Before You Try to Win, Figure Out What the Prize Is First

Keep Your Eyes on the PrizeWorking in the startup world, I see a lot of ink written and a lot of who will “win” a market. That is, who will be that one service out of many competitors that eventually has all the users using it vs. any of today’s competition. Every industry in the startup world is assumed to be a winner take all market where “all” is world domination in some form. In some cases, this is true. If a market has strong direct network effects, it can definitely be the case. This is why Google+ is having such a difficult time becoming a legit competitor to Facebook. Facebook accumulated all of the value from direct network effects creating very large switching costs because with all your friends are on it already, and that made it more valuable to you than sites that didn’t have all your friends on it. But very few industries are like this, even in technology. There are many successful sites that have equally as successful competition and many positive components to co-opetition i.e. being friendly with competitors to make sure there is a market. Also, the ability to get out ahead of competitors is much harder with the ease of development and the cloning phenomenon.

I think this logic is flawed in a much more dramatic way than just assuming every new technology space will be winner take all. In the emphasis to win ever-emerging new markets in technology, one of the main questions that is frequently lost is what is the prize in winning. The prize should be profits, but I think many companies are going to realize that’s not necessarily a given. Look at Groupon. I think it’s fairly consensus that it “won” daily deals, but at the cost of winning, they struggle to find any actual profit from it despite 50% margins. Their value is now less than what Google offered to acquire them for. And the “losers” of daily deals are in worse shape. Living Social is bleeding money and trying to get into any other business besides daily deals to find profits. BuyWithMe was liquidated, and Gilt is laying off people left and right.

A similar situation has now emerged with check-ins. Foursquare “won” that market, beating out competition from Gowalla, Loopt, and even Facebook to a certain extent. Sure, it got them a $600 million valuation, but they just pivoted to a local recommendations app (read: Yelp competitor) where its business model comes from paid recommendations by national chains. Not only is this change baffling and frustrating/contradicting for foursquare users, but it is unlikely to be source of profits for its investors as Yelp as a market comparable of $1.2 billion. At best, venture capital investors will double their money, and that “best” is very unlikely. The prize of winning the check-in game seems to be abandoning all the data check-ins create to shill corporate branding to users to used you in the first place to support local businesses.

This emphasis on “winning” can be very dangerous for young companies. First, it creates a rivalry that prevents competitors from learning from and working with each other when necessary. Second, it creates an emphasis of growing a business to build market share instead of to build future profits. Market share doesn’t matter if the market doesn’t have any value. These mistakes can be very hard to recover from, and we have some cautionary tales in the market currently that should remind us to stop harvesting a “winner take all” mentality and start thinking about how to develop your business to make long-term profits.