Unicorn Hunters (5): Exceptional Quality and Category Leadership

Unicorn Hunters—5 To stand out or achieve an industry monopoly, being good is never enough. You and your team need to become truly exceptional. Unicorn hunters hope to identify early on whether a startup could become the leader in its market. If unicorn hunters do not believe the team has the potential to lead its market, their interest in investing will diminish. This is a winner-take-all world. The easier a business is to scale, the easier it is for the company with the best product to dominate the entire market, because everyone is drawn to something exceptional. If two products compete in a market, one exceptional and the other merely good, which would you choose? Usually, the exceptional product will win. Who wants the second-best search engine, messaging app, smartwatch, or painkiller? Why choose a slightly inferior product? There is a qualification, though: if the slightly inferior product costs half as much as the better one, many people will still choose the cheaper option. That is because a product's excellence is really the sum of all its attributes, and price is one of those attributes. An exceptional product is a category killer. It eats everyone else's lunch. That is why Google dominates search and has a market capitalization many times that of its closest competitor. The same applies to Apple, Amazon, Facebook, PayPal, Netflix, and most other top-performing companies in their markets. What is the market capitalization of Amazon's closest competitor in the United States? Or what is the value of the second-largest social network after WeChat in China? In any highly scalable business, the leading player tends to attract far more customers and a much higher market valuation than its competitors. Some less experienced investors may avoid market leaders because their valuations are so high, turning instead to latecomers trading at steep discounts. But unicorn hunters know this is not a wise decision. What seems cheap at the time may not be cheap in the long run: market leaders usually move faster and soon leave their competitors far behind. This is especially true of certain platforms, which become more valuable as more people use them. As an entrepreneur, if your goal is merely to become the third-ranked company in your market, you might as well give up now. If you aim for third, you might, with luck, end up seventh, eighth, or ninth. Those are terrible positions, and startups occupying them usually do not survive. If you do not believe you can become the market leader, quit before wasting more time and money. You can choose something else where you really can win. When Snapchat was founded, Facebook was already the dominant online social network, so confronting it head-on was not a good strategy. Instead, Snapchat focused on mobile communications. In 2010, Facebook was not yet a dominant player in mobile social networking, meaning the field was still wide open. Snapchat targeted teenagers who wanted a free way to send messages and share photos. It also had a distinctive feature: certain messages disappeared after a period of time, making it more attractive to this group. Snapchat worked on phones and could deliver its services over Wi-Fi, so teenagers without mobile service plans could still use it. The app ultimately made its investors winners. Snapchat went public in 2017, and its share price soared 44% on its first trading day, bringing its market capitalization to $28 billion. Across product categories, you can find companies that do more than occupy part of a category: they have become synonymous with it. For example, when most people think of customer relationship management (CRM), Salesforce is the first name that comes to mind. For databases, the name is usually Oracle. For marketing automation, it is Marketo. Inbound marketing has long been dominated by marketing automation company HubSpot; SurveyMonkey is now king of the survey industry; Zendesk leads customer support; DocuSign has become synonymous with electronic signatures; and Zuora has taken over the entire market for subscription-commerce billing. You get the idea. By becoming the name associated with a product category, market leaders gain an enormous advantage. Their brands are better recognized; they attract most of the media attention; they appear more trustworthy; and they can offer more value, especially where network effects exist. Together, these create huge barriers to entry that make it impossible for competitors to catch up. Another key factor is scalability. In a highly scalable business, a small initial lead can quickly become an enormous advantage. Once a market leader with a high-quality product pulls ahead, its growth gains momentum. It can raise money more easily and benefit from economies of scale. Its brand becomes more valuable, and it can fuel further growth by reinvesting more resources in sales and marketing. This story plays out repeatedly in Silicon Valley. Even a competitor's better product may not matter. Once a company establishes market leadership, it has room to maneuver. The graveyard is littered with the remains of PC operating-system companies that tried to replace Microsoft, and Apple nearly became one of them. Had Steve Jobs not returned to take charge and shifted the entire company toward online music, Apple might already have gone bankrupt. That fundamental shift saved the company and paved the way for the iPhone, which in turn helped sell Apple computers. Customers do not actually want to change the suppliers of the products they use, and they will stick with the market leader whenever possible. That is why giants such as Alibaba and Amazon keep getting stronger, consuming more market share while their competitors struggle to survive. For a startup, being good is never enough. You need to be exceptional. So let me ask: is your product truly exceptional? If not, now is the time to start over, as Steve Jobs did. #SurvivingAStartup