How startups can unseat incumbents
The strategies new companies should take to beat the big guys
Hi guys, welcome to this weekend’s blog post. I’ve always been interested in learning about startups, especially consumer tech. If you’d like to exchange ideas on startups, I’d love to hear from you.
Today’s post is on how startups can compete in markets with established leaders…or not compete at all.
Before we start, here are some of my favorite quotes from smart people this week:
“You are most powerful when your identity is tied to your own name…Start a newsletter, a passion project, or a new venture that lets you tie your identity to something that actually matters — your own name. Nothing is more liberating” — Polina Marinova, Founder & author of The Profile
“Success is if we can help the founder reach his/her company’s full potential — it doesn’t end at the IPO. The end-goal is to become a category king” — Alfred Lin, Partner of Sequoia Capital during a fireside chat through LunchClub (taken from the conversation)
During the past few months of quarantine, we’ve seen our world turn upside-down. Powerful players hit hard by COVID-19 have had to adjust their business strategies, demonstrating flexibility and resilience.
And with this crisis came opportunities for entrepreneurs to tackle new and challenging problems — to turn these dire circumstances into opportunities to innovate.
Our world is now broken, so let’s come together and try to make it better.
So, okay, you may say. I want to build a startup that can help improve people’s lives. But where do I start? How can new startups enter crowded spaces with big, powerful incumbents and compete meaningfully? Isn’t there an app for everything already?
True, it’s difficult for new players to compete head-on with incumbent players. In fact, some argue it’s almost suicidal. Incumbent players often have so many advantages, such as much larger user bases, enduring network effects, operational efficiencies, lower costs for their products and services, etc., that just make it hard for new players to compete successfully if they are fighting for the same market.
There are two strategies startups can take:
1) Unbundle these incumbents — to focus on a specific vertical in the market and serve this vertical better
2) Become new “category kings”
Source: giphy.com
Unbundling Incumbents
The catch-22 of incumbents is that as they grow and become really large companies, they add more services to provide more value to their customers, but inevitably, it’s difficult to continue doing many things really well. In other words, these incumbents create new opportunities for disruption by new, smaller companies that can focus on doing a few things very well. Google, for instance, is the category king of search, but the jury’s still out on how effective its Meets and Hangouts services are compared to innovative companies like Zoom that focus specifically on providing video conferencing services and do it really well.
So, rather than compete head-on with incumbents, new players can find success by picking a specific segment of the market that has been underserved and focus on becoming the expert in that specific category.
For example, Airbnb didn’t compete head-on with incumbents such as Expedia, TripAdvisor or Hilton. Instead, Brian Chesky and Joe Gebbia realized that they could provide value to budget-conscious users who were interested in a more authentic way of traveling. The incumbents didn’t serve this specific market well, which gave Airbnb a huge opportunity to unbundle the incumbents and provide this specific service to interested customers. Thus enter a new category king in travel: short-term home rentals.
And fintech startups are unbundling traditional banks. Fintech players, such as Brex or Chime, focus on market segments that were previously overlooked or underserved by traditional banks, such as entrepreneurs and small businesses, and thus, provide value in a new category of financial services. These new players are listening to customer’s complaints from their experiences with traditional banks, whose legacy technologies often make for poorer customer experiences. As a result, these new players are building companies with services that can better serve these market segments, where customer experience is king.
Some important questions to consider if you’re building a startup that’s trying to unbundle incumbents are:
What are the specific problems that your target market has?
Why does the incumbent offering not address these problems well?
What are the features that your company has that will help solve your target market’s problems better than the incumbents can?
How are you positioning yourself amongst other competitors in the space?
How are you marketing your services to your target audience?
Creating New Categories
Another option: you could create your own category and become a “category king.”
Some of the most innovative founders build companies in uncontested spaces that we never thought of. These are companies that give us new ways of living that we didn’t even know we wanted.
The idea is to strategically position yourself so that customers can clearly understand the value that your company brings them and how it’s different from the other companies currently out there. And then, pull these interested customers in.
Sometimes these new categories come from advances in technology, for example, cloud storage, but sometimes they are driven more by external market forces. For example, social media and audio-based apps aren’t new or exciting. But spontaneous audio-based social media apps that mimic real-life interactions? Now, we’re talking. While we’re all isolated in our homes, to have the ability to engage in spontaneous real-life interactions with people from all over the world — from celebrities like Oprah to thought leaders in the VC world — is really exciting.
External forces like the current coronavirus pandemic gave this new category of social apps a stage from which they could really shine. Otherwise, if we were still out and about in our daily lives, we may not have fully appreciated apps like Clubhouse that have brought a lot of people joy and connection during quarantine.
Clubhouse is just one example of a new app that has already made waves in the tech world for providing a new type of experience for users — a new category of social apps.
I’m excited to see more startups enter the scene by disrupting incumbents in existing markets and by creating entirely new categories for themselves. Right now, our world is clearly changing and there’s no better time to build and find opportunities to provide value in these unexpected ways.
Thanks for reading! Let me know if you have any thoughts, feedback, or startup ideas you’d like to discuss. Otherwise, see you next weekend.
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