This post originally appeared at www.chrisamarks.com in 2013
Day after day, I see pitches by companies highlighting their “first-mover advantage.” And for good reason. As investors, we are constantly searching for ideas that are innovative and new. We are always looking for companies creating new markets or disrupting existing ones. The idea of a company establishing itself as a market leader in an emerging segment is very powerful.
You don’t have to be in this business very long, however, to realize the landscape is littered with failed first-movers who were ultimately overtaken by more agile and innovative followers (think MySpace and Facebook).
I was recently discussing this phenomenon with another VC who quickly made a compelling case for what he called the “first-mover disadvantage.” In other words, a distinct disadvantage for those leading the way.
One thing is clear, first-movers face a number of challenges unique to their market timing. For example, they almost always carry the burden of having to educate their markets and change pre-existing behaviors. You don’t need to be a psychologist to know that humans resist change. As a result, teaching users a new way to do something can be a long (and expensive) road.
In addition, first-movers carry the burden of establishing market pricing. This may seem great when your company owns the market, but inevitably sets you up to be undercut — particularly by competitors willing to move down market.
In an ironic twist, often the biggest challenge for first-movers is the evolution of technology itself (the very thing that created their opportunity). These days, in a matter of months, a company’s tech stack can go from cutting edge to legacy. Every language and infrastructure iteration is putting more tools in the developers hands — making them more agile and allowing them to do more with less. As a result, first movers often find themselves boxed in from a development standpoint, and at a competitive disadvantage when it comes to evolving with the market.
All that being said, I would still rather be a first-mover than a follower. The advantages of being viewed as an early market leader tend to outweigh all of the challenges discussed above. In addition, the opportunity to define your segment can be an incredible strategic advantage.
The companies that I have seen successfully create new markets, and leverage their first-mover status into success, tend to share a few common traits. First, they are aware of their potential competition, but don’t let it define their strategy (I wrote an earlier post about competitive threats here). While it is important to be informed of market activity, a proactive strategy is always better than a reactive strategy. Second, they don’t stop innovating. Innovation is what made them a first mover — it is also what enables them to continue to be seen as a market leader. And finally, they know how to execute. After all, one thing is clear, innovation without execution is no advantage at all.