how end products look (i.e. a mobile app home screen).  Rather, it is just the starting point to a rich world of disciplines including interaction design and user research.  In fact, design thinking follows a very similar approach to the lean startup methodology, which is employed by many startups and incubators to achieve their most important goal – creating something people want.


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The philosophy of many tech companies during Bubble 1.0 was that they could lose money on every click, as long as they made up for it in volume.  Fast forward to 2012 and it seems like we are repeating the mistakes.

Today, many startups have no clear monetization strategy and even after reaching critical mass, are left wondering how to become profitable. Big names like Yelp, Twitter, Digg, Instagram, and DrawSomething come to mind.  These companies provide a free service but willingness to pay is very low.  Some companies were smart enough to be acquired by the “greater fool” such as DrawSomething and Instagram.  The result? Zynga just took a $95 million write off for DrawSomething and Facebook is still trying to figure out how to monetize mobile [1,2].

Who, then, is paying for our insatiable need to have up-to-the-minute tweets of our favorite celebrities?  Luckily, in today’s market, advertisers are willing to subsidize these services, which are producing tremendous (comedic) value. Examples:

“No, no, I didn’t go to England; I went to London.” — Paris Hilton

“I work out every day — Monday to Saturday.” — Jessica Biel

But if we take a closer look at the ads-driven monetization strategy, we see that the numbers often don’t work out.  For example, assume we want to generate $100M in revenue/year with a mass market consumer website.  CPMs on these services are particularly low.  For example, CPMs for social networking sites are about $0.25.  Even at a 4x CPM of $1 per 1000 impressions, we would need 100B ($100M = 100B impressions * $1/1000 impressions) impressions per year or about 8B per month.  This means the site’s monthly active users (MAU) will need to be in tens or hundreds of millions and be highly engaged [3].  Obviously, this is no easy task and, moreover, requires significant resources (servers, software, content, marketing).  Indeed, even companies that offer valuable services, like Yelp, are struggling to become profitable. In Yelp’s case, its losses are increasing as it expands. It reported a $9.8 million quarterly loss, which is triple its net loss of $2.7 million in the same period last year [4].

One might try to argue that this really isn’t a problem because the ads market is growing. It’s true that display ad spend did increase at 21% per year; however, CPM rates actually fell by 23% [5].  The upshot is that, even though the overall pie is growing, websites need to have more users for the same revenue, increasing cost of sales and driving profits down even further.

My concluding take away for entrepreneurs, investors, and anyone interested in mobile  and web startups is that consumers vote with their dollars. If consumers are not willing to pay for a service and there is no other clear way to monetize (ie: selling data, consulting/support service, etc), then you should ask yourself if that business is creating and capturing value in a sustainable way.

Sources

[1] Raymand Wong, “Zynga plans to write off up to $95 million over OMGPOP merger flop”, October 5th, 2012, http://www.bgr.com/2012/10/05/zynga-omgpop-95-million-write-off/.

[2] Brant Prewitt, “Facebook And Mobile Monetization: Obstacles And Opportunities”, September 11, 2012, http://seekingalpha.com/article/860061-facebook-and-mobile-monetization-obstacles-and-opportunities

[3] Andrew Chen, “What is considered a significant number of users for a free consumer internet product?”, February 26, 2011, http://andrewchen.co/2011/02/26/quora-what-is-considered-a-significant-number-of-users-for-a-free-consumer-internet-product/.

[4] Julianne Pepitone, “Yelp’s net losses triple on expansion”, May 2, 2012, http://money.cnn.com/2012/05/02/technology/yelp-earnings/index.htm

[5] http://www.crowdscience.com/2011/10/publisher-cpm-rates-down-23-despite-increase-in-online-display-ad-spending/


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