A startup strategy: rolling with a battleship

• Startups
• Airbnb, Craigslist, eBay, Google, Hannover RE, Hannover RE, Lireas, Netscape, Old Mutual, PayPal, Pineapple Insurance, Podcast, SnapScan, Sonder, Standard Bank, Startups, The Startup Junto, Yahoo
• December 17, 2020

We are on the cusp of releasing a new startups-focused podcast series at The Finance Ghost, in which we have discussions with founders, operators and investors who are willing to share deep insights and interesting stories with us.

The podcast will be called The Startup Junto and in Episode 1 we interviewed the CEO and CFO of iconic homegrown startup SnapScan.

This excerpt from the discussion really resonated with us:

“Battleships have very competent officers on them. They have really good mid-management who are paid to spot potential, and so battleships don’t travel on their own, they travel with corvettes and smaller little attack boats ….when a battleship has turned and has all its guns facing you – that is a predicament you don’t want to be in, you’d much rather want to roll with a battleship… battleships are not just going to protect you against competitors, they will be a supply line, giving you guidance and being a sponsoring entity for you…”

 – Chris Zietsman, SnapScan CEO

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The media love to romanticize startups as covert companies, appearing in the blind spot of incumbents (existing market players), disrupting established industries and ultimately leading to the demise of these entities.

I don’t necessarily object to this, as I can see how this can trigger a fire in the belly of young founders, providing them with an underdog narrative to feed their energy. They spend each day running up the proverbial stairs with Eye of the Tiger blasting in the background.

Instinctive emotional reactions are triggered in the oldest part of the brain (called the amygdala or the monkey brain), which used to serve us well (like fight-or-flight instincts from our hunter-gatherer forefathers), but this can cause us to neglect rational thoughts processed in the more developed part of our brain (the prefrontal cortex).

And this is where my issue lies – the narrative causes certain founders and companies to look past the opportunities that existing market leaders can provide.

In our recent interview with the SnapScan team on The Startup Junto, we talked about their relationship with Standard Bank as a partner and shareholder. As is our goal with the podcast, we learned a very important lesson along the way.

Sometimes it pays to roll with a battleship (to work with an incumbent).

I would like to add one derivative of this, whilst sticking with the marine terminology, by changing “work with an incumbent” to “leverage off an incumbent.”

I call this the Remora Strategy, with reference to a type of fish that sucks on larger aquatic animals (like sharks) and even battleships.

It may sound like the shark is on the losing end of the deal, but this is a symbiotic relationship which makes the comparison valid in the case of Standard Bank and SnapScan. That isn’t always the case though, as we will see in some of the examples below.

Remora Strategy Example #1: Access to balance sheet and regulatory support

Pineapple, a local insuretech company, has used this strategy to great effect.

Insurance is a highly regulated, complex and capital-intensive business, requiring a huge balance sheet (risk pool) and a host of actuaries on the payroll to calculate premiums that will profitably cover payouts.

So, rather than starting a traditional insurance business, Pineapple partnered with Compass (previously) and Old Mutual (currently) to underwrite insurance policies generated through Pineapple’s unique user experience of insuring products by taking pictures with your smartphone.

Lireas, an investment-arm of Hannover RE, was also the seed-funder for the startup, which no doubt provided them with industry insights to navigate their way through the complex insurance space.

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Remora Strategy Example #2: Tapping into a distribution capability

PayPal, among the most iconic tech companies and famous for the Paypal Mafia¹ (not to be confused with the notorious Stellenbosch Mafia) turbocharged their user growth by becoming the preferred payment provider on eBay, with many vendors choosing to use web-based payments rather than more traditional payment services.

The service became so important that eBay acquired PayPal in 2002 for $1.5 billion.

Airbnb, responsible for some newly minted billionaires after its recent IPO, leveraged Craigslist to achieve early traction. The company poached renters and automatically posted Airbnb host’s listings on Craigslist.

Interestingly, a company called Sonder is using Airbnb to grow its rentals of upmarket properties, after which they will look to own the relevant customer relationship for themselves going forward.

A caveat to Remora Strategy: Powering your own demise

Netscape, the first web browser and probably the company that did the most to democratise the early World Wide Web, provided Yahoo with the power to become the internet’s first real web directory.

Netscape was trying to grow the internet and Yahoo helped Netscape’s users to navigate the web in a more logical way. Yahoo in turn always saw themselves as a media business and used many different companies to power their search engine, finally ending up using Google.

Yahoo thus fed Google, and in a sense forgot to feed themselves, which led to their thoroughly documented fall from stardom.

Conclusion

We’ve barely scratched the surface here. The key takeout is that working with existing market leaders can be a powerful strategy for startups. In fact, this approach can even lead to a future exit for the founders through creating a working relationship with a potential future acquirer, seen in the eBay – Paypal example internationally and the Standard Bank – SnapScan example locally.

We will explore this concept and many others in The Startup Junto – look out for the podcast launch soon!

^{1 The mafia includes the likes of Elon Musk (Tesla, SpaceX), Peter Thiel (Founders Fund, Palantir, first external Facebook investor), Max Levchin (Affirm), David Sacks (Yammer, Craft Ventures), Reid Hoffman (LinkedIn, Greylock Partners), Jeremy Stoppelman (Yelp), Keith Rabois (Founders Fund) and others.}

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