Why Does Everyone Seem to Hate “Copycat” Startups?

by George Levitte

Earlier this week we were fortunate to have Fred Wilson, from Union Square Ventures, visiting our LTV class. Towards the end he remarked offhandedly that as a VC he refuses to invest in copycat startups. He said that it’s not because copycats are always bad financial investments, but rather because copying just isn’t right. It seems like stealing. So he doesn’t have much respect for copycats and doesn’t want to be involved with startups like that.

Unrelated to LTV, a couple days later HBS also hosted a recruiting presentation from Oliver Samwer, one of the cofounders of Berlin-based Rocket Internet. Rocket is best known for incubating and quickly scaling many startups in countries outside the U.S. that have business models which closely resemble those of successful U.S. startups like Amazon, eBay, Zappos, Groupon, and others. Although wildly successful, Rocket is often cast in a negative light for using the business innovations created by others.

One common rationale for the copycat hate is that copying reduces the upside potential for inventors, so it leads to the creation of fewer cool new inventions. Society would love to have both a plethora of new inventions and a highly competitive marketplace, but to encourage innovation we have decided to sacrifice one for the other. Providing a 20-year monopoly to patent-holders greatly boosts the incentive to invent new things, even if it reduces competition for making a particular widget. Copycats erode this incentive.

Although certain types of innovations are protected from copying by law (e.g. technical patents) and some are protected by secrecy (e.g. the recipe for making Coca-Cola), business model innovations are not. Nor should they be, because society has a vested interest in promoting competition. It forces companies to move faster than their peers, to price lower than their peers, and to execute more efficiently than their peers. Consumers, and society at large, benefit tremendously from this. If businesses were unable to use and adapt others’ ideas then many of today’s companies would never have existed. Google search in many ways copied the business model of Yahoo search, which in turn had copied earlier search innovators. Microsoft’s office suite applications copied ideas from a variety of earlier (and arguably more inventive) companies, its browser copied Netscape, and many elements of its Windows user interface were copied from Apple.

In fact, most innovation actually seems to come from people building off of each others’ ideas. One person creates something, and somebody else sees a way to make it better. So they do. The important thing to highlight is that they make it better. Copying somebody else’s microchip exactly does not create anything new, so it doesn’t benefit society and as a result we prevent such behavior with patents. But getting the idea to make a microchip from someone else’s success and then making a different microchip that works better than the existing one does create value for society, so we allow it. And the new inventor patents the new chip.

Similarly, taking somebody else’s business model idea and making it better can create a lot of value. I agree that exact copying is not a great thing, but it turns out that many businesses that people dismissively label as “copycats” are actually improving on existing ideas. For example, some of Rocket’s businesses create ecommerce websites that look similar to other businesses, but they innovate on how the product gets delivered. Developing countries don’t have USPS and many don’t have a reliable, timely local equivalent for delivering items. So Rocket hires people to drive around on mopeds or bicycles to deliver small items, and they innovate on delivery to adapt an existing business model to the country in which they’re operating. In that sense, they’re not too different from Microsoft trying to build a spreadsheet product or from Google trying to build products in search, email, maps, browsers, and mobile operating systems.