Why we should not race competitors to market
Business school teaches us that it is important to be 'first to market' and to get 'first mover advantage'. I believe this is good advice for many businesses, but in the world of launching new, innovative products or services, it is often wrong.
I will use the business that Plaxo is pursuing now (self-updating address books) to explore this topic.
The first player in that space to my knoweldge was Contact.com. Mitch Kapor (founder of Lotus) was on the Board, and, I believe, led the investment for Accel partners (a top VC). The VCs put at least $10M into it. At the time they launched, they basically had no competitors. What they did was to create a dedicated piece of software you would run on your PC that would manage your address book. It handled all the synching in the background for you so that the details for everyone in your address book were always up-to-date.
Overall it was a well-done app. It was free. It failed to get significant user adoption. The reason was that everyone wanted to have their contacts app be the same as their email app, and that Microsoft (and Notes, to some degree) owned that space. When Contact.com shut down, they still had no competitors. Mitch's comment to me later about why they may have failed was "What we were doing really was a 'feature', not a 'product'. What we were doing needed to be part of a complete product to work." What was needed was more insight into how users would respond to the product. Competition wasn't a factor.
A company called Peoplestreet, that I invested $2M of my fund's money in, launched the year after Contact.com shut down. It had the same basic idea as contact.com, but instead of a separate client, it worked inside all the major email/contact-management programs, like Outlook, Act, and Notes. It was also free. It did get user adoption--we had about 30,000 individual users--but more importantly, real organizations like Bank of America, Russell Reynolds, and others said "this will be important to my business". Bank of America invested $2M in the company, by way of underscoring that they believed this.
This company failed too. The underlying reason was that we couldn't find a way to get users to PAY for the service. In summary, we solved a problem that Contact.com had not, and encountered a second problem: a business-model issue. Although Peoplestreet nominally did have competitors (GoodContacts, Ants), I don't believe we ever 'lost' business to a competitor. The issues were, fundamentally, internal. Had Peoplestreet found a way to cast the product in a form that people were willing to pay for, it would be here today. If you believe that such a path existed for Peoplestreet, you can put the company's failure down to a lack of insight on the part of management and the Board (including yours truly). Like the example of Contact.com, one could argue that we should have been able to forsee this problem, before spending $6M to have it hit us in the face.
Today Plaxo is pursuing this SAME business, a few years later. It has a similar approach to Peoplestreet. They had the benefit of learning from Peoplestreet, I suppose, and their product is smoother and more refined than Peoplestreet. But to my knowledge they have not solved the basic problem of finding a way to get paid. They are now offering a paid version with 'premium customer support' and are trying to 'get into the enterprise'. I hope they succeed, but the bottom line, I think, is that they will have to take a significantly different approach than Peoplestreet, or they will fail. The challenge they are having is one that a bit of careful thought, or perhaps research into Peoplestreet's experience, would might have revealed early on. I think they have spent about $19M on this. I don't think competition has ever been a factor for Plaxo.
What is the moral of these stories?
It is critically important for us to work out the underlying usability and business model challenges that face a new, innovative product, prior to making major investments in it. Usually, the #1 reason companies don't do enough of this is rushing. They feel they must race competitors into 'the market', as though they knew that a market existed. Despite that fact that competition in the self-updating address book 'market' has never been a factor for any of the players seeking to create a product in that space, successive companies, each 2-3 years after the last, have rushed to bring their products to market, in each case spending their limited resources too quickly, and ultimately running out of cash.
The good news is that the enemy is within, so we know where to find him or her. The power to succeed or the responsibility for failure, at the end of the day, resides within the team, and its ability to evolve and shape its new, innovative concept.
I will use the business that Plaxo is pursuing now (self-updating address books) to explore this topic.
The first player in that space to my knoweldge was Contact.com. Mitch Kapor (founder of Lotus) was on the Board, and, I believe, led the investment for Accel partners (a top VC). The VCs put at least $10M into it. At the time they launched, they basically had no competitors. What they did was to create a dedicated piece of software you would run on your PC that would manage your address book. It handled all the synching in the background for you so that the details for everyone in your address book were always up-to-date.
Overall it was a well-done app. It was free. It failed to get significant user adoption. The reason was that everyone wanted to have their contacts app be the same as their email app, and that Microsoft (and Notes, to some degree) owned that space. When Contact.com shut down, they still had no competitors. Mitch's comment to me later about why they may have failed was "What we were doing really was a 'feature', not a 'product'. What we were doing needed to be part of a complete product to work." What was needed was more insight into how users would respond to the product. Competition wasn't a factor.
A company called Peoplestreet, that I invested $2M of my fund's money in, launched the year after Contact.com shut down. It had the same basic idea as contact.com, but instead of a separate client, it worked inside all the major email/contact-management programs, like Outlook, Act, and Notes. It was also free. It did get user adoption--we had about 30,000 individual users--but more importantly, real organizations like Bank of America, Russell Reynolds, and others said "this will be important to my business". Bank of America invested $2M in the company, by way of underscoring that they believed this.
This company failed too. The underlying reason was that we couldn't find a way to get users to PAY for the service. In summary, we solved a problem that Contact.com had not, and encountered a second problem: a business-model issue. Although Peoplestreet nominally did have competitors (GoodContacts, Ants), I don't believe we ever 'lost' business to a competitor. The issues were, fundamentally, internal. Had Peoplestreet found a way to cast the product in a form that people were willing to pay for, it would be here today. If you believe that such a path existed for Peoplestreet, you can put the company's failure down to a lack of insight on the part of management and the Board (including yours truly). Like the example of Contact.com, one could argue that we should have been able to forsee this problem, before spending $6M to have it hit us in the face.
Today Plaxo is pursuing this SAME business, a few years later. It has a similar approach to Peoplestreet. They had the benefit of learning from Peoplestreet, I suppose, and their product is smoother and more refined than Peoplestreet. But to my knowledge they have not solved the basic problem of finding a way to get paid. They are now offering a paid version with 'premium customer support' and are trying to 'get into the enterprise'. I hope they succeed, but the bottom line, I think, is that they will have to take a significantly different approach than Peoplestreet, or they will fail. The challenge they are having is one that a bit of careful thought, or perhaps research into Peoplestreet's experience, would might have revealed early on. I think they have spent about $19M on this. I don't think competition has ever been a factor for Plaxo.
What is the moral of these stories?
It is critically important for us to work out the underlying usability and business model challenges that face a new, innovative product, prior to making major investments in it. Usually, the #1 reason companies don't do enough of this is rushing. They feel they must race competitors into 'the market', as though they knew that a market existed. Despite that fact that competition in the self-updating address book 'market' has never been a factor for any of the players seeking to create a product in that space, successive companies, each 2-3 years after the last, have rushed to bring their products to market, in each case spending their limited resources too quickly, and ultimately running out of cash.
The good news is that the enemy is within, so we know where to find him or her. The power to succeed or the responsibility for failure, at the end of the day, resides within the team, and its ability to evolve and shape its new, innovative concept.
posted by Tim Rowe at 11:35 AM
2 Comments:
Thought-provoking material, but aren't there counter-examples--innovative offerings that were first-to-market, and became market leaders at least in part because of that? Yahoo comes to mind...
Plaxo has close to 5M users today (as compared to People Street's 30k). They are introducing a variety of new premium services (not just one). And, they have a completely different business model than the companies that you mention. Otherwise, Mike Moritz and Ram Shriram would not invest.
Also, whether to "race" into a market or wait for others to fail first, depends entirely on the specific dynamics of the sector--investors who see the difference will be successful.
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