Why Competition Is Good For Entrepreneurs and How Blockbuster’s $50 Million Mistake Helped Reed Hastings and Netflix Destroy a $6 Billion Empire
Find Angel Funding & Venture Capital for Business Startups, Entrepreneurs, & First Time Founders – Episode 8
When battling for resources or investment, early-stage entrepreneurs may believe that competition is a bad thing. On the surface, they are correct. There are a limited number of angel investors willing to provide a finite amount of venture capital to founders.
However, is competition a good thing for business startups?
Competition is not always a bad thing for entrepreneurs. If you have a brand new startup with an innovation that nobody's heard about, you may not have any competition. However, this may cause a challenge getting customers or angel investors. Why? Because your audience will likely be confused by your solution business.
When you sell something that is truly new, your first step will be to educate your audience. People cannot buy something before it exists. It is tough to attract startup funding when investors do not understand your solution. It is even harder if there is no proof that there is a market for what you are doing. This is often the case for innovative startups, because it is hard to prove if your target market will pay for something they never had.
This leads us to another benefit of competition. If you need to compete with other businesses in order to win customers, at least you have proof that a market does exist for your startup.
Doing a competitive analysis is critical for your business to succeed. It will give you an opportunity to see the lay of the land. However, it will also help you to avoid a common startup trap that costs millions of entrepreneurs countless hours and dollars. Creating something that already exists.
At least 20% of the pitch decks I see are promoting a business or technology that has already been created. Competing with powerful incumbents is already tough enough. But creating a clone of something that already exists without powerful differentiators is a suicide mission. Why spend time, money, and energy building a YouTube-type business technology when YouTube already exists?
However, you can attack a powerful incumbent with technological innovation. Early in 2000 Blockbuster was a $6 billion giant that dominated the home entertainment business with almost nine thousand rental stores around the world. That year, Netflix founders Reed Hastings and Marc Randolph offered to sell the company to their major Blockbuster for $50 million. Blockbuster turned them down.
In 2002, two years after that meeting, we took Netflix public. Blockbuster was still a hundred times larger $5 billion versus $50 million.
How did Netflix compete?
“It was not obvious at the time, even to me, but we had one thing that Blockbuster did not: a culture that valued people over process, emphasized innovation over efficiency, and had very few controls. Our culture, which focused on achieving top performance with talent density and leading employees with context, not control, has allowed us to continually grow and change as the world, and our members’ needs, have likewise morphed around us.
Netflix is different. We have a culture where No Rules Rules.”
Reed Hastings and Erin Meyer, Netflix Founders
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