First-mover advantage (FMA, not to be confused with FML) is one of those things they teach you in business school as *doctrine*. Be first, or don’t bother. This leads to much malaise when, upon coming up with, say, a brilliant idea for a mobile coupon business, hopes and dreams are shattered when it becomes known that hordes of other entrepreneurs are working on the same idea.
I have been thinking about how FMA applies to web startups, and after some thought, I now believe first-mover advantage is a myth in the web world.
If the premise of FMA relies on the fact that a first-mover will gain resources and advantages that later entrants will not be able to match, then these advantages have to be compelling enough to warrant fighting to be first. And I’m not sure they are any more.
Argument below. Thoughts/criticism welcome. Put this together pretty quickly (and highly unscientifically) so I’m sure there are lots of holes.
1. Moore’s Law and speed.
Moore’s law is one of those “golden rules” in the tech world. Everybody looooves to cite it. Moore’s law is to tech nerds what Foucault is to philosophy junkies.
It’s because there’s a lot of brilliance in Moore’s law. As I understand it - the real brilliance here was the observation that technology progresses much quicker than people would think possible (or more accurately, that the number of transistors on a chip doubles every 24 months).
If you think about how this plays out in the consumer world, it means that consumers will become socialized to adopting more advanced technology faster. So the amount of time it takes for a market to develop, hit a peak, and become saturated (say, photo sharing) is shrinking.
How does this affect first-mover advantage? Take a look at my lovely graph below. If a technology markets develop more quickly, this will seriously reduce the potential upside for a first-mover. The top graph is what we think is FMA, the bottom is what I believe it really looks like.
If this is true, the potential upside you can gain from FMA is shrinking.
2. Underestimated importance of initial users (adoption) and marketing.
I know a lot of entrepreneurs who have the “if you build it they will come” mentality. No one will admit to this, obviously. They talk to you all day about marketing and user acquisition, but it seems like very very few web startups actually do this well.
Initial users are the ones that will evangelize your service and make it zeitgeisty and remarkable. I saw this great video last night on the importance of “first followers” and how they help to create mass movements.
Sharp marketing and committed users have nothing to do with FMA and seemingly everything to do with popularity and adoption.
3. Zero barriers to entry, commodification of apps, low switching costs.
Have you noticed all of those “hey look at what I built in a weekend” links on Hacker News? The ease-of-use afforded by these new slick web frameworks like Rails and Django make it pretty easy and quick to build a site and enter a market.
Web sites and mobile apps are undergoing a process of commodification as they become easier and easier to make, and the move toward cloud-based apps makes the switching costs for the user nearly zero. It’s no longer enough to have a single hit with a single great app.
All of these trends are really cutting into the upside of being first.
4. “Early is the same as wrong”. This is something I heard a lot in Silicon Valley. I don’t necessarily agree - if you are early but are smart enough about your cash to hold on until the market matures, then you’re not necessarily wrong. Seems like the emphasis on being first is flawed - it’s about timing.
The tough part is finding the trade-off. There’s this sweet spot between the first-mover land-grab and market readiness, but you have to hold on until the wave hits. Everyone’s favorite example here is online video - there were plenty of video sites pre-YouTube but they were slow and mostly annoying. The strategic use of flash and rise in broadband internet in homes helped to make the market timing nearly perfect, though with the dominance window narrowing I think even trying to time the market is an exercise in futility.
Market Dominance in the Brave New Web World
So, if not from FMA, where does real market dominance come from?
I suppose in a way I’m making an argument for extreme iteration. But it’s more than that. I think the consumer web industry - similar to fashion and music - is incredibly driven by trends and timing. If you can hit a curve at the point right before widespread adoption, and do this consistently, you will become more invaluable to your user.
See the graph below - the point here is that it’s no longer a single curve and a single market. Instead, the companies that will do the best, in my mind, are the ones that can take advantage of many markets consecutively.
The company that I believe does this best is Facebook. If they had stayed a profile -n- poke site, they’d surely be dead by now. Instead, each product launch happens right around the top end of a curve - photos, videos, Twitter-style-messages, and now talk of geo-enabled features and even “check-ins”.
While FMA as a concept is not dead to me completely - it can be incredibly helpful in many many other markets, to me in the app-driven world of the web (and increasingly mobile too) it just doesn’t seem all that important.
Conclusion: “someone’s already doing this” should be a crappy deterrent.
If you really love something, you should want to know everything about it, right?
I am currently in an ongoing love affair with the internets. This, mixed with the liberal dispensing of tech-related kool-aid that goes on at MIT, has provided enough of an impetus for me to begin learning how to actually write beautiful code. The hack-job e-commerce sites I had developed and run and SEO-ed like mad before school just will not do. No, this is a completely different undertaking.
