
Startup Competitive Advantages that Work - stakent
http://blog.asmartbear.com/unfair-advantages.html
======
btilly
What is sad is to see a company with a competitive advantage fail to see it
and throw it away.

I used to work at Rent.com. A key competitive advantage is that its revenue
cycle is wrong. When it started its competitors all made money as soon as they
referred someone. Rent.com only made money after the person was referred,
leased, reported it to us, the apartment was contacted, and the apartment
paid. Optimizing for this was difficult, but once Rent.com had traction none
of its competitors could afford to switch models because that would open them
up for apples to apples comparisons, with a company that had already been
optimized, when they didn't even know how to track that data!

Then Rent.com got a new, well-funded, competitor called MyNewPlace.com with
deep industry connections. Same model. Some people there used to be at
Rent.com. Absolutely no idea how to implement. This is where Rent.com should
have increased their spend on advertising to the point where the unoptimized
upstart was losing money on every sale and Rent.com was making money. Wait
until the competitor went under. Then cut back on advertising.

Unfortunately Rent.com had been purchased by eBay, eBay didn't understand
Rent.com's business model, and so Rent.com was forced to squeeze margins. This
gave MyNewPlace all the time in the world to figure out the business model.
Worse yet, Rent.com put someone in charge of internet advertising who
completely didn't understand affiliate relationships (even at break-even they
are profitable because of positive SEO), and that self-inflicted wound only
helped MyNewPlace more.

It was a great competitive advantage. No competitor should have been allowed
to flourish. But if you don't understand your competitive advantage, it is
easy to throw it away. And they did.

~~~
patio11
_even at break-even [affiliates] are profitable because of positive SEO_

Not necessarily true in all cases, but broadly accurate. Also, you can work
the backend. (Solicit upgrades, upsells, and repeat purchases from the
customer, which would typically not result in you paying additional
commissions to the affiliate.)

~~~
btilly
It was certainly accurate in Rent.com's case. Working the backend is another
good idea, but not one that Rent.com used. (Typically once people have found a
place to live, they aren't in immediate need of another.)

~~~
ebiester
Moving services? New furnishing for that bigger apartment?

~~~
btilly
Rent tried those things, but they were never more than small sidelines
compared to the main business.

------
arturadib
I still think that the best predictors for success are variables that
characterize the founders (smarts, perseverance, adaptability, etc), rather
than their initial ideas or pitches.

People like to dissect ideas and pitches because that's a lot easier to do
than assess the competence of the founders. (Via for example, recommendation
letters, but that's a whole new topic).

Try doing this: Read "Founders at Work" or some other collection of startup
stories, and try to identify _any_ pattern in the initial ideas that were
reasonable predictors of success.

I am sure you will scratch your head for a long time before realizing that
it's all about the founders: how they adapted to the circumstances, how they
dealt with the tough times, etc. (Ask the very author of the post above!).

My family is full of successful entrepreneurs in totally different market
segments (ice cream shops, uninterruptible power supplies, ornamental rocks,
etc), and frankly if I didn't know them I'd think they'd all flop: their
markets were saturated at the time, they were non-experts, and there was no
clear "competitive advantage".

I love the following quote from my cousin (the most recent and already very
successful entrepreneur in the family), when talking about how he dealt with
all sorts of difficulties with his company:

 _Sometimes I'm afraid of what I might want in the future. Because it seems
like if I really want something, there doesn't seem to exist anything I_ can't
_have._ (Loosely translated from Portuguese).

~~~
mkuhn
What you are describing is called Upper Echelon Theory or the Upper Echelon
Perspective which is backed up by quite a solid base of research. It basically
states that a company is a reflection of its officers (or founders) and that
they therefore are largely responsible for a company's successes or failures.

Upper echelon theory is one of the things used to justify the bonuses and
salaries that Top Management Teams receive in today's world. Also a lot of the
research into entrepreneurship in the last years has focused on the upper
echelon perspective a lot and tried to establish a link between factors in the
founder team and a company's success.

For my Master Thesis I myself looked into the fact if diversity in a founder
team increases the likelihood of startup success. The result there have been
that) diversity largely has no significant influence on the success of an
internet startup, only diversity in Nationality had a significant, negative
impact.

If you are interested in the topic I can dig up and post a few of the papers
that I used as the base for my Thesis. Unfortunately I am not yet allowed to
post my own Thesis.

~~~
gojomo
What kinds of diversity did you look into? Did you find any factors in
founding teams correlated with success?

~~~
mkuhn
I only looked at diversity and no other factors. I did a survey which I also
published here on HN and in total got back 67 usable results. Quite a small
sample but enough.

I checked for a total of 7 different kinds of diversity that can be split into
two broad categories:

1\. Ascribed Characteristics - Things that are "visible" and others ascribe to
you. Here I checked for Gender, Age, Nationality, and Race. Hypothesis here
was that diversity in Ascribed Characteristics has a negative effect because
it fosters non-task related conflict.

2\. Achieved Characteristics - Things that people have worked for. Here I
checked for type of education, level of education, industry experience,
functional experience. Hypothesis here was that diversity in achieved
characteristics enlarges the overall knowledge available to the company and
fosters task related conflict which leads to better decisions. Therefore
diversity in achieved characteristics should have a positive effect.

As mentioned before while the results trended towards what I expected the
results weren't significant enough to reject the Null-Hypothesis in all cases
but Nationality diversity which had a small negative effect.

To summarize what I found: The effects of diversity in founder teams of
internet startups are so small that they are outweighed by many other factors
that are easier to achieve than to fine tune the composition of your founder
team.

------
ntoshev
The founders he admires (Gates&Allen, Jobs&Wozniak, Page&Brin) probably
wouldn't be able to articulate competitive advantages that this guy considers
"real". They didn't have insider info or authority. They were passionate about
what they are doing, but who knows if they were more passionate than their
competitors (also applying this point to Apple for design and Google for
search is not correct; Apple sacrifices very little to make their products
look beautiful (and this is a narrow understanding of design), Google founders
cared more about collaborative filtering at first).

