More than 100 million startups open their doors every year, according to figures from Get2Growth. Those building web and mobile companies face intense competition to build a substantial business, and need to find ways to differentiate themselves quickly. But in such crowded markets, just how crucial is raising capital?
Often we hear about the obsession to create a superior user experience, build proprietary technology or create a game-changing business model. While these elements all can come into play, particularly in the early days, do they truly help a software startup create a sustainable advantage? Or, given the ease with which many products and experiences can be replicated, does the advantage revert to the startup with the bigger bank account?
A relevant case in point is Uber, which has developed an on-demand car service delivered through a mobile app. When Uber got started in San Francisco, the prevailing reaction among its customers was that the user experience was second to none. Open the app, and within minutes, a driver would arrive to take you to your destination. An elegant user interface provides a map of available cars in your area; written reviews show you what past customers think of individual drivers; and credit card information is stored so you can consummate each transaction without any data re-entry. No muss, no fuss.
In the five years since the app was launched, Uber has raised $3.3 billion with rumors of more funding to come (yes, that’s a “b”). Its CEO, Travis Kalanick, has publicly proclaimed that while the business is generating healthy gross margins, the name of the game has been a race to build the biggest balance sheet. Uber has expanded to 50 countries and admitted to losing money in new markets, such as India, in an effort to acquire customers. In Uber’s rear view mirror is the next largest competitor Lyft, which itself raised $330 million to try and keep pace. While Uber started out as an app that stood out for its ease of use and wide availability of drivers, it has shifted it focus on building a business through sheer financial muscle.
This dynamic of raising large sums of money is now occurring much sooner in a startup’s life cycle as companies and investors recognize that competitive advantage, except in a handful of cases, is fleeting. Increasingly, as investment funds seek category killers, they are likely to over-fund them and encourage them to invest in growth, all with the aspiration that they can be the biggest first, and by doing so, own the category.
That’s the zinger. With all the talk about plenty of available capital and money “sloshing around” as though it is a commodity, the irony is that the opposite is holding true as fewer startups are soaking up more concentrated amounts of the capital. The length of competitive advantage for most startups is being compressed, as first mover advantages that used to last years now last months. Today, capital can find ideas quite quickly, human resources are very fluid and customer loyalty is a click away. For most startups, this puts an even greater emphasis on outspending the competition – whether it’s paid marketing, building out customer support operations or doubling down on engineering.
The value of capital, and whether it is perceived to be a commodity or a differentiator, tends to be a cyclical phenomenon, in part influenced by where we are with disruptive trends. For instance, when new technologies are emerging or where consumer behavior is changing, the size of a startup’s balance sheet is not as impactful; the uncertainty of a market opportunity keeps new entrants at bay. Think about Uber in the early days. Mobile was still new, consumer behavior was unknown and regulatory hurdles existed (and still do). Many of these catalysts are now well established, and the pendulum has swung favorably to the side of the well-heeled startup.
Contrarian and unpalatable as it may sound to the “maker” in each of us, a startup’s greatest asset may be its investors, after all.
Arie Abecassis is a startup entrepreneur and investor based in New York City. He is a Venture Partner at Dreamit Ventures, and actively serves as an advisor or board member to tech startups such as SeatGeek, Adaptly and BiznessApps.