And guess what? Writing respectable code is REALLY EFFING HARD.
Genius conclusion, I know. I wanted to write this post though, not to announce to the world that hey-guess-what-coding-is-hard, but rather to analyze why I believe business-y people like myself tend to abandon ship at this point in the learning process.
I do not plan to quit. In fact, I am only *more* determined and believe that over the next 2 years I can learn enough Python to be dangerous. That said, long-term-progress undertakings are really easy to quit.
The reason I’m not quitting is because I’ve been through this before, when I decided in 2005 that I just had to learn Chinese. So I did what any normal/sane person would do and packed my bags and moved to Beijing. I was not leaving until I could speak Chinese. Period.
I wanted to learn Chinese because my ultimate plan was to get a PhD in Chinese-American relations and become a badass diplomat (translation: spy). I really believe that in order to understand something at the most intimate level you need to learn the entire chain - ie, in order for me to understand the inner workings of the Chinese government, I had to be able to understand how the interactions take place in their most basic form. Same thing with computers and the internet. In order to truly understand macro trends, it seems like one needs to be familiar with the most granular aspects of the trade.
I enrolled in a beginner (level 0) Chinese class here and off I went. What I did not realize is that any Chinese class worth a damn will spend at least the first month going over the fundamentals of the language. This means you don’t even learn how to say a single sentence until at least one month in - and keep in mind this is full-timestudying. See the video below. Welcome to my entire life, September 2005. I’ll call this the “bopomofo” period. Day after day it was “bo po mo fo”, again! repeat! You learn sounds and tones and initials and finals and radicals and you leave each day not one bit more prepared to go and order lunch than you were the day before.
I was frustrated, and wanted to quit. Why was I wasting my time learning how to shape my mouth and twist my tounge just right and listen for the difference between first tone and fourth tone? Hello! I had dumplings to order, and fake-North-face vendors to haggle with!
With Chinese, you can’t just take what you know from English or Spanish or German or whatever and apply it. You have to start from scratch and completely re-conceptualize how you think about language and structures and communication fundamentally.
After three months, it started to make sense. If I wanted to actually become good and not just some dummy with a phrase book, I had to have a strong grasp of the fundamentals. I couldn’t go straight to learning phrases otherwise I would have to eventually unlearn all of my bad habits. So I sucked it up and went back and really really mastered all those mouth formations. And then I skipped two levels of class and ended my year having an all-in-Chinese throw-down with a military doctor in Tibet. Good times. (Though sadly now I’ve forgotten a good chunk of what I learned).
Seems to be the same in the world of developers. There are probably more than a few who have some knowledge here and there but don’t really have a clue how the entire system works together. These are the people with the phrase books who can say enough to sound impressive but in reality have a really shallow knowledge-base.
I am in the “bopomofo” period of learning to program, which is fine with me only because I know it’s going to be these micro-incremental teeny tiny baby steps for a while. But man, it sucks.
Now I understand why so many business students and other non-technical types who love technology make the attempt to learn how to code and then quit right around now. In non-technical professions there really is no equivalent to this particular type of learning. Spending an entire day to get the “name” field to work on a form for your website is easy to dismiss as a “non-optimal” use of time, especially when there’s someone you can hire who can do it in 5 minutes.
Though I think that is completely missing the point.
Knowing the “bopomofo” of the web world can be extremely helpful for non-technical people when interacting with a technical team. And once you make it through mastering the fundamentals, your ability to learn new concepts improves exponentially.
I believe the J-term (short for January term) might be the best thing to happen to an academic calendar since President’s Day.
I never had one in undergrad (silly quarter system) so I was unable to appreciate that four weeks of “do-a-small-project” at the beginning of the year is a most excellent way to try something new. Almost no downside. It’s not like the “internship” during the summer between the two years of business school - a popular topic of conversation at cocktail parties among MBAs.
When I started business school, I was totally S.O.L.D. on cleantech. Coming from Texas, I had drank the energy kool-aid hard. I was extremely lucky to land an opportunity to work for a clean-tech startup in Beijing over January 2009 and it was through that opportunity that I realized that although I was in love with cleantech conceptually, I needed to have a more direct interaction with consumers. And that I loved the internet too much.
So, as they say here in Silicon Valley (SV from now on), I “pivoted” away from Cleantech and approx one year ago decided that the consumer web and everything that goes along with it was really my jam.
