The Competition Fallacy & Zoom Case Study

A year ago, I partnered up with my co-founder and made the move from venture capitalist to CEO, and while the transition has been both exhilarating and demanding, I've noticed one fallacy I overcame as a VC that continues to plague the industry.

What’s the fallacy? That too much competition = bad.

Competition is an important construct in the wild, and it has manifested in such interesting ways in organized society. Ranging from how competition impacts an individual's psyche (stack ranking students, employees, spelling bees, participation trophies, etc.) to being a source of entertainment within professional sports.

Now imagine applying humanity's diverse perspective on competition to innovative technology. There are so many different experiences, perspectives, and positions to view them from -- entrepreneurs, co-workers, customers, investors -- and they are all voting with their feet. Everyday people make important decisions with competition in mind like which job offer to take, which idea to pursue, how much budget to spend, and which startup has what it takes to go all the way.

So let me offer my perspective, both as a former VC and current CEO. I’ll put on my VC hat and describe a common fallacy on competition that impacts everyone to different degrees before ending with lessons learned. With quote blocks I demonstrate how I applied these lessons learned in my journey as CEO and co-founder of a startup in a competitive space.

No matter which way you apply competition to startups, the fallacy makes sense. If the focus is on capital efficiency, wouldn't more competition make sales harder, commoditize pricing, create a double whammy on top line?

If the mindset is that winners-takes-all, why compete in a space where there are already winners?

If the mindset is a constrained market size, wouldn't trying to replace an existing vendor be difficult and costly?

Despite the fallacy being such a logical hypothesis, it doesn't factor in timing, category creation and rejuvenation, or execution.

It is when people start to dispel this fallacy that creates hard-won learnings like the second mover advantage, the hype cycle, startups = disruption. These lessons, which I've generated in my career along with everyone else, don't take this perspective far enough. How to interpret and apply important signals like competition is a skill worth continuous learning and open-mindedness because like so many things in life, there is so much to learn from the details. Let's jump into Zoom as a case study.

Zoom's Early Days

I had the opportunity to track Zoom as a VC, use Zoom's competition, be a Zoom champion as an early adopter, and learn from one of their earliest investors, Nagraj Kashyap. As a result, I've had the chance to build, track and answer both my hypotheses and others over Zoom's journey.

As a VC, I got to see multiple reactions to the organization. From the earliest days of Zoom being one of many in a crowded space, to the mid stages of Zoom where they were growing incredibly efficiently and could be highly selective with venture capital. Then, to the pre-IPO stages where it was a clear winner but still unclear if it would become the category leader considering how many "category leaders" there were at the time. And finally, to now, where it is a clear leader and building upon its success in unified communication to apply AI and become a productivity suite.

As a customer, pricing was never the top consideration when I was evaluating Zoom versus the competition. However, the free plan helped a lot. We already had another solution that no one was happy with. Our existing phone-centric solution worked, but we always had the classic questions, "Is xyz on the line?", the non-stop beeps as each person dialed in, the, "I'm sorry I'm late, tech issues getting on", and the "I'm not sure why you can't see my screen? I'll send the slides instead". When I started using Zoom, the experience was simply better. Finally, we were actually having video calls. I could actually see who I was talking to, everyone was more present, and it felt like we were getting closer to the experience of having an in-person meeting without the accompanying logistics required. As long as the pricing was within expectations, we weren't optimizing down to the last dollar, we were optimizing for having productive and successful conversations.

But hindsight is 20/20, and we can all universally agree that Zoom has a better product now. But why fund a company to build a better product in a crowded space? Before the product is GA, before the company has reached product-market fit, in the earliest days, it's always a (sometimes hard) decision to take the leap to fund a startup team to build with confidence. Layer in the competition and the question is... is this worth it?

But the question brings up a different set of initial conclusions that are also worth continuous learning -- are early-stage startups meant to fail? Is disruption inherently high risk, high reward (aka Power Law) so plan on failure? It's another tempting set of conclusions that aren't quite there. There are plenty of investors who are able to achieve a high hit rate of success, but why is that? Are they just lucky? Do they just get better access to deals? Do they have more resources to create their own destiny? Let’s again apply these questions to Zoom.

What We Learn from Zoom's Success

Zoom joined an incredibly crowded space and succeeded in building a category-defining, category-leading, long-term public company. Zoom was doing well but their success only compounded as we globally proved out the remote work experiment.

There are a couple of lessons learned and reasons they were able to be successful in that environment:

1. First, consider current customer satisfaction with existing vendors. It doesn't matter if there is a Gartner? Magic Quadrant listing someone as a leader, or if there are multiple leaders in the space. If customers aren't truly satisfied with a solution, there is room for disruption.

What does this look like in real life especially in the early stage of a category? It can look like frustration. When conversations with customers with existing solutions come attached with 10+ complaints. When solving this problem, that is when innovation can create a much-needed "shake up" that I'm enjoying in the crowded workforce identity space.

2. Second, consider technology shifts or what VCs summarize as the "why now." Nagraj Kashyap hypothesized that mobile had the capability to disrupt a crowded market. Zoom was built from the ground up as a mobile-native company while the incumbents were either dial-in-driven or video call-driven. Using the modern mobile-driven technology to be able to more closely resemble an in-person presentation, Zoom used technology to deliver an experience that was so delightful and simple to understand, yet difficult to deliver because of bandwidth inconsistencies (and the ISPs still have more room for improvement here).

Similarly, many incumbent solution providers are now trying to redefine their as artificial intelligence-powered. While new startups have the opportunity build as an AI-native identity company. As a result, we’re already seeing a heightened interest in understanding how advanced algorithms can enable better workforce identity management, and I expect that trend to continue.

3. Finally, consider a company's ability to "make" a market. This includes pulling a team together, deciphering problems into opportunity, and identifying ideal customer profiles. Then a company must build trust and educate those customers on what the future holds while aligning product roadmap to the industry, architecting and engineering a scalable and delightful solution, and building a GTM machine aligned with both the product, the industry, and their ideal customers.

Another way of describing this idea is Product-Market Fit. Repeatably making markets and creating something from nothing is hardest to do the first time. Building a team that has achieved product-market fit multiple times in the past naturally gives companies like ours an unfair advantage.

Making decisions is complex, especially when it comes to innovation, investing, and building a startup, which is heavily mentorship and experience driven. If you want to know why some VCs, entrepreneurs, and even leading-edge customers seem to have "the Midas touch", those three lessons learned are factors in how they are able to consistently build, work with, and invest in winners.

Why I'm Writing

I love to share hard-won lessons learned in service of community. Knowledge is empowering. The community of those those who are looking for knowledge, curious, and interested to learn, I salute you and am writing for you.

While I'm prioritizing AKA Identity , I won't be able to write for this newsletter and community as often but I will keep writing for this purpose. Check out "The VC Field Guide" if you haven't seen it yet. I wrote it by applying over a decade of investing experience during my transition from VC to my current role as CEO. The book focuses on the fundamentals of Venture Capital into a Venture Capital Investment Framework (VCIF) and the who, when, where, why, and how of startups.

Until next time!