The debate about incumbent firms vs. startups has been around for a while. Many experts still don't know which one will win. Before going into the pros and cons of each one, let's try to explain what makes them different.
We can say that an incumbent company is one that it's already established in its market of choice. It already has a reputation, and it can sustain its operations with its usual customers. It can also mean a company is a leader in its niche and controls a big part of the market.
For example, Apple is an incumbent company in the smartphone industry. The company is so well established that they even had a growth of 1 percent in the first quarter of this year compared to the same period last year, even with the Covid-19 pandemic.
On the other hand, a startup is a term more complex to defined. Some people believe that a startup is determined by the years since its foundation. But this is not always accurate. If we go by years, Snapchat could be considered a startup with only nine years since it was first launched.
But Snapchat is a well-established company with thousands of employees and equity of over two billion dollars. A startup is a company that is in the early stages of its development, is not well established, and has a lot of potential for growth, innovation, and disruption. Another thing that defines startups is their goal of technological disruption.
Famous startups include Stripe, Indigo Agriculture, Ripple, and SoFi. Some of these companies were founded more than ten years ago; others just two. All of them, however, are in the CNBC 2020 Disruptor 50 list. They all offer technological products or services like digital banking or blockchain.
Now that you understand a little more about what incumbent firms and startups are, let's look at each one's advantages and disadvantages.
Incumbents’
Advantages
Access to Capital
The more obvious advantage incumbent companies have over startups is their access to capital and resources. Besides having more access to financial resources, they own intellectual property and use their reputation to attract top talent. Plus, educational institutions like coding boot camps and universities go to these companies to offer their best graduates.
Incumbents also
have the right connections to drive real change in society. They can manipulate
the market for their own gain. You can look to companies like Amazon or Google;
they have vast control over their market and can control the masses. Google can
even control what we see, which can later influence our decisions. It isn't
easy to compete with that.
Strong Brands
Another advantage of incumbent companies is that they have strong and well-established brands. Having a recognized brand helps companies to attract customers, new employees, and investors. Which software engineer doesn't dream of working at Google?
Their name will make opportunities reached them without them having to make any effort. Google is a prime example of this. They receive constant proposals to collaborate with other businesses all over the world. And tech employees, which are so difficult to attract and retain, dream of working with them.
Their employer brand is so strong that they don't have to publish job openings. If you go to Google's employee's section, they allow you to send your curriculum, and they have the luxury of telling candidates that they will contact them if they need them.
So, incumbent companies have the advantage of a strong brand to attract new opportunities for innovation and growth.
Large Customer Base
Incumbent industries also have a large customer base on their side. They can rely on their current audience to buy and promote their products, which brings them even more revenue to invest in innovation. And having a bigger audience gives them more access to valuable data.
Companies like Google, Amazon, and Apple can use their customers’ data to know what they want even when they don't know themselves. They can pursue developments that they know will be successful.
The Downside
Incumbent companies sometimes are so big and have so much time in their niche that they get slow and lack innovation. They grow comfortable in their place in the market and don't pursue new ideas as much. They instead choose paths with fewer risks.
So, even though they have everything needed to pursue it and make it possible, it doesn't mean they will do it. And with more parts having to agree, it becomes more challenging to drive changes in its culture.
Startups'
Advantages
Agility
Startups are generally smaller teams, sometimes just the founders and a couple more employees, so they can reach a consensus faster. They can make decisions and implement them without having to wait for many people to agree, maybe a few investors.
They are also more eager to update their operations to optimize them. They are still new on the market, and trying different approaches is part of the process.
Innovation
If they want to compete, they have to offer something new to the market. If it is something that already exists, then it will be harder to compete with tech giants. So, by driving innovation, they have more chances to be successful.
Plus, startups are eager to prove themselves and reach the success level other companies have reached. After all, it wasn't too long ago that companies like Google, Facebook and Amazon were considered startups.
Risk-Taking Culture
Startups also have a culture of risk-taking that many times bears fruit. It may be due to a lack of experience or just an effort to give it all, but startups are always ready to take risks. This also attracts many tech professionals because they like that the environment allows them to pursue the crazy projects they couldn't do on their own.
The Downside
They have fewer resources to drive innovation and developments. Startups have a lot of risk of failure before making their service or product available. They could have great and innovative ideas that never come to fruition. And sometimes, startups create innovative services by leveraging the incumbent company's products. So, are they really creating disruption?
In Summary
Incumbent and startups are both creating innovation in their own way. They also are closing the gap between them. Each year, more startups partnered with the incumbent to use the best of both worlds and make new developments.
Maybe it will not
be about which group will create more disruption, but about how they will work
together to drive the next step in the tech revolution.
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