Instead of another international trip this January, I decided instead to pursue a different type of “cultural immersion”: spending the entire month in Silicon Valley. I am curious how I’ll do here - after many failed attempts to ditch my East Coast attitude problem, I have mostly stopped trying (which could potentially conflict with the “hella chill” personality type pervasive here in norcal).
The first few days of January was the MIT Entpreneurship Center’s “Silicon Valley Study Tour” where first-year students visit tech startups (both early and later stage) around Silicon Valley. 93 first-year students plus a few wise second-years stayed at the Stanford Park Hotel (which BTW is totally awesome - one of those places where you really feel “taken care of”) and organized a crazy scheme of rental-car-key-trading to get to lots of different startups over 4 days. Company List included below.
The two companies I visited - Pandora and Digg - were interesting to see because I am a user of both sites. Hearing stories from the execs about the challenges that each company is facing and the underlying shifts in the media industry that both companies are helping to perpetuate left me with a new respect for both companies.
Though the tour is over, I am very excited to be taking a class this January through Stanford/Harvard Law Schools called “Difficult Problems” taught by Jonathan Zittrain and Elizabeth Stark. The course will wrap up its first week tomorrow and has already provided a fantastic overview of a few very pressing current and future problems in cyberspace. For more on the class, check out the wiki, blog and twitter pages.
Finally, I’m working on a side project of my own in January while living in Palo Alto. Because there’s always a side project.
I’m hoping after this month I’ll come away with something insightful to say about the startup ecosystem here in SV. We’ll see.
To all you crowdsourcing-lovers out there who see the web as a way to subvert impenetrable elite networks and democratize industries and systems, congratulations, you have a new convert. (This girl.)
I was totally fascinated by the DARPA red balloon challenge earlier this month, and obviously pumped to see an MIT team named the winner. It took less than 9 hours for the team to locate the 10 red weather balloons deployed in different cities around the U.S.
If that stat alone doesn’t for the zillionth time reiterate the astounding power of the internet, please return to your cave. K thx.
What was most interesting, though, was not the shockingly short duration of the competition, but the very different strategies used by the MIT and Harvard teams and how each played out during the competition itself. To me, the strategies proved to me that effectively deployed crowdsourcing is an extremely powerful tool.
First, some disclaimers:
-I am currently a student at MIT, though I was not involved at all in the team’s efforts. I didn’t even register on their site. But I’m still biased.
-Everything I know about the Harvard team I got from these two great and thorough blog posts from Rafael Corrales and Caren Kelleher.
So, my thesis. The MIT team’s use of recursive incentives (ahem, cash money) to compel participation indicates to me that:
-Even on the web, greed and personal gain are powerful motivational forces
-Although the Harvard team was able to mobilize and engage their extremely powerful student and alumni network, the MIT team’s more tangible incentives were better suited to encourage widespread participation. Could this be an indicator of the potentially diminishing power of single networks (no matter how powerful)? I think it is.
Here’s why:
Based on the articles I read about the Harvard team, although they ran a Google adwords campaign, had a website, a twitter account (@helpredballoon) and a pledge to donate the entire $40,000 to charity, by far the most useful tool they employed was leveraging the current student and alumni networks. The Harvard network is arguably the most powerful network in the world - a common bond that ties together world leaders, politicians, billionaires, academics, etc. The sheer level of participation and engagement that the group received from this network is notable.
The MIT team, on the other hand, created an incentive structure that encouraged people to not only participate themselves, but get their friends to participate as well.
I think to me that was a key difference - converting participants versus converting them AND compelling them to get their friends involved too (the Facebook application Causes comes to mind here).
I don’t think the tools available on the web even five years ago would have had such success when pitted against a network as powerful as Harvard’s. But web tools are becoming downright easy to make, which I believe will enable this sort of mobilization to take many forms in the next few years and continue to chip away at the relative power of these very elite and deeply entrenched networks (examples: big media + youtube, finance industry + kaching, etc.)
The web/software as a tool of democratization is not a new idea; it has been veryartfullyarticulatedforyears. Though few instances have provided such a clear case for why the process is so game-changing and how the web’s ability to mobilize disparate groups is changing the meaning of elitism.
I worked at small web companies before business school. This meant that anything I did not know how to do, which was a lot, I made up as I went along. Terms like EBITDA, ROI, and value proposition were all foreign. This is why I came to business school - it’s finishing school for those of us who have never spent time as consultants.
I am fascinated by the term “customer acquisition cost”. Like many other b-school terms, to me it reflects the core narcissism of many businesses. Because it’s not just you, the business, that must “pay” (whether in dollars or otherwise) to acquire me, your customer. I have to pay as well to move over to your product. Maybe it’s not necessarily money, your product could be cheaper than whatever I’m using now. But I need to change my habits to adjust to whatever it is you’re offering. And this cost is MUCH MUCH higher than I think many new businesses realize.
