Startups And Differentiation: The 3 Different Types

Startups fight against the odds to succeed and differentiation is key for success. There are really three broad types of differentiation: technology, product, or business model. When a self-driving car startup claims it needs 10x less data to help a car make decisions it is claiming tech differentiation. When a mobile app claims its interface is optimized for clarity and easier usage, it’s claiming an edge around product. When a chatbot startup claims its engineering workforce is as qualified but half the cost of their competitors it is a business model advantage.

So let’s talk about these three different types in more depth using very well-known case studies.

1) Technology

Common wisdom is the inventor of a technology is the winner among users ie that a first-mover advantage is critical. More often than not what we see is second-mover advantage ie that a slew of innovative companies educates the market and then an improved company actually conquers it. Google, as the 18th search engine to come out in 1998, is the archetypical example.

When most other search engines were relying on manually curated lists (eg Yahoo) or natural language processing (the tech wasn’t mature enough at the time), the Google founders gave weights to different links based on who was linking to them. PageRank was a singular technological leap, essentially what already happened with scientific articles applied into a new domain. The second major innovation Google eventually had, inspired by their then main competitor, was an ads system that worked based on click thru rate rather than number of impressions, tying budgets to performance. The rest has been history.

Fundamental breakthroughs in technology are very very rare, what is in fact more common is a small edge like Google had that compounds itself. Like a rocketship where a small change in the angle leads is the difference between hitting the moon or ending up in the vacuum of space.

2) Product

Facebook in its early days is a classic example of product innovation. There had been plenty of social networks in the past, most notably Friendster seemed poised to take over the world when Facebook came out in 2004. Friendster was eventually dethroned by MySpace which ruled social media till 2008. How and why Facebook succeeded has been the subject of numerous academic studies and remains a matter of intense debate to the day, but at its heart it was about their differentiated approach. It was exclusive (originally restricted to college campuses), it was authenticated (you needed the college email), it was focused (you interacted with people your age), it launched new features fast (the company valued getting something out quickly rather than thoroughly).

Facebook in its early days arguably had no better technology than its competitors and it was only with multiple rounds of code refactoring that the company has become the $500B+ technology giant it is today. Product innovations are very very common and startups in the consumer space especially tend to have them, whether they fill a need (ephemeral communication -- SnapChat) or dramatically improve user experience (hailing taxis -- Uber).

3) Business Model

10 years ago would you have believed that millions of strangers would be renting from each other and staying at their homes? AirBnB was founded Aug 2008 and barely scraped by, dying multiple deaths and famously selling cereal at the Democratic National Convention to fund itself. It was simply a new business model that hadn’t succeeded before and that most investors wrote off as being possible. The AirBnB founders’ insight that a new business model could succeed, if they supported it with enough transparency and trust that wasn’t possible pre-Internet. The company’s defensibility has increased as it scales since a higher number of listings means a higher number of users and vice versa, a classic network effect that becomes ever harder to catch up to.

The hard thing about business model innovation is that your competitors can easily pinpoint to them and perhaps adopt them. What you need to count upon is that incumbents will suffer from Innovator's Dilemma ie they will not want to cannibalize their existing ways of doing things. The bigger threat tends to be fast followers, and for those the only remedy is to execute maniacally around your business edge.

These are purposely short articles focused on practical insights (I call it gl;dr -- good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. All opinions expressed here are my own. If this article had useful insights for you do give a like, any thoughts comment away.