Startups

Competition

Like most things in life, competition is not all good and not all bad but competition can be unhealthy and destructive if it is the end game.

Peter Thiel, founder of PayPal and other ventures including Founders Fund, gave an interview last year about his investment philosophy in startups.  As part of his explanation he talked about his issues with competition – not because he believes in monopolies – but rather to encourage more entrepreneurs to focus on solving problems that have no solution or competition.

He had three main reasons for encouraging entrepreneurs to solve problems that have no solution or competition.

1. Competition erodes pricing power and incremental improvements often result in razor thin margins. When the margins become too thin, people fight over “stupid things”.

2. Competition makes people work hard but it also makes them compete against one another.  Many people “get hooked” on competing and often miss the open door to new and better opportunities.

3. Competition on a global scale is good for those that can rise above it.  However, “God” might even find it hard to watch given how hard it is for those that have to compete against billions of people who make a fraction of their pay.

One of the examples used to support his argument was Apple versus the 600+ apps in the App Store.  Apple has tremendous pricing power because the company provides a unique product and exceptional experience whereas the apps all fall into one of a few categories.  Few apps if any are significantly better than the next to warrant premium pricing yet what seemed to puzzle Peter was the number of entrepreneurs still building new apps rather than looking for the open door.

So why aren’t more people looking for the open door?
As Peter acknowledged, the creativity that fuels innovation takes more than putting on black clothing and calling yourself a creative.  It takes time to see opportunities and for those competing for their next job, a new assignment or a big raise, time to observe, think, tinker and conceptualize is probably limited.

Is there more to the story?
There is a little less venture in the venture capital today compared to when PayPal was founded.  Back in the late 90s, ideas got funded.  PayPal burned $10M a month to take over the world. Today, people and evidence get funded.  Many of the startups with big bets on meaningful innovation today are founded by people who were successful in the 90s.  They have a track record and their own money to invest.  Whereas most entrepreneurs starting out today are following the lean launch pad philosophy of developing customers early and building a minimum viable product (MVP) to test the market as a way of hedging their risk.  It may also explain why so many talented people are focused on apps rather than meaningful innovation.

Are there lessons to be learned from failure?
Peter came up a little short on the lessons to be learned from failure but it something that I can speak to from my own experience.  I founded my company back in 2000 and launched our e-learning initiative for the healthcare market just before the dot com crash.  I had recovered and was building again when the financial market crashed in 2008 which basically ended the initiative when our consulting revenue also dried up.  It was heartbreaking and like many entrepreneurs, I blamed myself for not finding a way forward.  Years later a friend said to me “Everything you did made sense.  You were just underfunded.”  Why we were underfunded had a lot to do with the industry.

What does the industry have to do with it?
Many of the most highly regulated industries such as the airline, automotive and healthcare are some of the most competitive industries.  For the most part, they all have razor thin margins making them some of the hardest industries to change.  Without funding from the government to reduce the risk for entrepreneurs and the venture community and incentives for providers, few would undertake the innovation challenge especially if they have already tried and failed.  What remains to be seen from the changes underway in the healthcare industry now is whether the margins of the companies serving the market will be improved and sufficient to support further innovation going forward.

In summary, competing has become a state of mind for most people.  So ask yourself…Are you competing for something worthy of your time and effort?

About the Author:
Shannon Smith is a management consultant with over fifteen years of experience helping companies achieve greater success by helping leaders shape strategy, implement systems and processes and enhance capabilities.