Choosing Bad Competition

As an entrepreneur, it is theoretically possible to find an opportunity that is extremely valuable, but is still unrecognized by serious players. But that combination of circumstances can be so rare that it’s like being struck by lightning. When assessing whether the primary components of a viable business endeavor are present, the most important thing is to be able identify the valuable opportunity. You are far better off pursuing a high-value opportunity with bad competition than a low-value opportunity with no competition.

Therefore, the great strategy is not to try to find a competition-free market. Rather, you should seek a valuable market with bad competition. This advice, of course, begs the question, “What is bad competition?”

This essay and accompanying podcast look at a fundamental law of entrepreneurship. You can listen to the podcast here.

These laws apply to every entrepreneurial endeavor, not just high tech startups, though we’ll still spend plenty of time on the technology industry. The first law we’ll examine here is: Choose a field with bad competition.

The Three Types of Bad Competition

When people hear the term “bad competition,” many might think this refers to incompetent or foolish competition. But this is not necessarily true. In fact, bad competition can occur even when you are competing with smart, hard-working people.

I believe there are three fundamental types of bad competition. They are not mutually exclusive; in fact, all three could apply to a single opportunity! But bad competition must fall into at least one of these categories.

Type 1: Lazy Competition

The market demand is broadly recognized, but the incumbent players are fulfilling that demand in a lazy way. This doesn’t necessarily mean that the people involved aren’t hard-working; they may in fact be quite diligent in turning the crank on an existing process. Rather, the competition is intellectually lazy, relying on technology and techniques that might be decades out of date. This kind of competition occurs when an industry crystallizes into a stable monopoly or oligopoly, in which case the lack of competitive pressure results in complacency.

Type 2: Overlooked Industry

Sometimes, the value of an industry increases, but the existing players may fail to recognize that progress. This may be due to industry-specific technological change. For example, in our book Blitzscaling, Chris Yeh and I wrote about how horizontal drilling and hydraulic fracturing (or fracking), was overlooked by the big energy companies, allowing insurgents to dominate shale oil and gas production. But other times it is due to the indirect effects of broader change. For instance, as the world becomes more hyper-connected and hyper-local, what might have previously been a fragmented industry may now be much more addressable if you design a different business model that makes it possible to adopt a more interesting economic model. Airbnb offers a great example of this: by leveraging broader technological trends like smartphones and broader psychological trends like the willingness to trust the sharing economy, the company was able to create a better economic model and range of experiences for travel lodging.

Type 3: Stuck in Stasis

The last version of bad competition occurs when the major players in an industry become stuck playing the game in a certain way because, “it’s always been done this way.” Often, this occurs because the players are focused on internal competition (e.g. jockeying for position within a company) or on the current competitive set (e.g. American automakers essentially ignoring Japanese imports during the 1960s). This represents an opportunity for a player with a fresh perspective to adopt a new, better pattern.

All three types of bad competition boil down to a fundamental inability to recognize change. The change creates entrepreneurial opportunity; the bad competition gives the entrepreneur the best chance to realize it.

Successful companies can easily become a victim of their own success. Entrepreneurs build great companies, but after those companies become established and those entrepreneurs are no longer driving them forward, the leaders who rise and succeed at those companies are more likely to be managers and caretakers who achieved their position executing the status quo.

Success imprints more strongly than failure. That’s how otherwise smart people end up with big blind spots and become bad competition. They spend decades internalizing and perfecting a set of strong operating principles. The problem with that approach is that it presumes that the world is essentially static, when it is inevitably dynamic.

When things change, they struggle to switch from faithful stewardship to trying new things.

This fate is not inevitable. Established companies don’t just have to accept that they’ll be bad competitors.

All companies continue to undergo constant cycles of invention and reinvention. Invention, in the form of adding a product or a service or market, and reinvention, in the form of changing the product, go-to-market strategy, or business model. For example, the enterprise software industry has been around for decades, yet has re-invented itself from mainframe to client-server to the cloud. Companies that reinvent themselves, like Microsoft, can retain their relevance through these major shifts.

How Elon Musk, Richard Branson, and I Chose Bad Competition

Let’s take a look at how some well-known entrepreneurs tackled markets with bad competition, starting with my own story at LinkedIn.

To understand the state of competition when I co-founded LinkedIn, you have to think back over two decades. Before the internet, recruiting was a combination of classified job listings and high-end executive search. Most jobs were filled by placing an ad in a physical newspaper, and a few highly-compensated jobs were filled by paying a lot of money to search firms who would provide candidates using their own proprietary candidate lists.

When the internet arrived, most of the competitors in the jobs space did what people tend to do with any new technology–cut and paste the old business model into a new medium.

Companies like Monster.com, CareerBuilder, and HotJobs brought job listings online, thinking, “This will be so much better because online job listings will be available to anyone, and they will be more easily searchable.” They were right, but these businesses were still based on the old paradigm of waiting for active job seekers to find your job listing.

Now imagine you were an electric shaver company back then, trying to hire a product manager. What would be the likelihood that the right person with the right experience would just happen to search the right database at the right time? The answer is, pretty low. Instead, a lot of people looking for jobs might think, “I’ve never been a product manager, but I’ve used a razor, so I should apply.” While the results weren’t worse than a traditional classified ad, you would still end up with a flood of applications, most of which would be a bad fit.

In other words, these prominent, publicly-traded, Superbowl-ad-buying companies were bad competition of the Type 3 variety – they were stuck in an old pattern.

In fact, the better approach is to find the right people (who likely already have jobs) and pitch them on switching. This is the model that the executive search firms used, but it wasn’t scalable pre-internet.