~~~
rgr23
Same goes for the founders of Facebook, Twitter, Amazon, Craigslist, Ebay,
Yahoo, etc.

~~~
JesseAldridge
Those companies (except maybe Yahoo) had the advantage of being the first to
get-it-right in markets that tend toward natural monopoly (due to network
effects).

------
jargon
None of these are competitive advantages that are the opposite of the
suggestions from the previous post about things that are not competitive
advantages.

There are plenty of people who are passionate about their startups, working in
a team of talented people, with customers, and insider information.

If a company went to a VC and used these competitive advantages, they'd be
shot down in a second. Imagine this scenario:

 _Hi, I'm jargon. I am really super passionate about this idea and it's in my
knowledge domain, because I have retail store. I'm a programmer with a retail
store who has this software that I wrote to help me manage my retail store. I
got 5 other retail stores on my block to buy it because it is so awesome. No
other company is going to be able to compete with it, because all I care about
is retail store software. Plus, we got Donald Trump to market it for us!_

What VC in their right mind would ever invest in something like that?

~~~
gamble
You're in a pretty sweet position if you can go to an investor and say:

1) I'm an expert in my target market.

2) I have a functional product deployed in a real environment.

3) I have five other customers lined up already.

You'd be sitting better than 95% of startups, even if The Donald isn't
shilling for you.

------
yurylifshits
I think number #1 competitive advantage is Distribution.

Microsoft got to be an exclusive OS for IBM PC. Yahoo got a free button in
Netscape. Kindle was pushed by Amazon (the default place for book buyers)

~~~
JesseAldridge
Distribution is definitely big. Look at how much the top iPhone apps make,
look at Farmville. People generally will not seek stuff out. They will only
consume stuff that's placed directly in front of them, like pigs at a trough.

------
dgudkov
Good article.

Asking questions like "what would you do if someone will fully copy you" is a
bit dirty trick. Abstract competitors are always better, so it's meaningless
to talk about them. Real competitors, even very smart and mighty, can't cover
everything - they must limit themselves to something (market niche,
demography, geography, price range etc.), and this may become a chance to
avoid competition.

~~~
smartbear
I certainly agree with you in practice.

Think of this like an Einstein thought-experiment -- it's not how you should
run your life every day, but it's maybe a nice foil for thinking about such
things.

------
baguasquirrel
I keep hearing about "complementary skill sets", but what was complementary
about Brin and Page? They were both computer scientists with a mathematical
bent.

------
atomical
It's good to see someone admit that they didn't have an advantage in the
market place and then built something great.

~~~
cookiecaper
I think there's too much focus on initial advantages. There are a lot of
people that make a lot of money by starting restaurants, dry cleaners, book
stores, and other run-of-the-mill, every-day things in common and saturated
markets. The idea that you have to have something earth-shaking to be a
successful entrepreneur is far too pervasive, imo. The real thing is that you
start, persist, and have some semblance of the skills that you need and a lot
of dedication and perseverance.

------
ohashi
He makes a fair point, those are definitely competitive advantages.

Now the question becomes, most companies won't have them but they will still
be expected. Then what?

Of course, where do we draw the line? semi-fame? is that competitive
advantage? I have 20,000 twitter followers? 100,000? 1 million? (or mailing
list members, rss feed subscribers, whatever metric you want).

------
paraschopra
There are a ton of successful companies that don't fit any of the criteria
(Facebook, Nike, McDonald's, etc) In fact I have to think hard to come up with
companies that may have had unfair advantages.

So, while unfair advantages may work in your favor. Not having them (yet being
successful) may actually be a norm.

~~~
chc
Zuckerberg _was_ a college student when he developed The Facebook, so he at
least had the insider advantage over his competition at the time (Myspace,
Friendster, Orkut). This also ties into the fact that his product was a lot
more narrowly focused, which leads to the "single-mindedness" advantage and
was absolutely crucial to Facebook's success. I don't know enough about the
history of Nike or McDonald's to comment there.

------
Scott_MacGregor
Very well written, I got a lot out of this. I think it provides a good
framework for thinking about this part of the business.

------
Charuru
I like it! These advantages sound very good. But my problem is that these are
reformulations of the 'fake' advantages for purposes of marketing to VCs,
rather than any substantial actual difference IMO.

It seems to me like fake advantages Passion + Feature = Real Adv One Thing and
PhDs / MBAs is simply one way of saying Dream Team. I mean as a marketing term
'Dream Team' is even less substantial than PhDs / MBAs.

~~~
smartbear
I would take a proven entrepreneur over an MBA and a proven uber-coder-geek
over an MBA any day of the week, and most VCs would too.

~~~
Charuru
Not a real dichotomy though...

