There is Nothing Wrong with Copying

by Jonathan Lo

Fred Wilson stated that he would not invest in copycat models. This surprising comment came despite the many success stories of copycats such as Google copying Yahoo, MercadoLibre copying eBay etc. Not to take anything away from what Wilson has achieved thus far as a great investor, but I think this is an easy statement to make after you’ve succeeded in the Venture Capital business. Wilson mentioned that his no copycat investing is a matter of pride, but very few VCs can afford to make this a matter of pride. Union Square Ventures is arguably one of the top tier VC firms, therefore they have the luxury of being approached by a larger number of start-ups; as entrepreneurs are more inclined to work with them in light of their past success, giving Union Square Ventures a much wider selection of companies to choose from.

While Union Square Ventures has portfolio companies that expand internationally, a large majority of these investments start in the US market. Given that the US market is home to a large number of technology based pioneers, I would have to agree with Wilson that the copycat model is not necessarily as effective within the US, especially if the start-up has already gained significant traction. On the other hand, I feel that this is a very effective model to follow in areas that are behind the technology curve. In fact, there are some VCs that explicitly look for copycats to invest in. An example of one of these VCs is Monashees Capital in Brazil. Monashees recently invested in companies like (copying and Peixe Urbano (copying Groupon) because these were areas that had not been captured in Brazil. As these business models have succeeded in the US, there is no reason not to believe that these same concepts would not succeed in Brazil.

Another great example of a copycat investor is Rocket Internet. Rocket is known for bringing successful business models to new regions; providing the capital and operational support needed for the start-up to succeed. One of their portfolio companies, Glossybox, a copy of Birchbox, has already expanded into 8 countries; Glossybox is arguably even larger than the pioneer start-up. While Rocket only started in 2007 and has yet to prove their investment model, they have definitely made a strong case thus far.

Finally, based on a study by the American Marketing Association, in 1993, only about 11% of the pioneers were market leaders. Pioneers were able to maintain their market leader position for 5 to 10 years with long-term market leaders entering an average of 13 years after the pioneer. While technology and the internet have changed the dynamics of starting companies, do the findings of the 1993 study still apply? Is the copycat model the way to go?