The challenge was allowing employers to find passive job seekers, who weren’t going to post their resumes on a site like Monster.com for fear of appearing disloyal. My insight was that if you made it a normal thing for everyone to have a public-facing professional identity, it would allow access to those passive job seekers. Meanwhile, that identity wouldn’t just bring job offers – it would also facilitate networking and other business opportunities like partnerships, consulting, and many more.

Elon Musk, SpaceX, and Tesla’s Competition

While I faced Type 3 bad competition at LinkedIn, the competition that Elon Musk took on at SpaceX had elements of all three types of bad competition.

This is a bit embarrassing, but when Elon came to me and told me he was doing SpaceX, I gave him advice based on “conventional wisdom” which in this case was more like “conventional stupidity.” I told him that he should stay with software, which is more capital-efficient to build, easier to scale, and didn’t require actual rocket science to succeed. In addition, I warned him that new rockets could explode, and that the market was locked up by giant defense contractors that had hired all the relevant people with the right connections to win all the government contracts available.

As it turned out, Elon was totally right and I was totally wrong. But I do learn, so I’m a much later investor in SpaceX.
What this expensive lesson taught me was how to better identify bad competition. Everything I told Elon was true, but I missed the bigger picture on why the competition in the commercial space launch market was actually pretty bad.

While the big defense contractors did have a lock on the market, they had spent decades optimizing their business around winning guaranteed government contracts by hiring former Air Force colonels with good connections, rather than improving the product. They hadn’t invested in product development for decades, and relied on buying Russian-made engines because they were cheaper. This made them Type 1(or lazy competition), in a Type 2 overlooked market, with a static Type 3 approach!

SpaceX didn’t have to invent fundamentally new technologies. The company was able to adopt new technologies like reusable rockets, better engines, and more efficient manufacturing – which had been developed for decades but ignored by the big players.

The same pattern played out at Tesla.

The automotive industry also appeared to be a static, Type 3 market; the so-called “Big Three” of Ford, GM, and Chrysler have been major players for nearly a century, and no major American automaker had arisen during that time. The Big Three saw automaking as a matter of mechanical engineering, supply chain management, and manufacturing.

Tesla broke with that pattern. The company did this not just by focusing on an electric drivetrain, which had been built before but discarded, but by realizing that future cars will be more about their software than their hardware. Tesla shifted focus from a mechanical engineering paradigm to a software paradigm, and in doing so, created a new, superior pattern of competition and product evolution.

Elon saw that the world was different today than it was 10 years ago, but also that it will be much different 10 years from now. This learning is part of the reason why at Greylock I’ve invested in the next generation of autonomous vehicle companies, including Aurora, Nuro, and Nauto. I believe that the traditional car manufacturers are high performing and smart companies, but in a previous paradigm (type 3). It’s structurally very difficult to change their DNA from being mechanical engineering companies to being software engineering companies.

For both SpaceX and Tesla, what Elon brought to the table was a nearly unique combination of drive, reputation, and skills required to overcome the doubts of conventional wisdom. He was able to raise capital where others couldn’t. Perhaps even more important, he was – and is – an amazing recruiter who could assemble the human capital necessary to literally shoot for the moon. Before SpaceX and Tesla, there were a lot of brilliant scientists and engineers who were working on rockets or working on cars and who knew that they could do better, but were working for companies that had essentially been captured by the sales and finance organizations, by staying in the current paradigm. Every aspect of those companies was focused on how to minimize R&D spending rather than actually bringing new technologies to life. As soon as Elon was able to demonstrate that there was a real possibility he would succeed, he could get better, more passionate people than his competitors, because those great people cared about building game-changing rockets and cars – not earnings per share.

Richard Branson and the Virgin Perspective

I recently had the great pleasure of interviewing Sir Richard Branson for a future Masters of Scale podcast episode. What Richard has done throughout his career is to approach different markets and industries as if he were encountering them for the first time. That’s part of the reason why he adopted the Virgin brand.

Over and over, Richard encountered bad competition. He saw it in the form of either Type 1 (lazy airlines), Type 2 (overlooked music stores), or Type 3 (stodgy holiday tours). Rather than simply accepting an existing consumer experience, he said, “This is terrible and could be much better in so many ways.” Then he tried to fix the problems and add a liberal dash of fun – because everyone, especially young people, likes to have fun. The results are leading companies like Virgin Atlantic, Virgin Megastores, and Virgin Holidays, not to mention emerging businesses which overlap with Elon’s companies, like Virgin Galactic (space tourism) and Virgin Hyperloop.

For example, the Virgin America airline was well-known for having a fun safety video. Who said a safety video has to be boring? On Virgin America’s farewell flights, passengers sang along as if it were the Rocky Horror Picture Show. That was just one of many reasons that Virgin America was my preferred domestic airline (RIP).

Richard’s approach isn’t superficial. It involves reinventing the entire consumer experience. This is one of the reasons why the formula didn’t work when he launched Virgin Cola. Richard brought his usual sense of fun to the marketing – he drove a tank into Times Square to launch the brand – but there’s not much you can do to reinvent the consumer experience of drinking carbonated sugar water.

Conclusion

Elon Musk, Richard Branson, and I represent very different approaches to entrepreneurship, ranging from rocket ships to consumer internet to holiday tour packages. You might not think we have much in common. But when you look more deeply, you can see that all of us followed the fundamental law of choosing bad competition.

If you can find a valuable market which has been overlooked, or where your competitors are lazy or stuck in their ways, you can beat that competition, no matter how big or rich those other players might be.

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