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Startup Competitive Advantages that Work (asmartbear.com)
211 points by stakent on July 19, 2010 | hide | past | web | favorite | 39 comments

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).

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.

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

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.

This sounds to me like the Fundamental attribution error[1]: Attributing too much to the person and not enough to their situation. Smart, motivated people will eventually succeed. However, that doesn't mean that every given startup they found will succeed. A lot of people will go through a few startups before they get it right.

[1] http://en.wikipedia.org/wiki/Fundamental_attribution_error

Wait, did you also factor in everything I said after "smarts"? And did you interpret prediction variables as crystal balls with 100% accuracy?

All I'm saying is that, based on historical accounts, initial ideas/pitches do not seem to be good predictors of success.

The only patterns I have noticed have to do with the founders (not just smarts!).

But maybe you have noticed something else? Or perhaps no pattern at all??

Some research on business strategy, by rita mcgrath("discovery driven growth") found that many successful entrepreneurs have changed their initial idea while building their business.

This is specially true for very dynamic/chaotic business areas.

Her recommendation for dynamic/chaotic business areas:work with an adaptive strategy, using small experiments(in similar spirit to eric ries's "lean startup").

I'm not sure your standards for success are the same as the writer though. You need a home run idea to hit a home run.

Here's an article by the writer you should read:

"Your idea sucks, now go do it anyway"


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.

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.)

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.)

Moving services? New furnishing for that bigger apartment?

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

It looks like Rent.com still ahead of mynewplace.com http://www.quantcast.com/profile/embed?img=http%3A//www.quan...

I think his point is that they could have forced mynewplace out of the market very quickly, and didn't.

Exactly. And at this point MyNewPlace has figured out enough of what Rent did well to be competitive, and is coming up with new ideas faster.

It doesn't help that most of the team that made Rent what it was in the first place (including me) have moved on. There is a definite loss of institutional knowledge.

This is fascinating. Would you mind talking a bit more about this via email? I can't seem to find your contact info, but mine is in my profile.

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).

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

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).

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?

In your italicized text, it was good up until "No other company is going to compete with it."

The point isn't that you have no competition, but that you have enough raw material to be competitive yourself.

The point isn't that you're guaranteeing success, but that since most pitches (that I see) don't include ANY of the advantages you just listed, those that DO have those advantages look a lot better at the outset.

Of course anyone can succeed, and many should try. But that's not how investors think; they think in terms of reducing risk, and things like past success and traction are ways of reducing risk.

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.

If I could go into my investors with 5 signed contracts and an endorsement from somebody like Donald (assuming it was actually relevant to the product), I can guarantee they would be standing on their seats cheering.

Your pitch has outlined very real successes that are far more important to the success of the business than 15 slides of how cool your idea is.

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.

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.

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)

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.

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

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

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.

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).

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.

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.

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.

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.

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.

Not a real dichotomy though...

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