Fred Wilson wrote about what happens “When It Doesn’t Work Out”. His post inspired me to write about something I have been thinking about for a long time…losing. It’s a subject few people want to discuss but a very real part of building companies.

Losing.

It sucks.

And everyone knows when it’s happening. Your team, investors, partners, even your family. They can see when your competitor is in the news more often, is advertised more often, has a large social media presence, etc.

Because success in the business world is defined by one thing, who is larger.

Quality of experience, customer love, happiness of employees, positive impact on the world, better product, etc. are irrelevant. Revenue, number of active users, capital raised, or growth trajectory are all used to support who is winning in the market.

Especially in a culture that loves to talk about winning versus losing, #1 gets the glory and the rest are framed up against the winner. As if there is a predetermined champion even without defining the length of the race.

When you start losing, it’s very hard to correct. It seeps into everything you are doing and everyone involved in the company. It permeates your walls and begins to crumble the fort you have worked so hard to build around you. When the gap becomes large enough people even start shifting their mentality to justify why being #2 is okay. Because you haven’t changed the playing field, people start telling themselves why being second in a growing market is great, not only that, but they even go so far as to say "it’s right where we want to be."

It’s not. You are losing.

What makes this even more terrorizing, is you are not completely losing. If you have built a product people are using, if you have employees who believe, investors who support you, or anything in between you are winning. But now you are trapped in a confusing, directionless place. You feel good about the company you are building but at the same time terrified at the realization that you are falling further behind in the market.

So then why does being #1 in the market matter?

Because it maximizes your return on everything you do. It’s called the "Law of Increasing Returns." Chapter 1 of Eating the Big Fish explains this better than anyone, as they demonstrate how being #1 in the market provides disproportionate advantages in awareness, revenue, and profits.

“…it is not just that Brand Leaders are bigger and enjoy proportionately greater benefits: The evidence we are going to consider suggests that the superiority of their advantage increases almost exponentially the larger they get.”

The chapter goes on to show how #2 brands have to spend significantly more than market leaders, simply to keep up. You end up in an endless cycle of overspending and under benefiting, which leads to shrinking profits and a lack of sustainable capital. Their summary is pretty clear:

“If profit allows a company to make choices, to invest resources in finding sources of future competitive advantage, then this disparity serves to widen the discrepancy between the chips the Brand Leader has at its disposal and the pile we have to play with.”

Losing the market is your investor’s worst nightmare because they know you can waste unlimited dollars never catching up, which in the end significantly lowers their return.

At Contour we were winning. But most of the time it felt like we were losing. Despite making what many thought was the best product on the market, the gap between us and GoPro wasn’t shrinking, it was increasing. With each incremental dollar in revenue they gained, the gap widened as they plowed that money back into marketing, forever separating the recognition in consumers’ minds.

An agonizing feeling, that tele-tubby box of a camera haunted my dreams. The more I saw it the more I wanted to scream inside. Not out of anger, but out of disbelief that something so ugly could take over the market like a tidal wave. Getting caught in the emotion of being a founder, I failed to act on the changing tide a few years ago. I saw the gap widening but never changed our strategy.  Even worse I didn’t step back and define what success was. Being the largest wasn’t necessarily the goal, but it went undefined, which meant "size" became the standard metric of success.

If you are losing in the market you know it. You don’t need market data to confirm your worst fears because you can feel it and so can everyone else. To make matters worse, you are running out of time.  The gap will become so large you can’t recover or even worse you run out of money because no one wants to fund a desperate #2.

Hopefully you have time before it’s too late, but if you are sitting at #2 you have to come up with a new strategy to win back the market. That doesn’t always mean pivot, that could mean doing more of the same on a much larger scale. Assuming you have product market fit, your problem may just be not enough customers. Money can solve that problem.

“To allow yourself to continue to be just another second-rank brand is, by default, to put yourself into the mouth of the Big Fish and wait for the jaws to close.” ~ Eating the Big Fish

Hopefully you can close the gap, but if you can’t you have three choices to make before you run out of time: Sell Your Business, Create a New Category, or Redefine Success.

Sell Your Business

Yes, you may be selling it too early, but overnight you will have resources that can enable you to be #1 in the market. Building your business on the back of someone else may take away some of the entrepreneurial spirit, but it does provide you instant advantages that could otherwise take you years to build and millions of dollars in lost equity.

Selling your business as #2 in a defined category can work, especially if you are differentiated and provide a value that makes the acquiring company more valuable. Maybe the size of your customer base, the quality of your team, your cash flows, your IP, or a jumpstart into the market, are all reasons a company would be interested.

Selling is a personal choice if you own a majority of the company or an investor decision if you don’t. Even though it’s a path to win the market, this strategy can be difficult to get support, especially if the return is less than your investors dreamed about. Convincing people that you aren’t giving up is a difficult belief to overcome.

Create a New Category

Creating a new category can work, but generally you already did that to enter the market as a start-up. Pivoting categories is something you want to do before you have product market fit. Losing to another start-up makes it even harder to pivot because they are occupying the hole in the market you saw when you started the company. Think Myspace vs. Facebook, Gowalla vs. Foursquare, Living Social vs. Groupon, etc.

Convincing your team and your investors to go after a new category is relatively easy to do, especially if you have been losing for a long time. People will be excited to chart a new path where they can say we are #1 in X market. Even if you know it won’t work long term, people will grasp this strategy and therefore follow you.

The Immutable Laws of Marketing is built on the foundation that being #1 in a category is better than being #2. Hopefully you can pivot to a category that is large enough so you don’t become irrelevant or a business that can’t support its cost structure.

Redefine Success

Redefining success is the hardest of all. First it requires you to step back and redefine everything. Defining your business not just by its size, but by its impact on the world, the happiness of your people, how well you live your values, or any metric that connects people to the purpose of the company. Second, even more difficult than redefining success, is re-convincing everyone to follow you.

Even if you wish you had started the company with your deeper definition of success, you will still have to convince everyone why being the largest right now isn’t important. Why a deeper purpose will give the company the long term energy it needs to win the market down the road. This is incredibly hard for people to grasp, especially for your investors who signed up believing you could win the race and provide a monster return.

To do this, it requires people to remove their disappointment and to re-look at the business with fresh eyes. It requires them to recommit when they are exhausted from the journey. It requires them to reset expectations on their return. It requires them to remove their ego and think about what is best for the company. It requires them to be patient while the market shifts under their feet. More than anything, it requires them to re-believe in what you are telling them.

Redefining success by no means guarantees your investors a great return. Something Fred Wilson talks about in his blog post.

"These slog it out companies turn into real companies eventually but just not companies that have growth trajectories or strategic profiles that make them great acquisitions….we end up spending an incredible amount of time and energy (hopefully not money) on the 2/3 of our investments that don’t work out."

Your investors realize that as long as you stay #2 you will have a hard time raising new capital, which means they will watch you spend years struggling your way to success. But if you believe you can win the market in the long term, then convincing everyone why this is true will be your challenge. A challenge that may leave you building the business on your own for many years to come.

Conclusion

None of these choices are easy and none of us start a company to lose. We all have grand visions of stealing the market like a modern day battle ship crushing vikings and their wooden boats. But once you find yourself losing, the battle just got that much harder to win. Maybe too hard.

(Thank you Chris Devore and Seth Levine for their help on this post.)