Bring On the Competition!

Why a big company entering a startup’s space is actually a good thing

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“Hey little startup, aren’t you quaking in your boots at this recent big-company announcement?”

As the CEO of a robot startup (and, in the past, a smart home/energy startup), I’ve heard these words frequently whenever news breaks about this or that large company making plays in our segment.

After all, the whole point of a startup is to successfully bring a product to market in a space that the big companies haven’t yet owned. But if you’re right about your startup being viable, then it’s nearly guaranteed that sooner or later, those big companies will enter your market segment, too.

For example, it’s not a secret that robots are going to be a big part of our lives in the future, so robots are something that nearly all the tech giants are looking into. Google, Amazon, Apple, IBM, Samsung, Sony, Microsoft…all of these companies have public and private initiatives into artificial intelligence and robotics. That’s to be expected. (And if they didn’t, it would be a warning sign.) So…

“Nope. No worries here.”

I’d like to tell you why, whatever your niche as a startup, you shouldn’t be afraid when the big players come knocking, either. Instead, you should relish it and utilize every ounce of it. It means you are on the right track. And in practical terms, it means it’s about to get much less expensive to reach your goals.

If you’re worried about big-company competition, there are two main things to remember:

  1. Big companies brings category benefits to startups.
  2. As a startup, your products can remain positionally distinct from those of a big company.

Read on for details. Because, all in all, a big company competitor is just another step on a startup’s path to success.

Category benefits: Why “gorilla activity” is a positive

If you’re a startup in a fairly young market segment like robotics, when big (a.k.a. “gorilla”) companies enter your space, it’s good for everyone. Why? Let’s count the ways in which it’s beneficial for any startup when a big company enters your market.

1. The big company affirms the legitimacy of the new product segment for consumers

When one studies Geoffrey Moore’s seminal works on market adoption, the primary focus is on “the chasm” between early adopters and the brass ring: the mass market. When a small, unknown company is the only company in a segment, its credibility is small. The mass market craves safety, security, assurances, guarantees. So the entry of a big company into the market signals to the mass market that safety has arrived for the category. The patina of this arrival actually increases the shine of the startup.

When Honeywell entered the smart thermostat market after Nest, interest and volume for Nest picked up. It happened again when First Alert entered the smart smoke detector market. Not only did those big companies signal more safety to consumers, but Honeywell and First Alert signaled more safety to retailers and other channel partners who were being asked to stock smart thermostats and smart detectors.

2. The big company generates awareness for the product segment

One of the foundational problems for any startup is the high cost of creating market awareness for its products. Often customer acquisition costs will swamp any notion of gross margin, and the startup will be selling its wares below cost. This is especially true for any startup that produces a widget (as opposed to digital-only startups).

The primary reason customer acquisition costs are so high is simple: creating awareness is expensive. Startups are stuck between the proverbial rock — small-dollar spending on Facebook Lookalike ads which only generate small amounts of awareness — and a hard place — expensive radio and television advertising to generate mass market–scale awareness.

Big company announcements, press activity, and marketing dollars create awareness for the category. Sure, they’re generating far more awareness for their own efforts, but three powerful things for the startup inevitably happen, as well:

  • Consumer search results — prompted by big company marketing — generate results that include the startup.
  • The press doesn’t want to just be a shill for the big company, so they comment on the startup’s activities too.
  • Savvy consumers always evaluate more than one alternative, so they seek out the startups offerings to compare to the big company’s.

3. The big company generates motivation for the startup

Not only is the mass market afraid of risk, but so are lots of employees at startups. There are the questions of “are we doing the right thing?” and “does anybody care about our offering?” Which quickly lead to “is my family secure?”

Plus, the energy of working in a startup when the overall product category is unknown is skittish — it’s not hard-charging, confident, focused. It’s always got this small, nagging sense of fear. And successful organizations don’t ever have wild success with fear present (healthy paranoia, yes; but fear, no).

A big company’s entry can introduce some fear into the employee population, for the same reason conventional wisdom assumes that Goliath always wins. But when leadership explains the benefits, that energy shifts to one of motivation, focus, and drive.

