new ventures

Copycat Businesses Can Be Great

innovation copycat business

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!

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!