First mover - advantage or not?

At Aalto Capital, we have met many founders who claim the first-mover advantage when raising capital. Being a first mover, however, comes with both advantages and disadvantages, and it is not always seen as credible to investors.

For starters, bringing a new product to market is often capital intensive, requiring significant R&D in relation to product development and assessing product-market fit and routes to market. Companies with new products or services must convince the market that their product or service is worth trying and will inevitably make at least a few mistakes along the way.

Moreover, competitors may be able to learn from a first mover's mistakes, creating a better or cheaper alternative in less time. It is therefore important to first assess a company's competitive landscape. Even a company with a new product has competitors: anyone previously filling the gap this new product or service is intended to address (e.g., in the case of Uber, taxi companies).

Often large, established companies have substantial R&D budgets and resources which may enable them to bring a competitive product to market in a fraction of the original development time. Questions any first-mover should be prepared to answer when going to market are:

How quickly, with the right funding, could a competitor overtake your product?

How much time and money would a competitor need to invest to catch up?

What would a competitor need to do to gain a larger market share, i.e., what improvements could a competitor make and what corners could they cut to reduce costs?

Though the first entrant to the market may be able to establish strong brand recognition and customer loyalty, this cannot on its own keep a company ahead of the curve. It is therefore important for a market pioneer to also be able to support their first-mover advantage with evidence and strong statistics like churn and customer retention (how good is the company at keeping its customers), tender success and customer acquisition (how often is the company winning customers), sales cycle (how long does it take to convince new customers to buy the product or service), and return on sales and marketing (how much revenue is generated by sales and marketing).

What investors want to see is whether a company is winning contracts over or selling more than its competitors, as well as if the company can retain these customers.