Why?
Because I, the consumer, am lazy and averse to change.
This is the problem that I have with aggregators. You think you’re making life easier by pulling together various “feeds”, but really you’re making it harder by giving me a new interface I have to get used to and yet another account to manage. If there’s no value-add (b-school term in action!) what do I gain from shifting?
Example: weather widgets. Seems like they’re everywhere - on my desktop, taskbar, cell phone and anywhere else you can think of. But I check the weather on weather.com. Every time. Just because it’s habit and it’s reliable. My eyes already know where to find the information on the page and it’s always there. In order to sway someone to change his/her habits whatever you’re offering has to be an order of magnitude better than what’s already out there. And even then it still takes time.
Because there’s been a decent amount of buzz lately around the Mint acquisition, I’ll use that site as an example. I attribute the popularity of Mint not to the fact that it aggregates one’s bank accounts, or because it has a fancy UI, but because it was so, so much better than what already existed and gave so much *new*, valuable information to its customers.
The internet has been around long enough that people have developed habits. This is great - you can afford to be a bit riskier with design simply because you can assume a baseline of familiarity that is much higher than it was even five years ago. But be warned: the cost of disrupting habit is high and not necessarily always welcome. What you’re offering has to be exponentially better than what’s already out there, or completely integrated into existing habits. Otherwise it will be hard to convert people.
Despite the fact that this is more than likely my last “first day of school” EVER (scary thought) I am still dreading the “OMG how was your summer?!” bombarding that one gets at the beginning of the school year. Here’s my summary for your consumption. I’ll try to include more than the required sound byte: “I was in NYC working here, and it was great.” Cause I was, and it was.
So what did I get out of a summer working in VC?
Three main take-aways:
1. A summer is just long enough to figure out that you’ve got a lot to learn
Ten weeks go by, and right at the moment when you feel like you’re starting to “get it” it’s over. I am pumped for the class “Early Stage Capital” this fall where I’ll continue to chip away at the intricacies of term sheet math and excel models. For someone whose finance experience before school was exactly zero, this sort of thing excites me. Perhaps I should not admit to such things in a public forum.
2. New York Startup Forecast: Rosy
If the launch of the First Growth Venture Network wasn’t a huge give-away that there’s a lot of excitement around the NYC startup scene let me say it again: THERE IS.
After starting off the summer at Internet Week, I went to one packed-house event after another all summer until it was beat into my nay-saying little head that yes, people DO want to start companies in one of the most expensive cities in the whole world.
While New York lacks the informal advising/hacking culture of the Valley, it makes up for this through the fact that every other industry has solid representation in NYC. A clothing startup that wants to do deals with designers? You can just trot down to their studios. An art website that wants to feature gallery work? The subway to Chelsea will get you there.
Ultimately, startups need something that will provide momentum. I think - contrary to the popular Valley-centric belief that it’s “here or nowhere” - there are a lot of different ways to create momentum and one is having access to the best + biggest players in many, many different industries. No place better than NYC for that.
3. Early-Stage Investing is about People
What I found so heinously unattractive about finance jobs (for the 2.5 seconds that I was considering working at a bank) is that I saw it as high-class paper pushing. You don’t get to really know people. It’s about excel and ratios and presentations and deals, but not really about people. Early-stage investing is mostly people-focused. It’s about getting to know a team and assessing not only what they’re building but how they will build a successful company.
I believe this is what separates really good VCs from the rest - the ability to not only spot a market-crushing business model or technology but the ability to pick out a winning team.
This is not something one can learn in a summer.
So that was my summer. There were some other key moments, but I need to leave some items for the first-day-of-school excitement. I even got a new haircut.
The talk is called “The Art of Teaching Entrepreneurship and Innovation” (I know, how b-school of me!) and I was listening to it in podcast form on the train today. Really great talk by Tina Seeling, the executive director of the Stanford Technology Ventures Program. Got me thinking about the East Coast/West Coast separation in the way entrepreneurship is taught, which I’m sure has a direct relationship with the way businesses are built and the way investments are made.
I’ve been closely following the debate about the culpability of MBA programs in the recent financial crisis. How could I not? I’m $75K deep into an investment that - depending on who you talk to - may not, in fact, be the key to world domination. [SIGH].
Here’s where I - typical and current b-schooler that I am - stand on this issue. I have experienced first-hand the negativity and suspicion that comes my way when I tell people I’m in business school. There’s this seemingly inevitable distrust that is tangible, whether it’s people thinking I want to “network them” or steal their technology or somehow make money off of them in one way or another.
