Steve Blank defines a start-up as “an organization formed to search for a repeatable and scalable business model”. This search process however is certainly difficult and most likely unsuccessful: 90% of startups fail according to Forbes. So when a business opportunity is discovered, many start-up “copycats” quickly appear to try to take a piece of the pie quickly crowding out the space (how many Instacarts do we need?). However, in today’s globalized world, there is no need to attempt to compete with the incumbent when you can take an idea from Silicon Valley and simply deploy it in other markets. The question then is… is it as easy as it sounds?
International arbitrage is not a new concept: ever since trade came upon and merchants were exposed to new or lowered-priced goods, arbitrage opportunities have offered novel ways to make money. In today’s world however, technology has allowed arbitrage to be focused on ideas instead of goods, thus it is not a surprise that Silicon Valley is now the go-to-place for hundreds of companies to source proven business models. Why waste your time developing a new business model when you have seen one that has already achieved product market fit?
There are multiple reasons why international idea arbitrage can lead to a viable business, especially when it comes to copying a start-up model:
- New companies have difficulties expanding internationally: even if other markets might be attractive, exploring new markets demands local market knowledge, understanding the different technical needs for a go-to-market strategy, and a hefty investment. A local copycat company that can replicate a business model might potentially do it in less time and establish brand awareness before the original company decides to expand to the region.
- Many of the start-ups created in the last 10 years depended on network effects that are specific to the geography where the company launched. Thus, the first company to launch could experience a winner-takes-all scenario. Foreign companies can take advantage of this, be the first-movers in their own countries and create their own network effects.
- The risks of starting a new business model are huge, specially knowing that failure is the most common outcome. Copying a business that has already proven to show product market fit will secure better chances of success, not only because the business model can be easily replicated, but also because there are higher chances of finding investors for a model that has already shown its benefits elsewhere. Additionally, investors will find attractive that the company comes with an exit strategy: selling to the original company/ideator if things go well.
- Many ideas (but not all!) seem to be transferable to other countries, especially when it comes to technology innovations. Culture, habits or regulation may pose a challenge to copycat start-ups, but these have learnt to adapt to each specific context.
So how can an entrepreneur know what is the best idea to copy? Finding a proven business model is not enough. Some experts recommend (as well as the success stories) avoiding consumer startups, as larger existing companies tend to be international and the barriers to entry are low, instead focusing on heavily regulated industries (such as transport or finance), the local consumer or business community (such as restaurants), local e-commerce or B2B (since this is usually a winner-takes-a-part market). Also, it is advisable to find a space where you could have first-mover advantage, and potentially add some differentiation to your business, as by nature any sort of copycat model can probably be replicated not just by you, but also by many other competitors.
Many success cases exist in the world, but there is no company in the world like Rocket when it comes to copying businesses. In their case it’s not just about finding a local opportunity based on a proven model (they are not interested in startups), but it is also about using their scale to replicate the same company in many countries using shared resources, achieving economies of scale that are unusual for small companies. They also move faster than most American tech companies in terms of international expansion, having built an impressive network in every continent, and have learnt to adapt the business models to the local markets.
Rocket and the clones might not be as exciting a story as the one we frequently hear of start-ups in the Valley. But most certainly these companies are helping innovation spread around the world faster, and are also helping entrepreneurial ecosystems develop outside of the US. Who knows if the next great idea could come from Latin America or Africa? These new entrepreneurs might be leveraging the success of existing companies, but without a doubt they are also learning to iterate fast, adapt ideas and manage new businesses, all necessary skills to create new business models.