4. The big company drives down supply chain costs for everybody

For companies that produce widgets, supply chain costs are a huge factor in success or failure. Look at all of the smart home startups whose successes were at least partially dependent on the falling costs of cell phone processors. The price of sufficiently powerful processors was a blocker to innovation in many segments for a long time, but it was the volume of big-company purchasing that finally drove it down. Thus smart devices could be both powerful and affordable, while generating enough healthy gross margin that they could sustain a business.

Bottom line: the more volume of the overall industry, the better the gross margin picture is for everyone in the industry. The only exception is when the componentry is so vertically locked up by a particular large company, that those volume-based cost reductions are exclusively available to that big company (thanks, Apple).

5. The big company affirms the legitimacy of the new product segment for investors

Investors are no different than consumers — they’re driven by core basic emotions: fear and hunger. Startups that walk in with a pitch that’s in a completely unknown, unproven category face very strong fear headwinds. Not only must that startup overcome the particular headwinds related to their story (team, product offering capabilities, pricing, margin, etc.), they must overcome the larger (and often unspoken) headwinds about the viability of the segment as a whole.

While a big company’s entry into a product category can introduce surface fear for the investor, when a leader explains the benefits of their entry into the market, the larger subterranean fear disappears, and the startup can be judged solely on the merits of their story.

6. The big company creates competition with other large companies and fertile ground for potential acquisition

This last one is a pretty subtle benefit, but I’ve lived through it. Very few markets are ever won by one and only one company (unless they have some sort of natural monopoly — thanks, Facebook). Every business knows this. We’ve all seen the academic studies and data that show at a minimum there are at least 3 major participants in every meaningful product category.

When one big company signals entry into a product category in which other large and natural competitors are not active, every one of them takes notice. “Big company X must know/see something we don’t. Crap; we’re way behind the eight ball. How do we catch up?”

Acquisitions rarely happen when a big company believes they have time to place an offering in the market, because acquisitions are almost always more expensive than building something internally. By contrast, when time to market gaps are large enough that sizeable revenues are being forfeited, the acquisition calculus shifts rapidly in the opposite direction.

I witnessed this firsthand as Head of Company at Revolv. After Google acquired Nest for $3.2B, immediately Samsung starting scrambling for a partner and bought SmartThings. Apple announced they’d build their own solution (HomeKit) — calculating that they had plenty of time to market flexibility. About 10 other large companies also looked at partners, many of them taking a serious look at Revolv, which was ultimately acquired by Google/Nest.

Positional distinctions: Even a gorilla can’t sit in every chair

Consumer electronics markets are never winner-take-all markets. Digital markets can be; but physical products aren’t. There’s too much friction in the process of turning atoms into sophisticated physical products, putting them on boats and airplanes, getting them into retail shelves or warehouses, onto trucks, and ultimately to the front door of the office or home. There can be dominant companies, but not quasi-monopolies like we see in digital. No one company can occupy every niche in a given electronics ecosystem. It’s not true for phones, games, televisions, or any other product category I can think of.

Which means…each of the three to five winning companies will differentiate themselves from each other, either immediately or over time. So your big-company competitor will only ever occupy one position in the market — they can’t occupy the other two to four. As long as you keep the distinctions of your product in focus (and as long as there’s a place in the market for those particular distinctions), there’s space for both you and the gorilla in the room.

Only one of these chairs contains a gorilla, and honestly it doesn’t even look that comfortable. Find a different seat.

1. Distinctive customer segments

Most large companies got that way because they serve a mass consumer market. They don’t get out of bed to build a product that won’t sell several million units in the first year. The finance folks and senior leaders — like all leaders inside mega corporations (see “Innovator’s Dilemma”) — have to compare each investment with financial return. An investment that results in, say, 5,000 units the first year is laughed out of the room. So, in all likelihood your big company competitor is focusing on a product that is:

  • intensely consumer oriented, to the exclusion of other customer segments, including the frequently underestimated professional/enterprise buyer
  • appealing to a particular type of consumer, who they expect will purchase in mass quantities
  • designed to meet the requirements of only a “significant” few use cases for those particular consumers

This creates a huge opportunity for the startup that thinks differently. One that doesn’t initially aim squarely at the middle of the consumer market, but more off to the side. If you’re a tech startup, you might aim at developers initially, rather than consumers. If you’re in a food-related segment, your product might target chefs, rather than home cooks. Or, your target customers might include both chefs and home cooks, but perhaps those that consider themselves “organic/natural buyers” who will only use untreated cookware, rather than products with chemically advanced coatings, for example.

