Thoughts on incumbents from a startup’s perspective

– By “incumbents” I mean the big companies that are loosely competitive to your startup.

– The first thing to do is try to understand the incumbent’s strategy.  For example, see my analysis of Google’s strategy. 

– Being on an incumbent’s strategic roadmap is a double-edged sword.  On the one hand, they might copy what you build or acquire a competitor.  On the other hand, if you build a valuable asset you could sell your company the acquirer at a “strategic premium.”

– Incumbents that don’t yet have a successful business model (e.g. Twitter) might think they have a strategy, but expect it to change as they figure out their business model.  An incumbent without a successful business model is like a drunk person firing an Uzi around the room.  

– Understand the incumbent’s acquisition philosophy. More mature companies like Cisco barely try to do R&D and are happy to acquire startups at high prices.  Incumbents that are immature like Facebook only do “talent acquisitions” which are generally bad outcomes for VC-backed startups (but good for bootstrapped or lightly funded startups). Google is semi-mature, and does a combination of talent and strategic acquisitions.

– Understand the incumbent’s partnership philosophy.  Yahoo and Microsoft are currently very open to partnerships with startups.  Google and Facebook like to either acquire or build internally. If you don’t intend to sell your company, don’t talk seriously about partnerships to incumbents that don’t seriously consider them.

– Every incumbent has M&A people who spend a lot of their time collecting market intelligence. Just because they call you and hint at acquisition doesn’t mean they want to buy you – they are likely just fishing for info. If they really want to buy you, they will aggressively pursue you and make an offer.  As VCs like to say, startups are bought, not sold.

– Try to focus on features/technologies that the incumbents aren’t good at.  Facebook is good at social and social-related (hard-core) technology.  Thus far they’ve kept their features at the “utility level” an haven’t built non-utility features (e.g. games, virtual goods, game mechanics).  Google thus far has been weak at social and Apple has been weak at web services.

– Try to focus on business arrangements that the incumbents aren’t good at.  Facebook and Google only do outbound deals with large companies.  With small companies (e.g. local venues, small publishers) they try to generate business via inbound/self service. Building business relationships that the incumbents don’t have can be a very valuable asset.

– Be careful building on platforms where the incumbent has demonstrated an inconsistent attitude toward developers. Apple rejects apps somewhat arbitrarily and takes a healthy share of revenues, but is generally consistent with app developers.  You can pretty safely predict what they will will allow to flourish. Twitter has been wildly inconsistent and shouldn’t be trusted as a platform.  Facebook has been mostly consistent although recently changed the rules on companies like Zynga with their new payment platform (that said, they generally seem to understand the importance of partners thriving and seem to encourage it).

– Take advantage of incumbents’ entrenched marketing positioning.  The masses think of Twitter as a place to share trivial things like what you had for lunch (even if most power users don’t use it this way) and Facebook as a place to talk to friends.  They are probably stuck with this positioning.  Normals generally think of each website as having one primary use case so if you can carve out a new use case you can distinguish yourself. 

– Consider the judo strategy.  When pushed, don’t push back.  When Facebook adds features like check-ins, groups, or likes, consider interoperating with those features and building layers on top of them.

4 thoughts on “Thoughts on incumbents from a startup’s perspective

  1. kirillzubovsky says:

    Hi Chris, I’ve been following you (online, don’t worry) for a few months, and after I read this post I got curios and inspired. Turns out you’re hiring an intern. Let me spare the details, I was going to release this site in a week as I still need to make some changes, but I give you a beta-version. better now than too late. It’s self explanatory and I only ask for 3:59 minutes of your time.

  2. vruz says:

    I disagree about the Uzi machine gun. More a slingshot. it’s not Twitter’s faults if the third party developers are silly enough to base their business in selling glass-fragile products for the twitter platform.

  3. znmeb says:

    Excellent advice, and a huge step up from typical advice to startups I see in the blogosphere. I do think Twitter has a strategy and a business model but not everything has gone the way they wanted it to go. For example, I think they wanted but had to build their own link shortener. I think they wanted more support from partners for annotations and didn’t get it. And I think they wanted more licensees for the Firehose but didn’t get them.As far as being a “trustworthy” platform for third-party developers, I think they’re pretty easy to work with, but tend to commit to more than they can deliver. For example, in the oAuth rollout, they originally announced that oAuth users would get 1500 API calls per hour. They did push the rate up to 350 per hour, but that’s as high as it’s ever going to get as far as I can tell. They’re trying to get everybody onto Streaming wherever possible, which is a good thing for both them and their consumers, but Streaming can’t go back into the archives. And they announced a possible open source compatible oAuth and then had to withdraw it. My main concern with Twitter now is the story I’ve heard that they will be fielding a “free” analytics dashboard. If this is bundled with advertising products, I don’t have a problem with it. But if they’re going to give away keyword data out of Search, click data for links, or analytics derived from data other than the freely available default Streaming access levels, I think they’re leaving money on the table. And I think Twitter leaving money on the table is bad for the ecosystem. They’ve got valuable real-time analytics that nobody else has. They know what people are searching for, and how people *read* Twitter, while we on the outside can see only how people *post* to Twitter. It costs them money to design the algorithms and support the service, and I think they should be selling those analytics.

  4. Mark Essel says:

    After reading several thousands posts from a hundred or two really sharp successful entrepreneurs and investors, a quote comes to mind.”Unfortunately no one can be told what the Matrix is, you have to see it for yourself” -MorpheusAll the advice in the world is meaningless outside of the context of a particular business. On the other hand relationships with entrepreneurs, proto-founders and investors, and deep market knowledge are both well worth investing time into.An exit strategy is only as viable as the duration of the opportunity pursued.

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