You don't have to be the market leader to win big


There is nearly a constant stream of chatter in the venture community about fielding a product in a highly competitive market. On the one hand, lots of competitors typically indicates that you are in a hot market. On the other hand, venture folks play in a winner-takes-all league, which makes competitive markets very risky. Things are a little different in the private equity space. Truth be told, it’s not as black-and-white.

I’d argue that history has shown that most technical markets end up aligned along Geoffrey Moore’s “Gorilla Game” model. A market has a big winner, a.k.a. the Gorilla, and a number of lesser winners, a.k.a. the Chimpanzees. Of course, the product segment itself has to mature enough where you can judge the relative winners and losers. Tablet computing has made it, 3D printing hasn’t made it yet.  Any company that has gone out of business is a loser, but how you judge the rest of the market depends upon your perspective. Venture investors need homeruns, like having Google pay you a billion dollars for company that has lots of users but might still be burning cash. I am not criticizing this model, mind you, that’s just the nature of venture investing.  Private equity investors underwrite to a different level of return, so you don’t need homeruns to be successful.

To simplify Moore’s viewpoint, the gorilla is the market leader, capturing the most customers,  while each of the chimpanzees focuses on serving a particular niche below the gorilla. The specifics of each niche vary by product and market, but they generally take several forms. For example, there is often a “price” niche, a “technie” niche, and a “coolness” niche.

Let’s talk about a simple piece of software that illustrates the Gorilla Game model, the ubiquitous web browser.

As of January 2014, Microsoft’s venerable Internet Explorer held 58% of the worldwide desktop (non-mobile) browser market share. Clearly, it’s the gorilla. Yes, IE has been losing market share over time, but it is still the gorilla. (Ultimately we’ll end up seeing a new gorilla in the mobile web browser market).  While desktop browsers are essentially “free”, the market dynamics as outlined by Moore still apply. Second place (chimps) is essentially a two-way tie between Chrome (16%) and Firefox (18%). I’d argue that Chrome and Firefox represent the “technie” niche, supporting non-Microsoft desktops like Mac OS and Linux. Chrome arguably has the fastest, most efficient javascript engine and it’s self-updating environment appeals to developers. Historically, Firefox has boasted the strongest set of tools for developers to use when debugging in the browser. Safari checks in with 6% of the market, smallest of the three chimps. If you view MacBooks as “hipster” machines, representing the higher-end, expensive niche of the desktop/notebook computer market, then Safari, by extension, is the “hipster” chimp.

Strictly speaking, none of these four were truly built from Moore’s model. Internet Explorer was hatched by Microsoft to outflank Netscape’s Navigator (which essentially became Firefox upon Netscape’s demise). Apple wasn’t really a player in the Internet space when this battle took place and Google had yet to be born. They do, however, provide a parallel model for how Moore’s winners and losers shake out.

Gorillas are the market share leaders, but are not necessarily the “best” products in terms of technical superiority, customer service or price. They are the winners as a result of capturing as much market share as possible during the hyper growth phase of the market. Microsoft used their dominance on the desktop to make the browser a commodity and cut off Netscape’s revenue stream. IE was safely ensconced as the market leader by the time that the first Internet wave came crashing down in 2001.

In the private equity business you can do very well investing in one of Moore’s chimpanzees. While you may not be the market leader as a chimpanzee, you are dominating a niche within your overall market. And that niche is often a very profitable niche. Chimps that surround the market gorilla will often follow a similar pattern as the various web browsers that I described above. Your company might be the technology leader, with better, faster, cooler technology — favored by customers with a strong technology bent. You might be the price leader, solid features at a lower price point, appealing to the frugal buyer. The hipster chimps often come along later in the market cycle, featuring a new look, or bringing new features to an existing market — but you can make money in this segment too.

Regardless of which subcategory your company inhabits, you can still make money as a private equity investor. As a company founder you can likewise be very successful and profitable without being the market leader.