Copycat Businesses Can Be Great

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Innovation is relative, originality overrated

Innovation is one of the sexiest words in the business vocabulary. However, originality can be overrated, especially when it comes to the opportunity of bringing a proven business concept to a new market. The world is full of examples of copycat business models that were successfully replicated in new countries.

The Chinese watched the successes of Amazon and eBay and launched Alibaba, which today has higher revenues than both U.S. firms combined. Indians followed suit with e-commerce Flipkart. Brazil’s Peixe Urbano, in turn, mirrored itself on e-coupon websites like Groupon and LivingSocial. Pretty much every country or region in the world has its own travel booking website, inspired by Expedia and Travelocity. And on and on we go.

The main benefits of copycat business models

The first benefit of being a copycat is the fact that the business model you are implementing has already been proven elsewhere. Of course, this doesn’t mean it will be a hit in your country, but at the very least you can incorporate several lessons before developing the product and launching the business. The risk therefore is considerably lower than that of an outright innovation, with no benchmarks to fall on. In fact, lessons learned can be applied not only at entry, but also from the moves and mistakes your reference company makes along the way, for it will always be a few years ahead of you. You benefit from the best of both worlds: innovation (at least in your target market) and proof of concept/benchmarking.

Second, pitching the business to investors and potential partners is easier than with other startups. What’s not to understand when you tell someone you want to start “Colombia’s SalesForce” or  “Turkey’s Paypal”? Investors quickly relate to your idea and can tell you if they like it or not. This may seem trivial, but it comes in handy when you are dealing with people who are used to listening to dozens of business ideas every week.

Third, copycats have the privilege to be born with a potential exit strategy already in place. If you are Turkey’s equivalent of Paypal, and market conditions are favorable, you can always approach PayPal for an acquisition or at least a partnership. Of course there’s no guarantee of that happening, and they may decide to compete instead, but the path is clearer than for many startups. In fact, copycats are often approached by their inspirers wanting to expand into new markets through strategic acquisitions.

Challenges with copycat companies

Nevertheless, there are a few particular challenges associated with copycats. Barriers to entry for replicated business models are by definition low and you usually have no IP edge. The innovation doesn’t belong to you and, unless there is some sort of local IP protection (rare), anyone with the same idea and resources can jump in. As an example, after the first couple of crowdfunding websites emerged in Brazil, dozens followed suit, ironically “crowding” the market. The only things that keep you on top are first-mover advantage, fast market-share growth, good marketing and continuing innovation.

Also, adapting the business model to a new market can be tricky. Country and cultural differences have to be taken into consideration. For instance, in certain regions of the world, you can’t really launch a peer-to-peer lending website because charging interest from peers is not considered a socially acceptable practice. Also, trusting strangers in web2.0-type interactions may not be something that the local meme supports (yet).

Macro role of copycatting

At the macro level, copycatting plays an important role in technology transfer, from developed markets to developing ones. New solutions and businesses are internationalized at fast pace and relatively low risk, benefiting the economy by fostering local innovation, creating complementary businesses and generating jobs. It is also one of the best ways for budding entrepreneurs in less mature markets to learn from more experienced ones. A copycat venture is a great first gig for an entrepreneur. And, who knows, we may get to a point where increasingly we shall see Silicon Valley startups copying innovations from Brazil, India and other developing markets.

See also An idea Is Just That. Image: Brad Jonas for Pando.

What’s your favorite copycat business? Leave us a comment!

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Greatest Entrepreneurs Adapt to Survive

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Successful entrepreneurs welcome change

There are tons of studies about the key traits that make up a successful entrepreneur. Some of the characteristics attributed to the greatest entrepreneurs are: vision, talent, perseverance, ability to innovate, leadership. However, from my observation, their single most important common characteristic is the ability to adapt. In a clear Darwinian fashion, those who adapt the best, thrive. No entrepreneur has succeeded without going through at least one of three forms of adaptation: adjustment, pivoting and rebirth.

Successful entrepreneurs adjust, pivot and resurrect

The first form of adaptation, and one that most companies go through in one way or another, is business model adjustment. Companies need to constantly evolve and adjust, quickly reacting to customer feedback, market changes, competitors’ moves. Facebook started as a simple “hot or not” website and evolved to the giant social media platform it is today, by exploring new forms of social interactions and testing monetization schemes. Apple tinkered with several consumer electronics before focusing on computers and then expanding to music and other business lines. Google stumbled for many years as an unprofitable search engine, before it figured out how to make money and expand to other (profitable) areas.

