To Clone or To Innovate?

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(Pictured above is a Rolls Royce Phantom. Wait… the grill looks a bit off. And the vanity plate – isn’t Geely a Chinese manufacturer? Aha, another Chinese copycat!)

China has long been the king of clones. From faux-luxury at the Autoshow to faux-iPhones on Alibaba, cloning has been a staple of the Chinese business portfolio for years. Heck, China has industrialized the cloning of pigs and even entire towns! In the past ten years, we’ve seen the software clone industry really take off as well. In China and elsewhere, copycat software services is now big business. VK, a Russian Facebook clone, became a billion dollar company despite a 2 year lag on FB, . WeChat, a WhatsApp clone, has had growth parallel to the $19B company and an even broader international audience despite a 1.5 year lag. And it’s not just a third world phenomenon anymore: from cloud storage (Dropbox) to mobile gaming (Zynga), billion-dollar IPOs to quick exits at <$20M, copycats are winning and the Valley approves. For proof, look no further than your favorite VC or accelerator’s portfolio.

Sure, this isn’t anything new – you could argue that Facebook was a clone of Myspace, Myspace was a clone of Friendster, and so forth – and it’s also true that most innovation consists of incremental improvement. However, this post is more of a thought experiment, thinking from an individual’s perspective. Suppose you’re a young technologist in a brainstorm session with your potential co-founder. Today, choosing to simply copy an existing startup is an entirely sound decision. I don’t mean identical down to specific UI elements and complete feature set, but rather a high-level decision to knowingly enter the same space as another startup and offer a similar, competing service. Being second-to-market means that a proof of concept exists. Someone else has done the market research and created something that seed investors are interested in, which means the chance of success are slightly above terrible. It also means you can make wiser use of cash: their strategy targeted a mass audience? Okay, we’ll focus ours on the most profitable demographic. These facts have always been true to some extent, but what factors are new?

For one thing, accelerators and incubators have now taken over the seed-stage startup scene, and VCs continue to raise record funds. These forces are inclined to be more receptive to proven ideas. Dave McClure explains it well in his seminal work, Moneyball for Startups: most VCs are lazy and don’t have deep domain expertise so they jump on the trendy deals and invest in other startups in “hot” sectors. While I don’t have any data backing this up, I’d wager that it’s easier to get your startup to Tech Stars and follow up with a Series A if it’s a clone of a “hot” startup than otherwise.

There’s not a lot lost by not being first-to-market. A captive customer base is a legitimate concern, but the internet audience is increasingly fragmented and this might be a consideration in choosing who to copy to begin with. Is there a race to get acquired? The various companies that make up Big Tech have so much cash and have so many competing interests that if one startup gets acquired by them, it’s likely that the copycats will follow suit.

My guess is that we’ll see an increasing number of copycats created by US companies. Market factors will explain part of the trend, but the face of entrepreneurship is also changing. Fresh grads who might have pursued careers in investment banking before 2008 are increasingly looking to the Valley for the potential windfall and prestige. (For those who say the Valley doesn’t care about prestige, read the first sentence.) On average, the type of individual banking has traditionally attracted is probably more interested in starting a project with better expected, risk-adjusted returns than one that serves an intellectual purpose or solves an interesting problem. The more risk-averse the entrepreneurs are, the less innovation we should expect.

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Don’t we need innovation? Deliberate innovation is extremely difficult to achieve and even more difficult to monetize. Most BIG ideas, the type that a Founder’s Fund might be interested in, can only realistically be launched by successful serial founders who have proved that they can make magic happen with VC money. In some ways, this view is anti-innovation and pessimistic, but it’s important to take caution around the Valley hype and listen to pragmatism once in awhile. Perhaps all this is part of the reason why Peter Thiel believes innovation is dead. If you have an hour to spare, I highly recommend watching this debate between Peter Thiel and Marc Andreessen.

In the end, I want to believe Marc is right and that innovation is real and sustainable. I’m committing myself to the outcome, in fact, as I’m planning my career around it. To clone or to innovate? Hopefully both.

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