As an example, take the case of Fitbit v. Apple Watch. Fitbit aimed for the avidly athletic and health-conscious, whereas Apple aimed for a larger segment of “average” (though affluent) buyers. Or for a backward example, where a startup entered a mature market that was chock full of big companies, consider Tesla’s entry into the personal vehicle market. Those giant manufacturers in 2002 would have told you there wasn’t a viable customer segment that they didn’t have covered. However, Tesla’s incorporation in 2003 and subsequent history tell a different story.

2. Distinctly affordable or distinctly high-quality?

Most large companies want to optimize for affordability. They’re experts at squeezing all of the cost out of their products. And that’s okay for a mass-market product. It means you’ve got a simple but affordable product, which is typically what the bulk of the consumer segment wants. But this leaves the door wide open for you to take advantage of an important positional distinction.

How? By making your product in some way better.

For example, maximizing affordability is not fine for a tech product aimed at creators (developers, artists, etc.). How many software engineers or videographers do you know who get their work done on low-end laptops, for example? Not many. It takes a fast machine to deal with the masses of data involved in working with video or building code.

Take Rachio, a smart sprinkler controller company. True, giants such as Rainbird and others remain kings of the ~$100 sprinkler system. But kings of nice design, connectedness, and smart weather-related algorithms? Not so much. Those quality differentiators have allowed Rachio to make a killing by distinguishing their products from those of the big companies.

And while quality distinctions often translate into “more premium,” that doesn’t have to be the case. Sometimes higher quality in a product doesn’t cost more to the startup or their customers. In the case of Southwest Airlines, while they haven’t been a startup for quite a while, they’ve explicitly maintained a startup-like attitude. And what some might consider their biggest quality differentiator — friendly service — is pretty much cost-free.

3. Distinct use cases

If you’re designing a product, you don’t just think about who your customers are. You also think about use cases — what your customers want to do with the product. Basic, right? But here’s where big companies really leave themselves exposed to their more agile startup competitors.

A big company that’s planning an offering in a new tech category is likely to be seeking the “killer” use case to build their product around. Like the unexpected emergence of spreadsheets for the Apple II, this is the use case that will open the door to mass-market acceptance of the category as a whole.

But, unlike the case of the Apple II, big companies today demand that their product development teams figure out their product’s version of the killer app months and years before the product ever reaches the marketplace. This means that they are creating a product around what are simply educated guesses.

Now, I’m not saying that startups can make better educated guesses than big companies about what the actual “killer” use cases for their industry will end up being, either. But what a startup can do is take advantage of its ability to be financially successful with lower volumes than the big companies and target those use cases that the big companies are unlikely to even consider.

If we know that a big company is going to be looking for a few key use cases that will strongly appeal (sell millions) to the middle of the mass market… well, then, as a startup, we can do something else. Consider Ring. Netgear, Logitech, and other big company sellers of mass market consumer video cameras were great at covering a wide swath of the market. But they were distinctly not good at either (a) interacting with the person at the other end of the video or (b) constructing a video camera that could directly attach to a front door. Ring’s use cases were very specific: identify visitors and interact with them (or scare them away). Ring highly differentiated their intended use cases, and they experienced phenomenal success.

It’s all part of the plan

That’s right. Someday you (and some other startup who wandered into the photo) will be all grown up and looking that gorilla right in the eye. Unless you get distracted by a bug or something. Image: The Gorilla Foundation

So the next time someone waves a headline at you about your idea or startup being crushed by a giant company, just smile and thank them. You might consider also enlightening them about what an awesome thing this is. But the key is that you know that everything is simply going according to plan.

A version of this article originally appeared on VentureBeat. Read the original article.

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