The second form is business pivoting, which implies a more radical change in direction. I’ll use the example of one of my companies, Brazil’s PV Inova. We started the business as a BoP (base of the pyramid) model, developing telecommunication technologies for public transportation vehicles, targeting the low-income population. However, because margins were too thin, after a few years, we decided to capitalize on the knowledge acquired dealing with fleets and changed the business completely. We developed a fleet management software to be offered on the cloud to companies that manage large fleets. The company was pivoted, from a hardware telecom business to a scalable SaaS logistics venture. Also, to use a more well-known example, Paypal started as a cryptography company and only later reinvented itself to become an online payment pioneer.  

Finally, the last and most traumatic form of adaptation is rebirth after failure. Most successful entrepreneurs have folded at least one business (sometimes several) before they hit the jackpot. Being able to rise from the ashes is the ultimate adaptation challenge and requires passion, conviction, and courage. Most iconic tycoons have dealt with failure before launching a successful venture. Henry Ford had two unsuccessful car companies before getting it right. Bill Gates failed with Traf-O-Data before launching Microsoft. Even Richard Branson, with all the amazing businesses he launched, went through more failures than successes, including Virgin Cola and Virgin Records, which were never sustainably profitable.

When it comes to launching a startup, there is only one certainty: it will not become a great company if you stick to a rigid plan that was set out in the beginning. If you are doing something minimally innovative, you will have to go through many transformations. The entrepreneur is the chameleon of the business world. 

See also An Idea is Just That. Image: scribblitt.com.

Are you an entrepreneur and pivoted a business or failed? Leave us a comment!

Not All Angel Investors Are From Heaven

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On Angel Investors

As entrepreneurs, in the initial stages of the startup, we often think that the answers to our problems will come in the form of an angel investor. By definition, angels are high-net-worth individuals who get involved early in the company’s life, bringing capital, sector knowledge and network, and relevant expertise.

Angel investors usually invest anywhere between $20k-$300k and take on 10-30% ownership. They spend some of their time coaching entrepreneurs, opening doors, helping the company build the team and product, participating in strategic decisions.

Not all angel investors are the same

However, not all angel investors are the same. Reality has “expanded” the definition of an angel and many times what we see is well-off folks with no particular value-add (beyond the dough) playing the angel role almost as hobby. This is particularly true in less developed markets, such as Brazil (which I know from experience) and the rest of LatAm. Being rich and successful doesn’t necessarily make someone a good angel.

As an example, a retired C-level executive from a large pharmaceutical company may easily have a couple of hundred thousand dollars to spare and decide to invest in a startup. Why not help a couple of smart kids with a brilliant idea for a new technology or web business? What better way to stay busy and motivated!

The problem is that often these investors often have no idea what they are getting into. They just don’t know the real challenges and risks of starting a company. As time goes by, the product doesn’t launch as planned, the bank account gets thinner, and the investor gets nervous.

Entrepreneurs also get frustrated because they had expected miracles from this angel. After all, he is the older, successful mentor, who’s been there, done it all.

But it turns out the guy you looked up to actually doesn’t know much more than you when it comes to building a tech company from the ground. His rolodex only has contacts of retired people from irrelevant sectors. And as he sees his investment going down the drain, he doesn’t think you’re that cute and inspiring anymore.

Of course, I’m painting a pretty extreme scenario here. But the point is that you shouldn’t necessarily accept the first person who’s willing to invest in you. If the angel investor is not a good fit, it’s better to hold your horses, bootstrap the business a bit further, until you find someone who can actually add value to the company.

Originally posted on the Entrepreneur Academy (NEN). Image: nenonline.tv. See also Time To Start a Company – or Not.

What’s your experience with angel investors? Leave us a comment!

Outsourcing With Care

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Challenges of international outsourcing

Many tech entrepreneurs face the question of whether to outsource software development to a foreign country. After all, there are good coders in countries like India, Russia and Argentina, while U.S. developers are quite pricey in comparison. But managing a team or project from afar can be quite challenging: communication often gets lost in translation and cultural differences; accountability is diluted across borders; pop-ins are not possible; contracts are harder to enforce; IP issues can come up; and even quality might not be as good as you expected. Here are a couple of simple (but often neglected) steps one can take to minimize risks.

Dealing with international outsourcing

First, make sure you consider firms or developers that have been referred by a client you know and trust. Don’t just pick a developer on Google or let yourself be lured by pretty emails selling outsourcing services. My LinkedIn inbox often gets messages from Indian and Russian developers offering their services. Maybe they are good, who knows, but I wouldn’t risk it. Client referrals are especially important when dealing with international suppliers in general. Ask a lot of questions to the referrer, such as how the developers deal with deadlines, if their English is good, if different time zone was an issue, how they heard about them in the first place, besides of course the quality of the job.

