The First-Mover Disadvantage: Why Startups Fail

Amazon is entering India. The timing, and not the move in itself, catches the eye. 2010-2011 was a period of rampant funding and hazy valuation calculation for Indian e-commerce. Flipkart was widely celebrated as the first mover that got most things right. Amazon is, of course, coming to the party once it’s over and done with.

Cash on delivery has proven to be a dud, the ecommerce model itself is broken in many places. And for all those who entered the fray a couple of years back, most have done little more than serve consumers at below-cost prices in an effort to bite off some of the pie. In effect, Amazon is entering a landscape conveniently created by its potential competitors, most of whom are either too exhausted or on the verge of joining the deadpool.

In effect, Amazon knew all along that there was a significant ‘First-mover Disadvantage’ to launching in India.

In an industry where decisions are often spurred by the Fear of Missing Out (FOMO), the first-mover disadvantage blows all conventional startup wisdom out of the water. Startups believe in running to gain traction and becoming big faster than their competition. Venture capitalists invest in growth at the expense of all other factors. And yet, there are conditions under which first movers actually suffer a significant disadvantage.

 

Market creation challenges

Most startups embarking on an entirely new business model in a new market face the challenge of making the market. Talks of product-market fit go out of the window not because the product isn’t good enough, but because the market isn’t ready for it, no matter how good the product be.

Early to the game often requires one to create a game before they can start playing.

First movers may often have to invest in one or more types of market creation:

1. Demand creation: Udemy, one of the pioneers of the online education marketplace model, struggled to get instructors on board initially. Teaching online for money was an alien concept. Paying to learn online, from non-accredited sources, was unproven. Udemy had to invest in getting both sides of the market educated about the concept. It relied significantly on PR based on instructor success to create awareness and interest among other prospective instructors.

2. Investment in removal of friction: These are especially tricky. The first mover may have to invest in solving some fundamental infrastructural problems and late movers may benefit from these efforts without spending a dime. Startups like Flipkart invested heavily in creating alternate cash collection mechanisms to improve per-transaction economics.

Tesla, today, has to invest in creating a supporting infrastructure of charging points for a world of electric cars. The best recourse in such a scenario is to create infrastructure that is well-controlled and can be subsequently owned and licensed. This is not always as straightforward as it sounds. Removal of friction is often at odds with any form of control. Hence, most advantage created by the first-mover is often lost to a slow-but-sure-footed late entrant.

 

Regulation hacking

When startups go head to head with traditional industry counterparts, being the first-mover isn’t pretty at all.

Startups trying to compete with large incumbents often hit a roadblock when the traditional industry is heavily regulated. The incumbents tend to lobby well with regulators and force them to protect their interests. Airbnb’s problems with the rental industry and Uber’s problems with the transportation industry are frequent reminders of the challenges that the early mover faces.

Most industries that look ripe for disruption but haven’t been disrupted yet, typically have a regulation card up their sleeve. Education, for example, is highly regulated when it comes to certification. These regulations are largely the reason incumbents are able to hold out and counter disruption at this point.

Legal services, again, is an industry ripe for disruption, being a high value services vertical and one where the majority of the end product can be transmitted digitally.  However, industry regulation, again comes in the way and protects the incumbents.

Regulation typically lags innovation, and the first-mover often has to face the strongest pushback when disrupting the way the industry base traditionally worked.

In both cases above, the problem of product market fit isn’t something that can be solved on the product side. It is the market that needs to be fixed. Once fixed, a late, but carefully observant, entrant may easily come in and benefit from the first-mover’s efforts.

It is important to watch out for significant factors that point towards a first-mover disadvantage. This doesn’t necessarily imply that the startup should  give up the idea of getting in, in such cases. If a startup does invest in solving for the initial challenges, it needs to have a clear path for exclusively harnessing the advantages it creates.

 

Tweetable Takeaways

First-Mover Disadvantage: Why you may fail by doing everything right! Tweet

Why first-movers fail! First movers invest in demand creation but others may capitalize. Tweet

Why first-movers fail! The first-mover often has to face the strongest pushback in #Disruption. Tweet

 

 

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  • http://platformed.info/ Sangeet Paul Choudary

    Yes, I know. But the late entry has definitely helped.

