The Virtues and Opportunities in Being #2

Screen Shot 2013-03-06 at 1.12.28 PMIn our insular tech world, we’re all obsessed with being #1.  Look at Google Search vs. Bing + Yahoo!  Facebook vs. Google+.  Salesforce vs. nobody else of any scale.  Etc. etc.  We all know in tech, in internet, almost all the spoils go to #1.

Except …

Often, not always.  In fact, there are a lot of advantages to being #2.

Two events this week reinforced this for me.  First, I had drinks with a good friend who is CEO of a slightly under-the-radar SaaS company doing about $40m in ARR and growing > 100% YoY.  BooM!  Except their competitor is doing $100m+ and trying to IPO.  But … the competitor is growing at a far, far slower rate.  You do the math.  I’ll take the #2 player here.

And then I saw a really interesting notice (see below) in the secondary markets space.  Nasdaq decided to partner and set up a JV with SharesPost — Nasdaq Private.  Which sounds like a pretty big deal to me.  Now, I’m going to assume SharesPost, as successful as they are (I love SharesPost), is actually #2 to SecondMarket.  If not in all private transactions, then at least overall, since SecondMarket has more products.

So why did Nasdaq go with the #2 for a potentially game-changing partnership?  Well, fortunately, they told us 😉  As Fortune / Term Sheet summarized:

“NASDAQ took a cursory look at SecondMarket, but the two companies never had serious negotiations.  SharesPost seems to have been more attractive to NASDAQ in terms of both technology and financial position (i.e., SharesPost needed a $$ partner more than SecondMarket did).”

I think this is very telling.  First, if you’re #2, you still have to be #1 at something.  That’s important.  Often, it’s technology.  That’s what seems to be the case here.  Also, #2 often is a more engaged partner.  They’re hungrier than #1, and will do more to get the partnership or the deal.

So in SaaS, it’s great if you’re #1.  But if you’re #2 and post-Initial Traction, or post-Initial Scale, don’t necessarily listen to all the group-think about #1.  Instead, focus on where you can still be #1 … even as #2:

  • #2 Can Win With Better Technology / Better App.  It’s really hard to enter an established space with a 30% better product.  You ain’t gonna beat Salesforce with a brand new CRM that is 30% better.  It has to be 10x to disrupt an entrenched dominant player.  But, #2 can win with just a 30% better product than #1, if #2 is already a leader and in the game.  Post-traction, with a brand.  Then, it’s down to which is better for me, #1 or #2.  #2 often has a better product, at least for some market segments.
  • #2 Can Win as a Better Partner.  See above.  #1s can get arrogant, worst case.  Best case, they start to think in terms of direct ROI in partnerships.  Maybe the NASDAQ partnership above had questionable economics.  I bet it did.  JVs are complicated.  But these deals are easier for #2s to take on.
  • #2 Can Win on Innovation.  This is closely related to the first point.  Sometimes, #1 gets staid.  Have they been around 7, 8 years?  Not everyone is able to stay innovative after the first phase of the SaaS journey.  You can focus on the future, while they are stuck in the present, and really, the present of about 2 years ago.
  • #2 Has a Clear, Simple Target.  If you’re #1, what’s your target?  Just revenue growth.  Yes, you worry about competition.  But not as an existential target.  But if you’re #2, you know exactly who you are gunning for, every hour of every day.  It simplifies things and makes it easier to rally sales, product and marketing.
  • #2 Can Take the Higher Ground and Be More Customer-Focused.  When you’re #1, especially in sales … you end up trying to squeeze every last dollar out of the customers.  As you should.  And that does maximize short-term revenue.  But, it also creates friction.  If you’re #2, you don’t need to necessarily cut your prices.  I don’t think you should.  But your sales team will see prospects and leads as something more than just a numbers game.  You’ll care more.  This can pay off 18-24 months out.
  • #2 Can Get Better Economics.  Sometimes, #1 takes all the capital and air out of the space.  But sometimes, they set the stage for you.  You come in, you can build your product more efficiently (you already have a roadmap), and leverage the multiples #1 has already established.  You may end up with less dilution and better economics.
  • #2 Can Go Down Market Easier.  I’ve seen this a lot.  It’s hard to go downmarket in general.  You get good at a certain price point, you optimize around it, and while you can tilt upmarket … the DNA just isn’t there to go downmarket, at least not to monetize it effectively.  #2 often finds whitespace one market level below #1.  Then, the overall market for your products grow.  And it eventually grows even faster downmarket … which #2 becomes well positioned to take advantage of.

Just some thoughts.  Again, I have no idea who is #2 to Salesforce in ondemand CRM.  Sometimes, #1 does eat everything.

But not always.  In our marketing automation case-study, to use it again … #1, Eloqua, got acquired for $1 billion by Oracle last year.  #3, Pardot, got acquired by ExactTarget for $100m without any venture capital.  Both amazing outcomes.  But the previous #2, Marketo … is now going public at a $2 billion+ valuation.  #2 isn’t always so bad.  Sometimes, it has the highest ROI.

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Published on March 7, 2013

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