Are “copycat” businesses good for innovation and entrepreneurship? What about for MBAs?

by Will Clayton

When Fred Wilson from Union Square Ventures spoke to our LTV class, he mentioned a profound emotional dislike of copycat investing and entrepreneurship where instead of inventing an idea in the first place, the focus is on out-executing the innovator. Often these “fast followers” end up winning the market, e.g. Google vs. Yahoo, Lycos, etc., so there is a clear economic incentive to learn from the core innovator’s missteps and focus on incremental innovation through superior execution. Though Fred acknowledges these rewards, he remains disinterested in this style of investment. I suspect his lack of interest is driven by his preferred role as the “entrepreneur’s consigliere“ – a role that could be less necessary in at least some copycat models when execution (not strategy) is the driving force behind success.

At this point there is probably some value in making a distinction between copycat/fast-followers in a start-up’s home market and clones in alternate geographic markets. Fast-followers, such as Google initially, arise in situations where leadership of the home market is still contested and a new entrant can innovate on strategy or technology to develop a sustainable competitive advantage. In contrast, “cloning” indicates that one company has clearly demonstrated a successful business model in its home geography, but has yet to expand broadly, so a new entrant replicates that successful strategy in one or more other countries before the original innovator expands on its own. Rocket Internet, a Berlin-based incubator, seems to be building a successful business based around this cloning strategy. For example, its Groupon clone CityDeal sold to Groupon for an estimated €750m in cash and shares according to TechCrunch.

Oliver Samwer, one of Rocket’s co-Founders, spoke to students at HBS on Thursday and was very clear about his organization’s strategy. Articulating a distinction between innovators who create fresh companies and executors who build replications of the innovative companies, Oliver embraced his role as a “big construction worker” who builds the second type of company in 43 countries across the world. Oliver’s approach seems to be to build a core support team of functional experts that his CEOs can draw upon and then leverage this back-office support group across similar companies in a variety of geographies. Leveraging deep pockets, back-office functional expertise, and feet on the ground in a broad collection of countries, Rocket is seems able to replicate successful business models overseas far more rapidly than any innovative first-mover company is likely to be able to manage thereby claiming large swaths of international markets to the long-term detriment of these innovators.

One might be tempted to ask if fast-followers and international clones are a good thing for the entrepreneurial ecosystem. Are these copycats not stealing the innovators’ ideas and then stealing their markets? Could this reduce the incentives for innovation?

While I have some sympathy for these arguments, I think competition through fast-followers is necessary for continued innovation and improving the quality of products/services delivered to customers. If you have an innovative twist on an existing product or service, then you have every right to challenge the established players and see if you can win through your own incremental innovations. This need for the innovative leader to continually keep their eye on the rear-view mirror is a positive force in driving innovation forward.

Compared to fast-followers who are still innovating in some respects, I have a more mixed perspective on international clones. While these clones may possibly innovate slightly during their execution, I suspect any sustained market leadership on their part is driven more by the original innovator being asleep at the wheel. The company that developed the winning business model may see its long-term value reduced because pre-existing clones limit its international expansion opportunities. But despite my personal attachment to innovation, clones still serve a useful purpose to the entrepreneurial ecosystem more broadly. Beyond helping to rapidly spread innovations across the global, clones may also force leaders to accelerate their plans for global growth. Perhaps US entrepreneurs have been too content to wait before expanding internationally and the increasing threat of these clones will drive companies abroad more quickly to ensure they capture the broadest possible market for their products? Successful start-up companies in the US will increasingly be presented with a clear choice: prioritize international expansion as quickly as practical after reaching product-market fit, or be prepared to buy up your international clones at prices similar to what Groupon paid for CityDeal.

While it may be uncomfortable and challenging to the original innovators (“creators”), fast-followers and clones both exert competitive pressures that keep creators from getting complacent in their customer serving innovators or in their expansion strategy. As Ben Foster from OPOWER’s Product group mentioned a week ago in class, copycats can only steal what they can see – they can’t copy your roadmap of future innovations, so as long as you can maintain your leadership position through continual innovation, then you can continue to succeed in the market place.

On the post-MBA career front, I think choosing to work for Rocket or another international clone has some interesting tradeoffs worth considering. On the one hand, you have an opportunity to be an “entrepreneur” with less risk because you’re leveraging a business model you have reason to suspect will work. But despite having worked in Operations before HBS and having a bias towards execution, I think it takes something out of the experience if you’re executing a script largely written by Company ABC in Silicon Valley over the last two years. Maybe for the same reason that Fred Wilson is less interested in being an investor in fast-follower companies that may have less need of his consigliere services, I am less interested in helping start Groupon clone #24 in Paraguay than in helping bring something completely new into the world. As with Fred, this is a perspective shaped by emotion instead of financial considerations, but I do think there is a valuable distinction between the two potential experiences for an MBA student interested in entrepreneurship. Working in an international clone, you will learn about scaling and operational/execution challenges, but you may miss the critical educational experience of searching for product-market fit. In short, you will be trained to be a “professional CEO” who can be dropped into a young company when its ready to scale, but you may not learn how to be an innovator, an entrepreneur, or a founder on your own.