Clone or Clown? Adaptation Vs Innovation For Startups Going From One Market Into Another

Society often celebrates the inventor, the lone genius or small group of people who comes up with a new insight. We heap praise upon the innovators, those who take the inventions and make them commercially successful. The ones that often do not get as much positive attention are those who keep the core of an idea but tweak it to a new reality, adding a new flavor to it. If imitation is the sincerest form of flattery then understanding the different shapes this takes is important for any entrepreneur, whether you are focused on flattering or being flattered.

1) Localization -- In the late 1980s Sega came up with consoles that rivaled Nintendo. The products were launched globally and were disproportionately more successful in Europe and Latin America. In Brazil specifically a small company called TecToy was founded in 1987 to focus on electronic toys. At that point, almost half of the overall toy segment was controlled by a single company called Estrela. TecToy decided to bet on distributing Sega’s products and made three adaptations: translating the content into Portuguese, replacing some of the computer graphics with themes that would be more familiar to the local audience, and portability of the games between consoles especially from newer to older ones. The company also invested heavily in marketing, created the Hot Line phone service for hints on games, a club for owners of the products, and vignettes on their games for the largest TV channel. The result was TecToy owning 75% market share and annual revenues of $115M by 1994.

The company did eventually end up in hard times but for just about a decade they were a classic example of successful localization. TecToy didn’t create any new technology, but what they did really well was package an existing innovation into a new market. Hardware especially falls in this category, whether it be consumer electronics or medical devices, since it’s typically too capital intensive for entrepreneurs in most markets to develop anew.

2) Copycat -- Rocket Internet was founded in Berlin in 2007 by three German brothers: Oliver, Marc and Alexander Samwer. The next year the company founded Zalando, inspired by Zappos.com. In 2010 came Wimdu focused on homestays, very similar to AirBnB. Lazada came along in 2012 to focus on bringing the Amazon.com business model to SE Asia. Over the years Rocket Internet has made several other bets essentially in fast followers of mostly US business models. While some have flamed out explosively, enough succeeded wildly so that when the company IPO’d in 2014 it was the largest tech company flotation in Europe for seven years. Since then Rocket Internet has come down in value significantly, but not before minting the brothers billionaires.

Rocket Internet has received much criticism over the years for being a factory model with little internal innovation. At its heart what they were doing was copying business models. While parents can defend a technical innovation, there is much less protection around business models. The lessons for startups is to either grow fast enough so you are the one conquering other markets -- or be comfortable that someone else will look at you and build a clone.

3) The Cost Advantage -- Unmanned Aerial Vehicles (UAVs), popularly called drones, have been used especially by the military for decades. In 2006 Frank Wang who was then in his 20s founded a company called DJI which started selling flight control components. The company struggled -- high churn among employees and low sales -- relying on support from a family friend to stay afloat. But then the company’s fortunes started changing. DJI capitalized on the manufacturing price for drones dropping precipitously alongside China’s manufacturing prowess, making a move into Western markets. In 2013 it released the Phantom, an entry-level drone that became a blockbuster arguably for being more user-friendly than competitors. In 2015 the newer model incorporated a live camera and eclipsed the original’s success. DJI became the world's largest consumer drone company and drove many others out of the market altogether. Today they account for 72% market share and Wang is worth close to $5B.

Could DJI have been created in another country? Could the French Parrot or the American 3D Robotics have created equally good drones at the same price? How much of it was the entrepreneur’s drive? While we can debate about any of these questions the lesson for entrepreneurs is unambiguous -- how you position your company does matter. Wang played to his strengths, including the cost advantage, to eventually win big even away from his home market.

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.dhirubhai.net/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.