New Venture Lab: Equipping Christian Entrepreneurs

Those of us that participated in the craziness of the dot com days in the late 1990's through 2001 will no doubt recall that there was a rush to be first-to-market and launch your company quickly with the coveted "first-mover advantage" status.  Simply having that phrase in a venture capital fund-raising presentation in those days usually guaranteed an additional $5 - 10 million in pre-money value from your investors.  I, too, was guilty of that thinking in one of my dot com ventures.  Well, as we all found out, you can only suspend the normal rules of business for so long and when the smoke and dust all settled, what really mattered was having the best product or service and not necessarily being the first-to-market.  What follows is an insightful article about this subject:

Customers and investors don't give much credence to a company that touts first-mover advantage as they do to the company that has the right product or service.

I remember reading a business plan a few years ago for a company that was planning to create custom compact discs that would contain songs customers chose from an extensive list. In that business plan, the founders discussed their first-mover advantage: Since no other company was doing this, they would be able to quickly gain market share, be recognized as the leader in the market, and keep competitors from entering.

Unfortunately, this company was not able to move fast enough and did not have the right product for its market space. Before this company could establish itself, competitors with better products entered the market (including Napster) and this company had to change course to a completely different business concept.

Rather than having a so-called "first-mover advantage," start-ups that offer new products or operate in new markets often run into difficulties resulting from unknowns about the market and the costs associated with creating market awareness. Additionally, customers don't give as much credence to the company that was first as they do to the company that has the right product or service. If your company is a first mover, remember that being first is not a sustainable advantage and you will encounter many challenges in developing a viable business.

Market Unknowns

One issue with being a first mover has to do with the idea itself. Remember that it is unlikely that you are the only person who has thought of a particular business idea. So, if your company is first to market with that idea, one of three things is likely: 1) It's a bad idea, 2) Someone else has thought of it and is working on it too, or 3) Someone else will immediately recognize what you're doing and enter closely behind with the same or similar concept. There is obviously risk involved with the idea itself, as market acceptance can't be guaranteed. On the other hand, if it truly is a good idea and you are the first mover, any advantage you have by being first to market isn't likely to last.

A second risk here comes from the fact that it is nearly impossible to determine the exact form of product or service that customers will prefer before entering the market. This can result in significant time and money spent redesigning the offering to meet customer needs. It also offers an opportunity for competitors to learn from your mistakes and enter the market with a better product or service. The company described above is an example of this: competitors followed it into the market with products that allowed customers to immediately obtain the music they wanted rather than waiting for a compact disc to be manufactured and shipped.

Market Awareness

A second and potentially larger problem with being first to market stems from creating market awareness. The "if we build it, they will come" philosophy generally doesn't work: With a completely new product or service, a start-up needs to let customers know that it exists and educate them on why they should buy that product or service. With the absence of competition in the market, creating legitimacy is easier said than done. There is significant risk here in terms of cash flow problems from higher-than-anticipated cost of marketing coupled with lower-than-anticipated sales, as well as from competitors jumping into the market and capitalizing on the development that has already been done. Again, the company described above is a good example of this: The market awareness they were able to develop actually helped competitors as they entered the market since there was already some understanding of the potential for custom music.

So, if you are entering a new market with a new product or service, what should you do? First, try to get some "guinea pig" customers that will test your product or service early on and give you feedback as to what customers really want. This will help you to validate your concept and have an attractive offering when you really hit the market. Second, you need to move quickly. As stated above, if it truly is a good idea, others are likely either working on it now or will be quick to act when they see what you're doing. Third, try to create some barriers for others entering the market, such as obtaining patents on intellectual property, locking up key locations, or negotiating longer-term contracts with customers. Fourth, don't be overoptimistic about how quickly you can penetrate the market, as this can lead to cash problems if it costs more to develop the market and takes longer to begin generating sales. Finally, remember that competition isn't necessarily a bad thing as it helps to validate the market, but anticipate where and when it will enter and try to stay a step ahead.

By Jay Ebben

Source: Inc.com