Second, before starting the work, have a face-to-face meeting at least once. Maybe your guy will come to the U.S. for a conference or to visit a client. Or, better yet, catch a cheap red-eye flight and go spend a couple of days with them. Meet the team, check out their office (garage?), go out for lunch, have a vodka (or whatever they drink) together. If the job is at least a five-figure commitment, visiting them is a relatively small investment and it will pay off. Despite Skype and all, in today’s world it is still important to shake hands once in a while, make things more personable. Putting a face to the partnership can help mitigate risks in the future and improve crisis management.

Don’t underestimate the complexities of outsourcing development to a foreign country. Knowing who you are dealing with, both through others and your own contact, is extremely important. An outsourcing job gone bad is hard to fix. Exit costs are high and transferring work to a new team may be difficult, if not impossible. If you don’t outsource with care, as we often say it in Brazil, “what’s supposed to be cheap becomes very expensive”.

See also An idea is Just That – Not Yet An InnovationImage: blogandretire.com

What’s your experience with software outsource? Leave us a comment!

With Disruptive Innovation, Customer Is Not Always Right

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Disruptive innovations and customer feedback

A recent study by ChubbyBrain.com listed the top 20 reasons why startups fail. The #1 reason, ahead of funding, product quality, pricing and other popular ones, was “ignoring or not seeking customer feedback”. However, there are two sides to this.

If your company is launching a disruptive technology, or a at least a truly innovative product, and you really believe in it, taking initial customer feedback at face value may not necessarily be the best way to go. A classic example is the walkman. When Sony was building the product in the 1970s it reached out to potential customers to learn what they thought of it. The most common reaction was to say that the walkman was a stupid idea! Who would walk around listening to music, instead of enjoying it while sitting back in the couch? How would you run errands or even jog with “speakers” on your ears, not hearing what’s going on around you? Had Sony been discouraged by this feedback, it would have probably discontinued the project and missed out on this huge hit.

If not a disruptive innovation, follow the rules

Now, if your product, like the vast majority, is not starting a new market or doesn’t require change in attitude or lifestyle, then of course the story is different. You should adapt to your clients as much as possible, not expect them to do so. This sounds intuitive, but many entrepreneurs (including myself in the past) think their product is so great that the problem, really, is with the rest of the world that doesn’t want it the way it is. Distancing yourself from your “baby” and taking client feedback into consideration is fundamental, both in the product development stage and thereafter.

At the end of the day, it is a judgement call. Do you believe so much in what you are doing – and how you are doing it – that you are willing to risk ignoring customer feedback? Are you breaking a paradigm of sorts to expect to be right over the majority of people you are supposed to serve? Only a very small percentage of startups would fall in this category. If you are one of them, you will have an uphill battle to change people’s behaviors; but one that can have a huge payoff.

See also Not All Angel Investors Are From HeavenImage: pocketcalculatorshow.com

What’s your experience with disruptive technologies? Leave us a comment!

An Idea Is Just That – Not Yet An Innovation

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Innovation and new ideas

I am frequently approached by people who want to share a new business idea with me. Some are actually good, others, well, you know. Usually the pitch is accompanied by a good amount of mystery and secrecy: “Andre, I’m telling you this because I trust you, but don’t tell anyone; this could be big”. So let me summarize what I tell friends who approach me like that.

Turning an idea (hopefully) into an innovation

First, don’t worry too much about secrecy. Your new idea is likely not as much of an innovation as you think, it has probably come up before in one way or another. And even if it is (almost) that great, you will only be able to go somewhere by sharing it with other people who can give you useful feedback and leads. The chances of someone stealing your idea are probably slimmer than you turning it into a business without sharing it with others. Competent people are busy and know how time consuming and risky it is to start something new.

Second, ask yourself what YOU would bring to the table. Are you business savvy? Have the relevant technical skills? Money to invest? An amazing network in the industry? Lots of time to spare (on top of at least a bit of one of the former)? If you answered “yes” to one or more of the questions, then great, you should move forward. Try to find the people and resources needed to complement your skill-set and hit the road. But if the answers are straight “no’s”, I need to say you should probably let go and try to think of another idea.

To illustrate this, once a friend came to me with a pretty good idea for a mobile app. However, he didn’t know a thing about starting a company or building an app, didn’t have money to invest, didn’t know anyone in the industry, and was not willing to invest a good chunk of his time on it. Seriously? Don’t expect that someone will start a company with you just because you had a decent idea, especially because the idea will evolve/change as the business matures. You need to bring something concrete to the table. Ideas are just ideas… We all have tons of them.

