In a recent appearance on the Entrepreneurship Opportunities YouTube channel, Rebecca Lynn explained how the famed “first-mover” advantage is not all it’s made out to be. While startups and investors may covet this apparent leg up on the competition, the most successful company in any new space is the one that learns from the first-mover’s mistakes.
Improving on What Came Before
The first company to reach the market with a new and innovative product has an undeniable advantage, but they’re also stuck doing all the groundwork. Educating the market, building infrastructure, and accumulating debt to get their product’s name out there. A second company only has to improve on what worked for the first mover and take advantage of the platform that the company established.
Second-Movers Don’t Make the Same Mistakes
Despite their perceived advantage, first-movers comprise a tiny portion of public companies in today’s market. The companies that follow what could be called “second-movers” learn from their predecessors’ experiences—the successes and failures—to overtake the market. They don’t have to make costly mistakes or validate the market when the first-mover has already done so.
“I have always been a believer in ‘second-mover,'” Lynn stated. “I think first mover advantage is a fallacy. The reason is that it takes a lot of money, time, and patience to really prove out a brand new market. Once you prove it out, you have a ton of technical debt. I invested in Lending Club, and from then on, Lending Club ended up being the largest US tech IPO in 2014. Lending Club wasn’t the first mover.”
Lending Club was preceded by Prosper, which led the way in peer-to-peer lending technology. Despite their first-mover status—or perhaps because of it—Prosper made mistakes that enabled Lending Club to learn from and improve on the existing product. The second-mover consistently has this same advantage.
How First-Movers Can Retain the Advantage
This isn’t to say that the first mover always falls behind the second. A first-mover startup can fix its problems to take the second-mover advantage for itself—but it isn’t easy to change perspective. Often, a first-mover assumes that their product is a perfect fit for the market, failing to recognize the shortcomings that an outside actor is better equipped to notice and capitalize on.
What KillerStartups’ George Chiklaze calls “The Product-Market Fit Trap” catches the first-mover who assumes their product is ready for the market and scales prematurely.
He states: “Here’s what typically happens: 1. Founders believe they’ve achieved product-market fit too early. 2. They hire expensive sales executives to build out teams. 3. Cash burn increases dramatically. 4. Reality sets in, forcing layoffs and restructuring. 5. The company must return to basics and rebuild.”
This rebuilding process is hardly a method for success, especially when it opens the floodgates for second movers to capitalize on the resulting vacuum. That said, decisive action can be enough to turn things around.
Shifting Perspective
It is evident that first-movers don’t always have an advantage—more often than not, they’re laying the groundwork for whoever improves on their product. That said, a mindful company can avoid “the product-market fit trap” by recognizing that its product is not complete and continuing to innovate. The first-mover keeps their advantage by shifting their perspective to that of the second, learning from mistakes and building from what they established.