It’s depressing that this is the general impression of MBAs, but I won’t say it’s undeserved. We have a special, albeit tongue-in-cheek, award at school for networking (video here!) and many of my classmates, myself included, have a deep appreciation for the art of arbitrage (buy low, sell high!) that started at a young age.
That said, I just can’t agree with the argument that the business school curriculum “indoctrinates [students] with half-baked management and finance theories, along with an unshakeable belief in their own talents, before sending them out to earn ill-deserved fortunes” (from 8 March 09 article in the Guardian). If anything, I have become more wary of power and question deeply the way I interact with others and the implications that will have for my future employers/employees.
One of the central themes in my first-year of classes has been that band-aids (of the Enron + Lehman variety especially) won’t hide deep systemic issues for very long. The premise that you need to build respectable companies geared toward long-term success is definitely embedded in the MBA curriculum - the gap, I believe, lies in teaching students how to abide by those principles outside of the classroom, when shareholder/investor pressure mounts and they don’t have a supportive peer group to look to for guidance.
If we must play the blame-game when discussing the origin of the financial crisis, we’ve got to tie in modern corporate culture, market economics, George W. Bush and a host of other factors, the MBA curriculum included. However, clinging to the idea that business schools are factories pumping out Objectivist, Faustian, schmooze-machines is short-sighted and not particularly accurate.
One thing I’ve learned after serving as an organizer for the MIT $100K: great entrepreneurship competitions offer more than just prize money.
Sure, $100,000+ is an awesome carrot (and actually, the most any team could win in the 2009 $100K is actually $340,000), but startups need more than just cash to succeed. I now completely understand why VCs demand (and rightfully deserve) board seats - navigating how cash is spent and how to actually run a business is a different skill set from raising money or developing a cool technology.
As an MBA student, I get asked semi-frequently whether I believe entrepreneurship can be taught. Here’s my stance - you can’t teach passion, hustle, drive and attraction to risk. Entrepreneurship to me is like dancing - there’s the technical part and the “other”.
The technical part is teachable - financial statement analysis + accounting, basic business law and capital structure. I am NOT someone who believes it’s valuable to learn these lessons the hard way. It’s totally tragic when a perfectly viable and compelling business is driven into the ground because of accounting naivete, in-fighting or massive lawsuits over IP.
What I’ve learned after getting an insider’s look at the $100K is that the value for the teams comes in the lead-up to the final awards ceremony; all semi-finalist teams meet with industry, legal and VC mentors to refine their plans and attend workshops on negotiating term sheets, properly assessing market opportunities and refining their product.
One thing that surprised me was how many entrepreneurship competitions globally are modeled after the $100K. Now in its 20th year, the competition has produced companies like Akamai, Harmonix, Brontes Technologies and Visible Measures. And I don’t think any of these companies were $100K winners (they were either finalists or semifinalists) - just by participating in the process they were able to get their companies off the ground. It’s not about the winners - it’s about the ecosystem.
I am so excited for this year’s finale - this year’s ideas are kick-ass and it’s going to be a great show.
Hope you can join us –
The MIT $100K finale is next Wednesday, May 13th at Kresge Auditorium in Cambridge, MA. There will be a showcase at 6pm highlighting all the semifinalist teams and the awards show will start at 7pm. It is open to the public and no tickets are necessary - seats are first come, first serve.
There’s a certain art to putting together one’s class schedule. I try to make sure I have a few reasons to love every class I sign up for even before the semester starts (great prof, cool topic, endorsements from trusted sources, etc.) and I pay very little attention to the recommended classes that one “should” take while in business school.
I’m bummed because there are 4 classes I was WAY excited about and all 4 are scheduled in 2 time slots. Boo.
Here’s what I’m taking in the fall:
1. New Enterprises - Think of an idea and spend the entire semester writing a business plan, then present to VCs and get feedback.
2. Early Stage Capital - Strategies for raising capital, valuation, market norms
3. M + A - Valuation as it related to mergers and acquisitions
4. Power and Negotiation - Simulation-based class on negotiation techniques, BATNAs, etc.
I have heard great things about the class “Economics of Information” taught by Erik Brynjolfsson, the director of MIT’s Center for Digital Business, but it doesn’t fit in my schedule. Still looking for a 5th class, but I’m sure I will find something before September.
I'm Amanda Peyton. I am an MBA student at MIT Sloan and this is my blog about startups, technology, entrepreneurship, business school and "other". For more about me visit http://amandapeyton.com.
