A number of years ago I remember reading an article in the business section of our local newspaper about a new product named CUIL (pronounced Cool) trying to create software competition in the Search Engine category. I already knew about CUIL, because I had noticed that it had just recently indexed the PJM Consulting website. One of their claimed differentiating factors was that they’ve their search index was twice as large as Google’s was. In addition, they believed that they had improved the ranking algorithms, and they also present the results in a different – and they thought – better way. The results offered fewer results per page, but more comprehensive information on each site, and often included a photo or other graphic image (all things that Google has since adopted). The premise of the article was that it could have a chance to be a real competitor vs. Google, or at least Yahoo and Microsoft for market share in the huge search business. The founders had impressive pedigrees and came from Google on the technical side.

While the article gave credence to the possibility of CUIL being a potentially serious competitor to Google, Yahoo and MS, it also pointed out that quite a few companies have attempted to enter this fray, creating barely a blip in search engine market share after their entry.

I took a quick peek at CUIL at the time–the presentation was definitely different and possibly superior for some tastes. But in my quick look I wasn’t terribly impressed with the relevancy of the search results. No matter how you present the data, the relevancy of the results is paramount in search. I stuck with Google, as it appeared that just about everyone did.

I’m pretty certain none of you ever heard of CUIL. Did CUIL meet with any success at all? Well, they’re no longer in business, closing up shop in September 2010. They were barely around for two years. They’re took on – head on – what is one of the 2 or 3 most powerful technology companies in the world today, attempting to compete with them in their core area of strength. So you can’t say that the odds of success were high — which they rarely are for any startup anyway. And this might have been the ultimate toughest market to enter at that point. Microsoft over a long period of time has continuously poured money into competing with Google with little success, most recently with BING and the partnership with Yahoo.

I recently worked as a consultant with a Search Engine company with some great technology. The company had little success, even while not taking Google on directly in web search, but in more niche market segments. Search is a really difficult business for new competitors; we’re really talking tough market segment here. But this IS the technology business; everyone gets at least a puncher’s chance. Once upon a time Google was an unknown upstart competing against well known names at the time such as Excite, Ask, Lycos, AltaVista and WebCrawler to name a few. A big key to having a real chance at survival (if not success) is usually how well you execute and it didn’t appear that CUIL executed very well.

But execution aside, what’s the best way to go about competing in the software and hardware industries today? Should you just steer clear of the elephants of the industry? Many believe this is prudent, but I think it is not always necessary. Well, maybe going directly at Google’s search engine isn’t the best bet! But it wasn’t so very long ago that is was nearly impossible to get a venture capitalist to fund a company that was perceived to compete in any category vs. Microsoft (which could have been viewed as MOST categories of the software business at the time). Yet a short time later, Microsoft is considered in many ways a dinosaur, one that is quite beatable in many segments(don’t get the impression that I’m writing MS off–I’m not. Redmond is doing fine and could still rise to the top in many areas again).

Can you Dance with the Elephant?

If it isn’t insane to compete with the giants, what are some best strategic practices that an early stage tech company can adopt to give it the best chance to survive and thrive — when entering market categories with large, entrenched competitors?. Let’s take a look at a few ideas:

Make sure that you can differentiate from large hardware/software competition

This would seem obvious for any business, but when you are going up against huge hardware or software competition with a good brand–well, don’t even try it without significant differentiating factors. They don’t need to be product related, necessarily–it could be free and outstanding support, better (cost-driven) price points, exceptional ease-of-use, a completely novel business model or many other things. But don’t kid yourself–you will need REAL differentiation.

Pick a niche, any niche–at least to start

It is important to pick a tight enough niche so that you can provide that true differentiation discussed above. Your outside investors may want you to attack a huge market, but if you don’t have that (often BAD) influence pushing you in that direction, pick a smaller area with less hardware or software competition that you can have a better chance of dominating when you’re new. If you are successful in your initial niche, you can then broaden out into adjacent segments (see Amazon.com). Down the road, maybe you take on the giant “head-on”; but when starting out it is NOT the time for this.

If possible raise more money than you think you will need

Every once in a while a new company will “hit on all cylinders” from the very beginning. But in my consulting practice I rarely see this. In fact, a significant part of my practice is helping companies “pick up the pieces” and turnaround after their initial business plan or execution has gone awry. No one likes to give up more equity than they need to, but things usually take longer to start working than you initially project. There are usually too many things that you don’t know until you really get into the marketplace. Plus, it’s generally easier (and cheaper!) to raise a bit more money at first than it is after that first misstep. A little extra funding in the bank can be a good insurance policy against a capital crisis early on.

DON’T try to be like them

A common mistake that I often see early stage companies make is trying to be like giant hardware or software competiton. Sometimes this comes from an inferiority complex and sometimes it’s because the founders come from one of the giant companies themselves. The last thing you want to do is create a big company bureaucracy in a startup. In most ways, you want to operate VERY DIFFERENTLY from you huge, slow-moving hardware or software competition. Resist the urge to create huge amounts of process before your company size dictates it as necessary. Be very careful about hiring away senior executives from you giant competitors, unless you are certain that they also have successfully operated in an early stage company before. Stay as fast and nimble as possible for as long as you can–that is the primary advantage vs. the big guys at this stage of a company’s development.

Recognize the giant’s execution weaknesses and beat them there

Analyze the large hardware or software competition’s business and try to create your differentiation where they are weakest. It could be faster customer service, better channel relations, better ease-of-use, a free entry level product version, etc. If you concentrate your differentiation where they are doing the poorest job, it will accentuate that difference to the marketplace and you will have a better chance of your advantage being recognized.

Focus, Focus, and Focus

This advice can be viewed as the culmination of the points above. Make sure that you don’t try to do any more things than you can do EXCEPTIONALLY WELL at this stage. You can always expand your focus later. Remember, there is a good chance we would all be speaking German if Hitler hadn’t prematurely opened up a second front with Russia in World War II! The tech landscape is littered with companies that followed an analogous business strategy, with similar disastrous results (upstart software competition Novell and Netscape are two former high-flyers that immediately come to mind).

SUMMARY

As an early stage company entering a market where a major company or two are the known leaders, make sure that you don’t “bite off more than you can chew”. You can always expand your focus after initial success. Contracting your focus later is usually quite a bit more painful and many companies don’t make it through that transition. That’s my advice on how to attack a large, entrenched hardware and software competition. As usual, I’d be interested in seeing your comments–post them below to expand the discussion.

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