I have been hearing many venture capitalists and entrepreneurs talking about “fast follow” as of late. “Fast Follow” is a startup strategy that aims to build a company by copying an already proven business model- and executing quickly to “follow” the moves of the predecesor. In school, this would be called “cheating”, but in the startup world where the game is all about minimizing unforeseen risks (typically technology, team, and market risks), “fast following” is a time honored tradition. Indeed, Microsoft built one of the most profitable and important companies in our lifetime by taking innovations by others (windows and the mouse) and making them ubiquitous.
As the Internet matures and it becomes more difficult to find a “seam” (a small opening to build a sustainable company), I am confident we will see more of these kinds of startup companies, especially in e-commerce. This is sure to set up the ironic fast follow dynamic of startups being funded to follow the success of, say, luxury goods seller Gilt Groupe, itself a fast follower of European company, Vente-Privee. Whoa, man, you just blew my mind. I know.
But, the aspiring “fast follower” should take head because the principle cannot be blindly applied to every company nor industry. There are some business dynamics, network effect type businesses especially come to mind, where it is nearly impossible to mimic the predecessor’s successful formula. Just ask Amazon about its failed auction business.
Here are a few examples where Fast Following has been and likely will continue to be successful:
- When You Have Technology Advantage:
Google is the most famous example of this kind of following. When Google started nearly everyone declared search to be over. Google had the opportunity of watching the leaders, such as Yahoo, Overture, etc prove out the business and the technology and then it out-innovated them.
- When You Have Distribution Advantage:
Social gaming company, Zynga, has built one of the fastest growing companies of all time. It has done this not by being the most innovative gaming company and coming up with new gaming concepts. It takes proven gaming franchises (such as poker, Sims, Pokemon, Mafia) and uses its competitive advantage in how to make them viral and work within and across social networks. Zynga uses two proven models, games and social networking, and gives people something to do with one another online.
- When You Have Existing Customer Relationships:
There is a lot of hype these days around geo-location based services, such as Foursquare, Gowalla and Loopt. These services allow people to “check in” to real-world locations and to easily communicate there whereabouts to their social networks. It remains to be seen how these companies will generate revenue, but the thinking is that as people become more and more comfortable taking out their mobile devices in local establishments, that there are many opportunities for vendors to pay and incent buying behavior. The latter is a key point because in order to scale this business, it requires having a relationship with small businesses, such as the local spa, car wash or restaurant. The leader in local reviews, Yelp, saw the early traction by the other startups and decided to launch their own version of the service. With millions using its iPhone application and its 170 person salesforce already calling on small businesses to advertise on its website, it will be difficult for another startup to replicate those customer relationships.
- When You Have a Partnership Advantage:
Back to the Microsoft example. They famously copied the windows interface from Apple as well as the mouse from PARC. Because of their early partnership with IBM and the fortuitous circumstance of IBM “clones” popping up, it meant Microsoft’s operating system, not the other upstarts, became the standard. Add in the fact that later, Microsoft created its Office Suite by mimicking the functionality of other software programs, you can see how following other’s innovations can be a winning short and long-term strategy. If your chosen market explodes into one of the biggest in your lifetime.
As I mentioned, fast following does not work in business with strong network effects- a dynamic where the value of the service increases exponentially the more people use it. The classic example here is eBay versus every other auction site that tried to copy the company’s early success. eBay relied upon a two-sided network- they needed sellers to list their products so buyers would have something to buy. Without enough buyers, sellers wouldnt list their goods because it was a waste of time. Once a critical mass of buyers and sellers were achieved and most buyers could find what they were looking for, it made it inefficient to go to any other site. The same was true for sellers. Large public Internet companies, such as Yahoo and Amazon, lost millions trying to chase eBay.
Good luck, cheaters!