Challenges of Me-Too Startups

Challenges of Me-Too Startups

Challenges of Me-Too Startups

As part of my work I meet many startups trying to replicate business models that are successful in the United States, or that at least look successful because they raise big investment rounds. [1]

The good thing about me-too startups is they are great laboratories for entrepreneurs. Founders learn valuable lessons and with hard work and lots of luck they might end up building a profitable business or exit.

Whereas I think it is futile to discuss if startup clones are good or bad, I want to mention problems me-too startups face in the real world, whether we like it or not.

Unproven Business Models

Lots of startups replicate business models that probably won’t even be successful in the United States. Sometimes the reason entrepreneurs copy them is because some American startup raised tons of money doing just that and seems natural to give it a shot locally. [2]

Startups are intrinsically uncertain and risky even in the United States. Therefore, investments in startups operating in immature markets are riskier, so the success rate thereof diminishes accordingly (exponentially).

The bright side of this premise is if startup clones copy uncertainty and risk, they might as well be innovative. Maybe just not too original or artistic.

The Market Size Fallacy

Mexico has around 120 million people. Colombia has around 40 million people. However, three Mexicos and two Colombias would not make one United States (300 million people) in terms of market maturity, strength and development. There are so many infrastructural, legal, cultural and socioeconomic deficiencies in emerging markets that we would probably need five Latams to match a US market. [2]

It is a risky assumption that a local market will behave as the American or European markets do even if founders get funky and creative adapting a model to an immature market.

In emerging economies we have to measure not only the market size but the market quality as well and make the math accordingly. [3]

Analysis Deficiency

Me-too startups fail to spend the right amount of time understanding the problem original startups are trying to solve. Sometimes the startups with the original business model do not know it themselves. [4]

Founders spend a lot of time and marketing money looking for users that might not exist in an immature market, or at least not yet. [5]

Socioeconomic problems and needs in US are not the same as those in emerging markets. Founders in immature markets maybe need to be better sociologists than managers. Understand problems thoroughly and build upon that, don’t do it based on an article on TechCrunch about a hot startup that just raised millions.

Epiphanies in emerging markets need a double check. It is important to make the right questions not assumptions that might be wrong.

Lack of investors

Even if there was a critical mass of users in emerging markets, there are not enough investors willing to put their money in local me-too startups.

Local startups depend heavily on local investors. The number of investors in emerging markets is so scarce compared to the US that they could collude and invest in one startup and basically kill fundraising hopes for any other startup in the same industry in those specific market. [6]

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Notes

[1] I would never dare criticize clones. The third company I co-founded and invested in was a clone, and I learned a lot of lessons from it. The two small exits I have been a part of were clones. This essay allows me to discover real challenges I have faced working with clones.

[2] Regional first-time fund managers fail to make the situation any better. The road to exit looks clearer because there is some giant startup out there with millions in funding that “has” to buy one of those clones in the near future. Exits help to build a track record, and a track record is what first-time fund managers need.

There is Rocket Internet that has proven to the world that clones are good business, even if returns are not as big as those for VCs in America. It takes a lot more money to achieve great execution out of the United States.

[3] I am sure there has to be some economic and more correct term for “market quality”

[4] When I meet me-too startups trying to replicate models of publicly traded companies I encourage them to read their filings on the Securities Exchange Comission. It is amazing they do not even do this.

[5] A lot of founders argue user acquisition cost is low in emerging markets. What’s the point of acquiring cheaply a non-existent or non-engaging user?

[6] This actually happens and it is a competitor blocking strategy to pull together most of the local investors in a round.

Sergio Romo

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