When Bad Companies Do Good Things

Entrepreneurs often ask me where good ideas come from. My answer usually is from bad companies.

The most obvious example of this is Facebook. MySpace prospered despite its founders’ penchant for pornography, spam and spyware. San Franciscans loved Friendster despite the reputed self-destructiveness of its founder, Jonathan Abrams. Was it really so hard to imagine that a Harvard computer scientist could build a better social network?

Citysearch was left for dead by IAC, but it was still folks’ only option for local online guides when Urbanspoon and Yelp came along. When Yahoo couldn’t do anything right, Yahoo Answers was a hit, which wasn’t lost on the founders of Quora. The same is true of newspapers and The Huffington Post, of Flickr and Instagram, of IAC’s Expedia and Kayak, of Match.com and OkCupid.

In all of these cases, the problem of social networking or photo-sharing seemed to have been addressed by a company that had lost its mojo. The reason that no one tried to build a social network after 2000 was because we all saw what happened to Friendster. The reason no one tried to build a technology-powered real estate brokerage is because we watched eRealty go down in flames.

These companies become the dead bodies in a passageway that new entrepreneurs have to step over before conquering the usual dragons a startup faces, of getting customers and making money. “Isn’t Yahoo doing that?” potential partners or investors ask. “Didn’t eRealty try that?” The answer to that question is “Yeah, but we’ll do it much better, cheaper, faster.” It can sound like empty swagger, and sometimes it is. But that’s how almost every startup succeeds.

What the entrepreneur has to focus on is whether people want a Q&A site, a local guide, a technology-powered real estate broker. Wherever there’s demand, especially demand so strong that consumers work with a company they don’t even like, you can find a way to win.

A professor of my brother’s once complained that freshmen who sprinted through One Hundred Years of Solitude as part of a 12-week survey course would go through life thinking they had read the book, never coming back to the experience when they could truly appreciate it.

The same is true of startups. The market concludes about an idea that we’ve been there and done that, but often it’s the second or third time that’s a charm.

Discussion

  • http://erickennedy.org Eric Kennedy

    Great post, Glenn. Learning from mistakes, especially those of other companies, is a huge competitive advantage. It's a classic example of the innovator's dilemma where the first company gets complacent and does things that aren't in the best interests of consumers. Take Google when they were first raising their angel round. Larry and Sergey presented the idea to Yahoo. Yahoo agreed that the search technology was superior to their human-powered index, but Yahoo had no incentive to provide more accurate search because it would mean users would need to go through fewer pages on Yahoo. (They probably hated the idea of the “I'm feeling lucky” button that skips the results entirely.) As a public company, fewer pageviews meant less revenue for Yahoo. Google was able to disrupt Yahoo's model by providing the best search results and pricing ads by click instead of pageview.

    The challenge for most entrepreneurs is knowing when to compete with the dominant player and when to pick another market. In the 90s everyone was scared of Microsoft, and there were a few high profile examples besides Netscape where Microsoft integrated a popular application into Windows. Now Google is the new Microsoft, but they haven't had a lot of success competing against new entrants like Yelp or IMVU. We'll see how they do against Groupon.

    I now believe that most big companies are so bogged down by bureaucracy that the smaller player can either beat the bigger company or becomes so irresistible that the big company acquires them.

    • http://blog.redfin.com GlennKelman

      Fantastic comment, worthy of its own blog post.

      A Sequoia partner, Pierre Lamond, once talked to me about Google when the company was making its initial investment.”But wait,” I said. “How are you going to beat Yahoo?”

      “By building a better search engine,” the partner said. He was part of the old guard, an engineer who founded National Semiconductor and worked on the Cray supercomputer. This was what made Sequoia great.

  • Jin Lee

    “reputed” should be added before the MySpace guys as well. those statements aren't true. like the story told in the link you post about Friendster it was also the overseers (newscorp) that killed myspace. tom & chris lost control just like abrams did.

    • http://blog.redfin.com GlennKelman

      Good to know Jin, it sounds like you worked at MySpace? How do you know the true story and what is it?

  • http://pulse.yahoo.com/_F5CR5SND3NCZR5KAZXXU4OYEZM Ciprian

    This is a nice post, Glenn.
    Yes, many people see a product and they think “we can do better”. So, indeed, they often get an idea from a “bad” (or just inefficient) company. But then the real test is “doing better”: make sure to execute right on the idea, learn from the mistakes of others, stay efficient, come up with good market decisions, etc. And it's probably equal important to avoid getting stuck with the original idea, but stay creative and adapt to the customer's requirements.

    • http://blog.redfin.com GlennKelman

      100% agree Ciprian. It sometimes looks easier to do better than it is…

  • http://www.Power2Switch.com Seyi

    Great post Glenn!
    Question for you though: how does the entrepreneur who's working on 'doing it better than the big player' convince stakeholders early on that his/her idea will do thing better because (for the most part) it does sound like empty swagger?

    • http://blog.redfin.com GlennKelman

      Well, first of all a little swagger goes a long way. And second, the big player has to have blundered in a few visible ways. And third, it just depends on whom you're talking to; a good investor can see the potential in one crazy guy with a prototype. Best, Glenn