In recent years, European companies from neobanks to grocery delivery services have been positively spurred on by their VCs to burn millions of dollars in a category race for customer acquisition and eventual market leadership. But both investees and investors always knew there would be fewer winners than riders.
Suddenly, these ‘maybe-a-corns’ are having the financial pipeline valves turned off. This is forcing them to drastically cut costs in desperate attempts to attain profitability whilst consolidation partners are courted by venture investors as they look to M&A to shore up reputations and returns to Limited Partners.
This familiar boom-to-bust approach is driven by investment strategies akin to casino betting. Herds of investors follow fashion, placing their gold-rush bets on look-alike companies that are competing head-to-head for the same customers in the same way.
Just like a gambling beginner’s luck, the good times seldom last. Massively resourced, but fundamentally undifferentiated, land grabs that look initially successful in attracting early adopters ultimately fail to jump the chasm in convincing the early majority.
Then the numbers don’t stack up any more. Shiny new, but extremely samey, technologies and services quickly become just a side note in the history of tech as billions of dollars of investment and entire teams vanish into thin air, when the category leader emerges.
In contrast, a smarter strategy for companies to survive and thrive aims to fundamentally condition the environment in which market success is achieved.
The object being to create companies whose proposition is fundamentally different to others in the market, not just apparently better than the nearest competitor. Such Category Design and relentless implementation over time increases the odds for success whilst being much more effective in its use of investment dollars.
That’s why In the last few months European companies with distinctive and strategic Category positions created with Categorical have still been able to attract fresh growth funds.
Companies such as Productsup (Product to Consumer – P2C), over $70m Series B $70 million led by Bregal Milestone, with existing investor, Nordwind Capital), Loctax (Collaborative Tax Governance), $12m Series A led by Index Ventures), Pentera (Automated Security Validation), $150m at $1bn valuation in a round led led by K1 Investment Management and now Railsr (Embedded Finance Experience), $46m Series C lead by Anthos Capital with Mars Capital. A few weeks after funding, Productsup announced the acquisition of World of Content to further strengthen its P2C position.
Whilst competitors struggle, executive teams who focus on differentiation have the opportunity to change the game. To follow the likes of European leaders such as SAP (ERP) and ARM (Fabless Chip Design) in creating and dominating entirely new tech ecosystems.
So, the confidence investors need from their portfolio is not similarity to other players, but substantial, real and provable differentiation. The evidence from the US is that past Category leaders are able to own three quarters of the entire value of their Category.
Even in Europe, where IPO exits are rarer, Category leaders make highly attractive acquisition targets and their differentiation gives them the bargaining power to argue for a premium to rivals.
So, the lesson here is if you want your tech company not merely to survive but thrive in current, and, I’d argue, future, conditions you cannot play by the same old rules of blunt competition and bloody attrition.
You have to be smarter. After all, it’s often said that the definition of insanity is doing the same thing over and over again and expecting different results. Think category, not casino.