Ask an Investor, Larry Li of Amino Capital, Ep. 10: Our company's business model has been plagiarized by a major competitor

"What if what I'm doing is also being done by big competitors?"

Have you, as an entrepreneur or an employee of a startup, ever had this concern?

In the business world, when a latecomer enters the scene with a similar business, it could be perceived as either illegal infringement or legitimate competition through imitation. However, regardless of being copied, imitated, or facing direct competition due to similar strategies, the looming presence of "big players" represents an inevitable challenge for entrepreneurs during their development.

When a startup's business direction starts to attract attention from big players, this attention leads to two scenarios: one being criticized for blatant copying or imitation, and the other involving overlapping development due to similar ideas and profit motives.

So, the first question we need to ask ourselves is: Will the behavior of copying or imitating disappear?

Instances of copying and imitating in the business realm may abate and change under the development of legal regulations, but as long as the potential for profit exists, they will never disappear. To some extent, copying itself is a force, heedless of moral judgment, that propels industry and market development. Additionally, it's a form of recognition for entrepreneurial ideas–we all know the old adage, "imitation is the best form of flattery."

Therefore, when entrepreneurs consider positioning their companies, they must have a practical, actionable plan. This plan should revolve around two core aspects: business direction and strategic positioning. It should either avoid conflicts of interest or build core barriers. These two aspects will determine the survival of the project when facing competitors in the future.

1. How can small companies survive and thrive under the shadow of industry giants?

There are two fundamental goals for startups: survival and growth. To put it bluntly, ensure survival first, then strive to thrive.

To ensure survival in the face of competition from large corporations and small-scale rivals, the choice of entrepreneurial direction becomes crucial. This requires entrepreneurs' innovative ideas to be precise, accurate, and most importantly, fast. They need to find business opportunities that big companies cannot or are unwilling to pursue, enter the market, and focus deeply on the core of their business; or they can seize the opportunity to enter and develop rapidly while large companies have not yet caught on, accumulate enough resources and barriers, and wait for the final showdown.

Easier said than done, right?

Established giants generally seek businesses with clear risk-reward ratios and significant potential returns, as cost-effectiveness is crucial for enterprises. But for startups, seeking survival is paramount when the team is still small. Under the pressure of survival, a good team is willing to enter the fray, work hard on tasks that others are unwilling to do, and then hope to strike gold, striving for survival in adversity.

For example, in 2016, 19-year-old Chinese-American Alexandr Wang dropped out of MIT and co-founded a company called Scale.ai with Lucy Guo, who was 22 at the time. Initially, they concentrated on serving clients in the autonomous driving sector by focusing solely on one task: organizing complex data and annotating it one by one.

This was a tedious and exhausting task that required immense effort, and at the time, the market was small. To circumvent these tasks, most institutions chose to outsource to save time and resources and focus on their core business. It was in this environment that the two founders saw the imminent growth and profitability in the data annotation market and began offering their services.

Under Alexandr's leadership, the team completed the annotation of massive amounts of data. More importantly, the team also built its own intelligent data platform, so that the processed data could be utilized by Scale.ai to train its own machine learning models.

While making profits, they accumulated and expanded their first-mover advantage. In the past few years, Scale.ai developed rapidly; the company secured a $91 million contract from the U.S. Department of Defense, completed a Series E financing round totaling $325 million, and achieved a valuation of $7.3 billion, making it the world's highest-valued, intelligent data-annotation enterprise.

How do we understand the scale of this achievement? Let's examine the valuation: $7.3 billion is 11 times the predicted size of the global annotation market in 2021, and nearly 5 times the predicted size in 2025.

This is truly remarkable. In other words, Scale.ai, as a company, has shattered expectations in the data annotation market.

Secondly, in the development strategies of large enterprises, very few are willing to sacrifice their core businesses to develop new ones. This is where the opportunity lies for startup companies.

Remember: What knocked out the old-school traditional camera company Kodak was the digital camera.

But who invented the first digital camera? Kodak.

In 1877, when the camera was invented, it was a cumbersome and highly complex device assembled from a large set of equipment. When George Eastman, the founder of Kodak first saw the heavy camera, he vowed to invent a small, portable, and easy-to-use camera. Nine years later, George Eastman achieved this goal with the invention of the "Brownie camera," ushering in the glory of this commercial empire. At its peak, Kodak occupied over 70% of the global market share.

In 1975, Kodak engineer Steve Sasson invented the world's first digital camera. Of course, this camera was far from convenient as it weighed 3.6 kilograms and had a meager resolution of around 10,000 pixels. Kodak felt uncertain about the future of digital cameras. More importantly, the development of digital cameras would strongly impact the company's most profitable film business. Therefore, the company locked the digital camera in the lab, missing the opportunity.

We all know the rest of the story: under the impact of digital cameras from companies like Sony and Canon, as well as smartphone photography, Kodak suffered greatly and declared bankruptcy in 2012.

Large enterprises, that have survived for a long time, carry lots of baggage, and their adoption of new strategies and business directions is not agile enough. This provides a rare development opportunity for startup companies. Chime Bank, which AMINO also invested in, is a great example of this.

Chime is an online financial services company founded in 2013 that initially struggled to raise funds but is now valued at $25 billion. Its success can be attributed to two factors: its products and services are more user-friendly, such as waiving debit card fees and providing superior online services; and its purely digital operations have increased the company's operational efficiency, effectively reducing operating costs and expanding profit margins.

