I wrote a post yesterday about the general euphoria in the tech market. One of the signs of things are heating up is the large volume of startups that are pursuing niche product strategies. Consumer internet is a busy space and in a race to differentiate themselves, startups are positioning themselves in tighter product spaces. As venture investors, we sometimes worry that those are features that another platform company may eventually add on their own, placing a startup that lacks the distribution power of a Facebook, Google and Microsoft at a severe disadvantage.
Apple announced Monday the addition of 200 new features in iOS5. Many of those features were the entire business purpose of some startups out there. Here is an article that details 10 of those at risk. This highlights the risk of being a feature that is wiped out of existence by a large platform company and why we are cautious in this regard. Sometimes, large companies acquire rather than build from scratch, but for a niche product, even an acquisition is not a lucrative enough for a VC because of the likely low valuation (it may be different for an angel investor).
For a startup, the advice is to avoid being in this situation if possible. Yes, I know, this is easier said after the fact. But in positioning a startup in a busy space it is worthwhile studying the dynamics of the market, what the major players have done in the past, and what are some contingencies in case this happens. Startups need to be ready to “pivot” in a new direction if their business becomes part of a large platform. This is where creativity and planning pay off. It is also worth noting that large companies don’t always succeed on their own: Google launched Google Video to compete against YouTube, but failed to get as much traction and resorted to buying YouTube for a nice price.
The reason to worry about this is that companies like Apple, Google and Microsoft and maybe soon Facebook have built such a cash cow in a business line (smartphones, search, operating system) that in their search for growth spend lots of money to give features away. Google has been a particularly dangerous player online. Their quest is to be everywhere the user tries to browse online. In that quest they have given away lots of features for free: a good example is android, a fully-functioning cutting edge mobile operating system. They are in the process of putting Symbian(Nokia) out of business.
Entrepreneurs are sometimes bitter when VCs claim that their business may be more of a feature, not a company. And they are partly right. Sometimes great companies start out as features. Yahoo was just a collection of links to webpages when it started out, but that “feature” became so popular that it enabled them to build a one-time dominant position in online traffic. However, the features that tend to become great companies tend to show up early in a new market. So caution is recommended to those busy bee startups that are in market in a maturing market.