  • KS

    Lots of examples to prove each, but the outcome isn’t always the result of well-thought-through strategy. Amazon certainly isn’t late because they wanted to. There were multiple other internal-to-organization challenges that they were solving.
    - [An amazonian closely involved with this from 2004-2011].

  • http://india.dialus.com/ dialus

    it is great article.Thank you.

  • http://platformed.info/ Sangeet Paul Choudary

    That’s a very interesting point and something I’d love to think further about. A first-mover who retains an advantage because of the value created rather than the ability to capture value will definitely be a much more useful strategy. Perhaps a follow-up post on that soon!

  • http://platformed.info/ Sangeet Paul Choudary

    Yes, that is indeed the common case which is why we have the term “first mover advantage”. The point of this article is to illustrate 2 cases where the first mover advantage gets thwarted. In amny other cases, it won’t be.

  • Manish

    How about iPhone, Amazon in US. Isn’t about building the moat around your business model. Companies who have been able to do that continue to lead the market. You pretty much have chance to shape user learning.

  • Aaron Wolf

    Great article. I wish there were a bigger principled angle here, however, instead of the selfish-business assumptions. Sure, owning and licensing electric car supporting infrastructure is the best recourse… well, if the motive is strictly profit and control rather than what is good for the world.

  • Kailash

    All three examples – Maruti, Telecom and Banking – are in the ‘regulated’ industries, remember the days pre-1991 helped Maruti significantly, and the first mover advantages was almost a decade instead of a few months or a year at best in most tech. based industries now!

    Moreover, for the banks owning the ATMs – the first mover advantage is again because you need licenses to open ATMs, some banks are more tech-savvy than others, many banks have only a regional presence and hence no point in creating a national network and because real estate space is available only so much! All this gives the first movers in these industries, significant leverage which can’t be negated soon!

    However, in industries like ecommerce (esp. in a nascent market like India), the so called competitive differentiators are probably only the brand, and then beyond that how long can you afford to hold on while others bleed to death! And once you kill the competition, then you can dominate the market, like Amazon, ebay do in US!

  • Vishal

    So you mean to say first mover has only advantages associated which counter foils if one is unable to garner the value of being their first.

  • http://platformed.info/ Sangeet Paul Choudary

    Agreed!

  • http://platformed.info/ Sangeet Paul Choudary

    Without a doubt, there is massive first mover advantage if you can capture it. Tesla has the potential to own the network of charging stations as well as the creation platform for the car. And, hence, capture that advantage. The poblem is when one creates first mover value but fails to capture access to it. In all the examples above, the first mover successfully captures that value.

  • http://platformed.info/ Sangeet Paul Choudary

    Thanks BeiBei! Twilio is actually a great example of this phenomenon.

  • BeiBei

    Great post, Sangeet! “The first mover may have to invest in solving some fundamental infrastructural problems”. Rather than building the infrastructure AND the business that relies on it, startups should just focus on building the infrastructure and making it available to later entrants. Twilio did this and look at how many business it now powers!

  • Bob

    Awesome Sangeet! Another great way of demonstrating the need to both understand your business model and target market and to carefully monitor where the value-add/benefit pool is deepest. Sometimes (often?) that means the 2nd to jump…:>)

    I like Arun’s contras, but like most start-up business cases, the answer to the question of “what is the right model” is typically it depends…

  • Arun Purohit

    A good PoV but here are contrapuntos : #1 Maruti had the first mover advantage in compacts in India and removed major resistance points like production, distribution etc. The first mover advantage still lets it dominate the auto market where Tatas, Hyundais, Mahindras still struggle # 2. Telecom towers : The company which sets up controls the network in those areas and may charge the service providers pretty high.. # 3 ATM business : Banks owning the ATMs can charge the banks not owning ATMs heavily

  • George Kollias

    The early bird may catch the worm but the second mouse gets the cheese. Thank you for the article Sangeet.

  • http://platformed.info/ Sangeet Paul Choudary

    Great to hear that, dude!

  • Santosh

    Very informative; clearly points out the structural reason behind things I’ve seen or suspected anecdotally. Loved the part about regulation – couldn’t agree more!