Around the time of its founding in 2013, few believed that Chime, an online banking service provider, could survive. However, as the financial sector continued to develop, business models were continuously validated, and with the catalysis of Covid-19, the company successfully grew and expanded.

Moreover, Chime's targeting of a clever demographic, primarily those born in the late 20th century who reached adulthood in the early 21st century, was strategic. These individuals are generally just starting their careers, have relatively stable incomes, and are more accepting of mobile services. If Chime had positioned itself only as an alternative to traditional banks, targeting low-income groups, it would not have developed as smoothly.

This is the advantage Chime has over traditional banks. It has shed the baggage and mindset of traditional bank giants and achieved its own development through adjustments and optimizations in a strategic direction. This is a good solution for startups under the shadow of large enterprises.

When you have no advantage, avoid direct conflicts with big players, attack them when they are unprepared, and where they least expect it.

As Sun Tzu said in The Art of War, “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” Understanding your potential competitors, finding something they are unwilling or unable to do in time, is crucial for the early development of startups. If you really can't find it, then you must at least be better and faster than others.

Otherwise, you won't be the last one standing.

2. Dancing with The Elephant

All the truths in the world are like this: easier said than done.

For startups, finding the aforementioned entry points is indeed rare because it requires many prerequisites. If market entry cannot be achieved, then there are two possible outcomes: one, big companies enter, leading to increased competition and risk; the other, big enterprises refrain from entering, leaving only companies of equal size as the main players.

If it's the latter case, this may indicate that the market and the profit space are too small, and the attractiveness to big companies is not strong enough. In such a situation, the startup companies already in the market also need to reassess the development potential of the market. The lack of imagination in profits that fails to attract big players is itself a form of negation.

If it's the former case, where big companies enter the market to compete, then this creates a situation where "ants dance with elephants."

But before we discuss the key points of competition, I hope entrepreneurs can first recognize a misconception: competition in the business world is fierce, however in certain industries, such as SaaS and new energy vehicles, it's neither a zero-sum game, nor is it necessary to abide by the law of the jungle. Thinking in terms of "either/or" is not a beneficial mindset for startups.

What this means is: while the imitation by big companies may bring pressure and risk to startups, imitation itself, although not commendable, is a driving force for market development. In new and promising markets, the entry of big companies often enlarges the market which then creates opportunities for small enterprises. For example, following Tesla’s lead, the new electric vehicle industry is rapidly growing, overturning the unchanged situation of traditional cars for over a century. Only founders with a broad vision can think of this and try to capture larger development opportunities.

If startup companies cannot leverage this, they must directly face competition with big enterprises. In that case, I believe the following three points are most important.

First, recognize that the advantage brought by the startup idea is only temporary; it's just a starting point, not a winning point. Whether it's big companies imitating or startup companies competing, ultimately everyone is competing not with ideas, but on user acceptance of the product. Acceptance comes from user experience, and good user experience comes from carefully designed features, a healthy ecosystem, and customer-centric service. The core of achieving the above lies in product strength and execution, which are the two things startup companies must excel at.

Second, timing determines the pace and focus of business development. If you enter early enough, you need to seize the opportunity to accumulate resource advantages and establish basic barriers, such as data accumulation, as quickly as possible. This will give you some advantage in future competition. Sometimes, the smallest advantage is the key to success.

If you enter relatively late, you need to observe and learn rather than rush into the competition. Just like chasing highs in stock trading, blindly entering the market often leads to tragedy. Seize the opportunity, in my opinion, this is a great wisdom. Being able to analyze the pros and cons, formulate strategies in advance, and then enter the field calmly and win with one strike is what the best entrepreneurs can achieve.

When Zoom was founded, there were already many competitors in the video conferencing software market, and almost all big companies had a plan to compete. In the competition with similar products, Zoom has always been looking for and adjusting its own product characteristics. For products like WebEx that require pre-payment for video conferencing software, Zoom adopted a freemium model, allowing all users to use the basic features of the product for free, thereby attracting a large number of users. When Google unveiled their competing product, Google Meet, Zoom launched a strategy that allowed consumers to use the product without registration, further enhancing the experience of casual users. These are reasonable business strategies that have helped Zoom rise to the top among numerous similar video conferencing products.

Third, the vision of the founder and the strategic development of the company are crucial. Don't be fixated on short-term gains; learn to profit from a higher perspective. To gain an advantage in competition, entrepreneurs must lead the team to break free from the current situation and develop a plan with a longer-term perspective, and try to expand horizontally and vertically in the industrial chain, gaining greater power. Finding the market space left by big companies and becoming a force to fill the market gap is the most effective development strategy for small-scale companies in the early stages and also one of the social responsibilities of small and micro enterprises. For example, many users like to experience products in physical stores and then search online for more affordable alternatives. The existence of offline physical stores and the flaws in service have become resources and soil for the development of startup companies in the online retail field, incubating a large number of high-quality companies including Amazon.

The business world is not a zero-sum game. Entrepreneurs don't need to pursue uniqueness—it's not always "either/or." Coexistence may give you a better ecosystem and a larger market. If direct competition is unavoidable, then wield both strategy and execution effectively, and let users choose the ultimate winner.