Your Company Doesn't Have To Be #1 To Be Successful


Photo: Faigl Ladislav via Wikipedia Commons

Conventional business wisdom points to focusing on market dominance. There’s really only room for success if you are number one, and maybe number two in a market. And the first generation of Internet companies bears that out.Amazon, eBay, and Google are all such clear dominant players that I struggle to even think of who the number two is in that market. If you are raising money, imagine telling an investor you are going to upend an established market leader (and I tried 10 years ago at the peak of the boom, only to sell our Ticketmaster killer, to Ticketmaster).

But what about fast growing, immature markets where there is a clear leader. Is it game over? Take for example, Zynga and Groupon — two companies that dominate their respective spaces, but still see many funded competitors. While some of this is the result of me-too investing (gotta get me a Groupon for my portfolio), I would argue that certain markets can support many large companies where market dominance is not needed to build a $100 million plus highly profitable business. I don’t think that an Amazon or an eBay plays into this but I do think in social games and group buying, or even flash sales or DSP’s, opportunity abounds. Every day I take video ad inventory from five different players in the ad network space, all of whom seem to be thriving. What are the factors that influence this? 

1) A low friction experience. To buy on Amazon or eBay I need to enter a great deal of information and the more information I enter, the better my experience is. If a competitor emerges with a similar but not substantially different value proposition I will stick with the established players. In games on Facebook or the iPhone, I can jump into any game at any time, or sign up for any daily deal at any time, or in political news, the next compelling article I is only a Twitter link away. In low friction to engagement markets, competitors can thrive.

2) The market is actually making money. It is likely that the fifth biggest social game company or group buying company could still be a huge business. And as an investor, I’d rather own a #5 in the space that makes $100 million than a number one in a space that makes $10 million. It’s cash on cash return. 

3) Low brand awareness. Ask a gamer on the iPhone or Facebook who makes the game they play and they probably won’t know (with the exception being FarmVille). I am signed up for three group buying sites but I can’t remember the name of the other two. I just know I clicked a link somewhere. If you are driven by distribution or CPA marketing, you are not forced to build brand awareness that drives users to a destination URL. And that allows for multiple players to thrive.

So if you are thinking of starting a company where established players exist, aside from staying clear of Amazon, eBay, and Google, asses the characteristics of your market. There may be space for multiple winners.

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