Interesting to see VC opinions of competitive advantage as expressed by what they are *not* funding. Large, growing TAMs in technology where there is minimal VC funding for new competitors are those with the highest perceived (VC) barriers to entry. Revealed rather than stated opinion.
By this metric, VCs are most respectful of Google in search (zeroish VC funded competitors), Amazon in general e-commerce (Jet.com was the only VC funded competitor in the US/Europe), Netflix in streaming (no VC funded competition) and AWS/Azure/GCP in IaaS (minimal VC funding).
Dovetails with Bruce Greenwald’s assertion in “Competition Demystified” (my personal favorite of his books) that scale is the most durable competitive advantage. Search, general e-commerce, streaming, and IaaS are all relatively capital intensive & scale driven.
Only large incumbent companies in adjacent markets that afford them scale/distribution are trying to compete in these markets. Microsoft, Apple, Facebook are trying to compete with Google in search. Wal-mart is trying to compete with Amazon in general e-commerce and I suspect Wayfair slowly expands into new verticals. Amazon is trying to compete with Netflix in streaming (Roku in ad supported) with Disney and AT&T as prospective competitors. And only Google and Microsoft were able to “catch” AWS in terms of features/functionality with Google still catching up.
In terms of VC respect for competitive advantages of incumbents in large, growing TAMs, the above markets are followed by: Operating Systems (could argue that Magicleap/AR is a new OS, or at least the investors hope it is), Office365/GSuite (Slack, Airtable — but no one seems to be going full tilt towards a suite other than Quip which is now part of Salesforce) and Social Networks (Nextdoor, Discord, Marco Polo, Tiktok — and would argue that all or most of these are more niches than a frontal assault on Facebook). These markets — operating systems, productivity suites, and social networks — are all dominated by network effects.
All of the dominant incumbents in the above markets should be good public equity investments over the next 5–10ish years. But scale — absent disruption — is a stronger barrier to entry than network effects (obviously interactions between the two) per VC revealed a preference.
Also interesting to note the lack of VC respect for competitive advantage amongst incumbents in travel, most SaaS categories, payments, deep learning semiconductors, and EVs — in each case the list of VC funded startups is too long to list. Time will tell!
And although obviously early to say there are incumbents in autonomous vehicles, I’m surprised at the amount of VC funding here given Waymo’s overall lead and Tesla’s growing data advantage (which could result in Tesla overtaking Waymo over the next 18–24 months).
- This is a US/European centric view because I am primarily an investor in those markets — the competitive situation in China, India, and several other EMs is very different.
- This was originally published as a thread on Twitter on 1/26/19.