Steve Sloane knows a good investment when he sees one. An associate at Menlo Ventures, Steve sourced Menlo’s investments in Heap, Clarifai and Breather – in which Menlo just led a $40 million Series C investment.
We were lucky enough to sit down with Steve and pick his brain about how midsize companies can compete with larger, more established players in their industries.
What do midsize companies do better than larger companies? How can midsize companies use size to their advantage?
In venture capital, one of the most common questions we ask ourselves before investing is what the response of big tech companies like Facebook, Google and Microsoft might be. If this is such a potentially lucrative area, why wouldn’t a company with essentially unlimited resources build and execute on the same vision? Of course, no company can pursue each and every initiative, and in many cases, even when they do, it ends up not going according to plan (à la Google Plus).
However, it is almost always important to consider the impact of incumbents on a market and how to best position the company to compete effectively. In doing so, midsize companies should consider the inherent advantages that they possess over their larger competitors.
First and foremost, smaller companies are more nimble than established competitors, as a result of a leaner management structure, fewer fixed costs or even a leaner codebase for tech companies. Midsize companies should take advantage of this nimbleness by adapting more quickly than the competition. By listening to customers of all shapes and sizes and being ready to rapidly iterate, midsize companies can stay ahead of market forces.
Midsize companies are also often blessed with hungrier workforces. Especially in the technology industry, employees at startups and midsize companies almost always gave up larger salaries and significant amenities to work for companies with an exciting mission statement and the upside potential of stock options. Effectively utilizing the passion and hunger of your workforce is one of the most significant advantages that small and midsize companies have.
Midsize companies can also use their size to effectively cover different market segments than their larger competitors. For instance, a midsize company may be better able to connect with a fellow midsize company throughout the sales process. In addition, by not having the burden of servicing larger, more demanding customers, midsize companies can focus their resources on customers that may have historically been neglected by larger competitors. Over time, midsize companies can use the brand they have built in this segment to expand upmarket or even benefit as some of the companies they sold to grow over time.
What do midsize companies tend to be worse at than their larger competitors? How can midsize companies overcome these challenges?
In cases where reputation matters, midsize companies are at a serious disadvantage. We’ve heard time and time again buyers stating that “no one ever gets fired for buying IBM [or another established tech player].” In many cases, even if a midsize company offers a better product at a superior price point, it may very well be impossible to dislodge an existing vendor. To mitigate such a disadvantage, it’s better to look for “greenfield” opportunities, where a potential customer is evaluating a solution for the first time and won’t be as married to an existing player.
Larger companies often have an advantage due to the pure size of their sales teams and marketing budget. They will simply be able to cover more territories and use their marketing budget to gain instant name recognition in multiple markets.
The way for midsize companies to counteract this is by finding a niche beachhead that may not be covered by a larger company and focusing nearly all of their resources there. It’s important to avoid chasing opportunities that may seem lucrative in a bunch of different areas, it’s a sure-fire way to spread yourself too thin and run out of resources. In addition, smaller companies should look to take advantage of the channel, or a partnership with a larger company that will add leverage to their go-to-market motion. Keep in mind that this takes time and effort to develop— channel partners won’t abandon long-time relationships quickly either— you will need to prime the channel over a period of time by bringing them deals.
Finally, make sure to develop a referral strategy. By creating a word-of-mouth strategy centered around a superior product and customer support experience, you may be able to cut through the noise generated by an established competitor. Be certain to ensure that the referrer benefits in some way—even a personal gift card works!
What essential features must a midsize company’s product and/or business model have if it is to take customers away from a larger competitor?
The key to disrupting a large company is to focus on a strategic beachhead that might not initially look worthwhile for an incumbent to concentrate on. In this way, a smaller company is able to gain momentum, build a following, and refine their product without running directly into competition. It’s important to avoid areas that would be considered highly strategic to a larger competitor right from the get-go. Despite its eventual successful acquisition, a good example of this was with Diapers.com, which went after new parents, a strategic area for Amazon. Amazon was anecdotally willing to endure hundreds of millions in losses to ensure that they didn’t lose this foothold to a new entrant.
It’s also important to consider doing something that is antithetical to the ingrained cost structure of a larger competitor. Consider the advent of Software as a Service companies (SaaS), these companies were able to rapidly onboard customers through a web portal, rather than through a long and expensive on-premise implementation process. It was very difficult for legacy software companies to adjust to this go-to-market motion, as they had large, expensive salesforces that relied on a traditional sales cycle.
Finally, in the tech world, it’s important to consider the impact of network effects on disrupting an industry. Marketplaces and social networks that have been successful (Uber, Facebook, Snapchat, etc.) experienced rapid growth within their networks. This made them increasingly more valuable by the day. This made it difficult for larger competitors to release a product that could supercede the power of an existing network.
How can midsize companies use and benefit from the work and research that their larger competitors have previously done or are currently doing?
It’s important for all companies to be recognized in trade journals, industry conferences and in the case of the tech industry, publications by research firms like Gartner. It lends credibility to companies and often serves as a fantastic source for lead generation. Often, to be recognized in these journals, it requires piggybacking upon an existing category that may have been defined by an incumbent. As we have discussed earlier, it’s important to avoid head-to-head competition when possible, but it is helpful to at least frame the solution in terms of a player that they might be familiar with.
It’s crucial for midsize companies to steer clear of potential IP litigation as it relates to prior research that may have been done by a competitor. The best companies plot out potential pitfalls before developing products that could even remotely be viewed as infringing. Whether or not a claim is even true, becoming embroiled in a lawsuit with a company with deep-pockets has ended up being the demise of many a young company.
About Steve Sloane
Steve focuses on investing in SaaS applications and marketplaces at Menlo Ventures. He sourced Menlo’s investments in Heap, Clarifai, and Breather and helped lead diligence for Menlo’s investments in Rover’s most recent growth round and UpCounsel. Prior to Menlo, Steve worked at Insight Venture Partners in New York, investing in growth stage internet and software companies. Steve is a Y-Combinator alum and spends time with a number of companies from the program.