See also Not All Angel Investors Are From HeavenImage: shutterstock.com

Have you ever had a business idea? What did you make of it? Leave us a comment!

MBA For Entrepreneurs Can Still Matter

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MBA and entrepreneurs

At times it seems MBA programs are passed their glory days. Every so often we see articles saying that they can be a waste of time and money, especially if your goal is to become an entrepreneur. My two cents: if you have no business background and you can afford it, a good MBA is still a great thing! My background is in economics and I wouldn’t have started my first company without the skills and confidence I acquired in business school.

MBA for entrepreneurs

If your undergrad is in the sciences or the arts and you want to start your own company, an MBA can be a good idea. Some will say that all you need is a business-savvy partner; but you know what, it’s not ideal to rely solely on others. Of course you will not become a management guru overnight (you don’t want that anyways), but by going to business school you at least learn the basics, the jargon, and know where to find the answers. You can sit down in front of an investor or Board and not look like a big question mark when they start talking about P&Ls, financial ratios, or SWOT analyses.

In a good business school you also meet interesting people, from different countries and sectors, expanding your network and perspective on things. You can bounce off ideas with smart people and potentially find the partner you’re looking for. You become part of an alumni group that can be of service in the future. Hey, even some of your professors might not be as dull as you think and give you good advice and open doors for you.

Depending on your age and where you currently stand professionally and financially, it might be that a two-year full-time program doesn’t make sense anymore. The opportunity cost can be too high. But you can do a one-year program, there a great ones in Europe, Canada and a few in the US. Or do a part-time executive program. If you can afford it, it’s never a waste to learn new skills and meet good people.

See also Entrepreneurship, Innovation and ProsperityImage: linkedin.com

Are you an entrepreneur and attended business school? Leave us a comment!

In Seed Capital Fundraising, You Gotta Choose Your Pizza

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Seed capital and ownership

A common mistake entrepreneurs make, especially in the startup’s early stage, is to worry too much about valuation and dilution. The business, after all, is their “baby” and they can’t give away too much too soon – every share is worth fighting for! Well, guess what, the business is almost as much of a baby to those who are willing to back you up so early. Overvaluing the company from the get-go generates problems on several fronts.

Seed capital must be priced with care

First, very often the early investors are “3Fs” (friends, family and fools) or an angel who is only within one or two degrees of separation. Selling an overpriced product, even if you didn’t do it with bad intentions, may leave everyone with a bad taste in their mouths; especially if an institutional investor comes in a year later and values the company at half the first round. It’s hard to explain that to your uncle.

Also, overpricing makes it more difficult to raise new rounds. It sends the wrong message to more sophisticated investors. The impression is that you either don’t know how to value a company, purposely overpriced it, or the company simply lost some of its value. Neither is a good story to tell when you are sitting across the table from a VC.

Obviously, at the same time it isn’t good for anyone that the first couple of investors grab more than say 30-40% of the company. The entrepreneur needs to remain motivated, ideally also vesting some of the equity (more about that in a future post). But getting obsessed with dilution is bad for your startup. The more deep-pockets have their skin in the game the better and greater the chances the business will grow for everyone. After all, which would you prefer: 90% of a pizza or 10% of Pizza Hut?

See also Not All Angel Investors Are From HeavenImage: generalstorecafenj.com

Have you raised seed capital with 3Fs or angel investors? Leave us a comment!

Time to Start a Business – or Not

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What to ask yourself before starting a company

Before launching a startup, an entrepreneur must ask him or herself the following question: Can I support myself for the next 18-24 months? This is specially important if you’re in your late twenties or early thirties.

It doesn’t matter where support comes from. It could be your parents, your own savings, your partner’s job, or a liquid asset you’re willing to sell at some point. It could even come from your first investor, such as an angel, although very rarely outside investors are willing to pay you a (decent) salary, especially in the early days of a startup. The important thing to remember is that it will take longer than you think before your company is making money to pay you, or an institutional investor joins in with a paycheck.

Don’t expect short-term returns when starting a company

Drawn into the excitement of launching their ventures, entrepreneurs usually underestimate the sacrifices to come. Optimists by nature, they assume that something great is going to happen within a year: a successful pilot or beta launch, an investor, even a first client. Not gonna happen. Success stories about entrepreneurs who dropped out of college or left a job to support themselves on credit card debts are very sexy but incredibly rare. They do however get all the media attention. You won’t read a piece on TechCrunch about the entrepreneur who ran out of steam, shut down his company, broke up with his girlfriend in the process, and had to go back to his parents house.

