When asked about copycat business models in our recent Launching Tech Ventures class, Fred Wilson responded with the perspective that he’s not interested. While he acknowledged that it was mostly due to “ego”, I think that there are serious risks to consider with copycat businesses.
The original player in a particular industry has the chance to build up its brand, scale, and relationships which can serve as a first-mover advantage. For example, Rent the Runway was able to establish relationships with designers which were essential to its business model. Whether it is because of a formal exclusive relationship or because it doesn’t make sense to put in additional effort to work with another company doing something very similar to Rent the Runway, designers are less likely to work with a similar 2nd or 3rd company thus making it hard for any copycat business to follow successfully.
In addition, by definition, a copycat will have at least one competitor and will have to share the market with them. By imitating another company, the copycat is almost directly instigating a competitive response from the original player. Instead of taking a little bit of time set themselves up for success with the proper people, processes, and other internal matters, the copycat is rushing to bring on additional stresses from the onset. It’s similar to a new kid at school picking a fight with the coolest kid in town. It just doesn’t seem very smart.
Being a copycat is not all bad. By paying attention to the incumbent, you might be able to learn from its mistakes and know that product market fit is possible. However, if you’re just imitating exactly what the original player did, then there’s really no reason for customers or partners to work with you. They would just go to the incumbent given that their brand is likely to be stronger. It also means that you might not have a great industry because the barriers to entry have obviously not deterred you from entering!
If there’s something that you’re doing better or different from the incumbent, then being a copycat might make sense. Along these lines, I think a copycat model might work if you’re taking a particular product to a new industry or geography where the incumbent doesn’t currently play. With the incumbent’s business model as a base, you could potentially achieve product market fit in the new industry or geography more quickly than if you were starting from scratch. You’d also benefit from being the first mover in that arena.
The bottom line is that you’re still copying someone else’s idea. Even if it makes good business sense in a particular situation, it can still feel dirty. I think that’s why Fred Wilson suggested that he could never invest in a copycat business – not because it doesn’t make logical sense but more because it just feels wrong.