Startups are great at creating new markets, corporates are great at scaling them. But what about startups trying to win an existing market that has started growing? Logic would dictate that incumbents would always win given they have essentially infinitely more resources compared to the upstarts. Yet time and again history has shown that is not always the case. This article will analyze three case studies to illustrate practical principles on why David can defeat Goliath — on Goliath’s own turf.
Case 1: Zoom vs Microsoft
Zoom was founded in 2011 and raised a $100M series D in Jan 2017 — so a very mature startup by any standard. That said, it was still dwarfed by Big Tech, Microsoft (MSFT) alone being a market cap of ~$500B at that time. Granted market cap is an imperfect metric, but in this case it’s very much indicative of the resources including cash that MSFT had available. And the company kept growing by leaps and bounds, becoming the third American company to pass $1T in market cap in Apr 2019 and the only one to stay above that watermark when the stock market took a nosedive in Mar 2020 due to the pandemic.
Yet it’s Zoom, not Skype or Teams, that overwhelmingly has conquered the covid world we live in now. Skype was built originally as a peer to peer, which is less ideal for mobile. Teams was launched in 2016 primarily around business use cases. Microsoft did finalize transitioning Skype to a client-server architecture in early 2017 and announced a consumer version of Teams in early 2020. If you look up the many articles on this topic, the industry consensus was both moves were bumpy rides in terms of time and features. Zoom in the meantime focused on its consumer-friendly selling points: 40-minute conference calls with up to 100 attendees are free, people don’t need a login to access a meeting, and the interface is relatively intuitive.
The rest is history. As the pandemic escalated the demand for consumer teleconferencing enormously Zoom took the biggest advantage, notwithstanding its larger security and privacy issues compared to Microsoft. Skype and Teams got a lift too — early in the pandemic Microsoft released numbers showing Skype has grown up to 70% month over month. But the teleconference crown went to the upstart who moved faster and had a product better geared towards the new reality.
Case 2: Facebook vs Google
Google’s first major foray into social networking, Orkut, was officially founded Jan 24, 2004. As such it actually preceded Facebook’s official launch by a couple weeks. Within six months ⅔ of the traffic came from Brazil and India, and this stayed true for almost the entirety of Orkut’s existence. Orkut was also ahead of Facebook in terms of pageviews for at least the first two years. Yet in 2014 Orkut shut down and Facebook was a public company for two years with a market cap of about $200B.
Google made other attempts at social networking including a product called Buz and Friend Connect. But the real major foray was Google+ launched in 2011, which leveraged other properties such as Gmail to get a massive userbase, perhaps as high as 500M. Yet Google+ suffered from low engagement and also failed, being essentially discontinued in 2019.
What happened? Facebook consistently outran its much larger and better funded competitor. They implemented major changes such as the Like button and the News Feed earlier or more comprehensively or usually both. They focused on creating a larger ecosystem around the company, including games with very high engagement. Orkut famously suffered from scaling issues such as servers being down; Facebook did too but they consistently reacted quicker. And finally Google as a company under the microscope towed a more conservative line when it came to new products. Facebook took advantage of its smaller size and also its more brazen culture to just launch features, sometimes suffering significant backlash, but overall being nimbler.
Case 3: Tesla vs GM
When Tesla came out in 2003 famously no major American car company had succeeded for almost a hundred years. As of writing this article Tesla is worth close to $600B, almost 7x GM’s market cap.
Tesla got product right. Like most car-makers Tesla worked with several partners for much of the car, including the Lotus Elise for the chassis. But the key innovation, around the batteries, stayed as the company’s secret sauce.
Tesla got branding right. The original Roadster was aspirational, turning on its head the notion that electric cars were slow and boring. Subsequent models have continued emphasizing on the notion of Tesla as being a luxury brand. Elon Musk also created a public image that is unrivaled in tech aside from Steve Jobs.
Tesla got timing right. The Great Recession in 2008-09 slowed down the incumbents. Tesla almost died but pulled off a financing round in 2008 just in the nick of the time. Then when the company was already much stronger, they betted the farm on growth and managed being just barely ahead of bankruptcy in 2019.
These three case studies illustrate many common lessons — Davids can actually not only hold their own, but take away market share from Goliaths. You either need to do something much better or much faster or much cheaper, or perhaps all three. In a future article we will broach these principles in more detail.
Thanks to Eileen Wu of Raise Partners and the Sand Hill Network for both inspiring and editing this article. Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.