The concept of time is very different for bootstrapping entrepreneurs and… well, the rest of the world! While you’re bleeding and resources are drying up, potential investors and clients will tell you comfortably: “Come back in six months or when you have more clients”. It’s a brutal catch-22 and it will drive you crazy unless you can’t support yourself and get into real world’s time.

If you’re in the early twenties or otherwise can afford it, screw it, take all risks! Starting a company – successfully or not – will be a great school anyways. If that’s not you, by all means, do also go ahead and pursue your dreams. But make sure you first do some planning on the personal front, soldier.

See also MBA For Entrepreneurs Can Still MatterImage: fotolia.com

Have you ever launched a new venture? How did you support yourself? leave us a comment!

Entrepreneurship, Innovation and Prosperity

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Entrepreneurship and economic development

What is the common ground between the economic prosperity of the Netherlands in the XVII-XVIII centuries, nineteenth century England, twentieth century U.S. and, more recently, countries such as South Korea, Singapore and Israel? Although the question could be answered from different angles, fundamentally it can be inferred: in their own time, these countries promoted economic systems where resources were efficiently channeled to the most competent entrepreneurs and endeavors.

Canadian economist Reuven Brenner summed it up perfectly: “Prosperity is the result of matching talent with capital and holding both sides accountable”. The “capital” can come from one or more sources: capital markets, government, savings or inheritance. The “talent” may be fostered internally – through education, incentives for innovation and entrepreneurship, development of a risk-taking culture – and/or imported, with the opening of borders to skilled and entrepreneurial immigrants. Finally, “accountability” is constructed through solid institutions (political, economic, regulatory, legal, social) that promote a stable business environment, where contracts are honored and a long-term perspective is installed.

Back in time, on entrepreneurship and prosperity

In the XVII-XVIII centuries, the Netherlands had the most developed capital market in the world. It operated the forefront of financial instruments, both debt and equity, which enabled people and companies with good business ideas to grow their ventures. Therefore, at a time when most societies were divided essentially into castes – with royalty, nobility and aristocracy keeping their wealth generation after generation – the Dutch popularized the access to capital and implemented a socioeconomic system that was (by the time’s standards) more democratic and meritocratic. Moreover, in addition to having effective institutions, it opened its doors to immigrants from diverse backgrounds, welcoming for example Spanish Jews and French Huguenots, who brought innovations from their countries and who, by definition, were mostly entrepreneurs (what is more enterprising than venturing oneself into a new country?)

A century later, England became the engine of the Industrial Revolution within the same logic: capital-talent-institutions. Innovations, both technological (e.g., steam engines) and of process (e.g., revolutionary management techniques) were only possible due to an economic system where risk was properly rewarded and the process of trial and error was stimulated. In the second half of the twentieth century, the United States, in turn, established itself as the major economic superpower based on: capital (Wall Street, Silicon Valley and its angel investors and VC/PE funds, R&D subsidies); talent (Americans and immigrants educated in universities such as Stanford, Harvard and MIT); and institutional climate (pro-business laws, efficient legal system, overall social fabric etc.)

Immigration was especially important in the U.S. As proof, 40% of Fortune 500 companies were founded by immigrants or their children, including giants such as Intel, Google, eBay, Apple and GE. Furthermore, ¾ of patents developed in American universities had the participation of immigrants. It is no wonder that immigration reform is constantly brought up within the debate for promoting American competitiveness and sustained economic growth.

Recently, the most successful cases of economic development were the Asian Tigers. The political, economic and institutional reforms that occurred in these countries, combined with investment in education and the development of capital markets, enabled a flurry of investments and skilled immigration, driving the growth and development of these countries. Another interesting case is Israel, a nation created just over half a century ago, in the middle of the desert, and that thrives due to skilled immigration and education, dynamic access to capital (private and public), a culture conducive to risk taking, and solid institutions.

Traditionally, the quest for prosperity has been driven by top-down policies, often based on unrealistic economic models. Looking at economies through the lenses of “capital-talent-accountability” gives us a clearer view of the issues at hand, from the bottom up. It provides better grounds for understanding the underlying factors that build an economy and allows for more factual and entrepreneurship-friendly policy making.

Andre Averbug is an entrepreneur and economist.

See also An Idea Is Just That – Not Yet An InnovationImage: source unknown (anyone?)

What’s your opinion about the link between entrepreneurship and prosperity? Leave us a comment!