Andvari gravitates toward companies that dominate niche markets. Aside from typically having excellent financial traits, these businesses are also well-equipped to fend off competitors, even giant competitors. The reason why is small, focused companies understand the needs of their customers better than the giants ever will. In Andvari's experience, the level of a company's customer intimacy correlates with the returns shareholders are likely to experience over the long-term.
David vs. Goliath
Let’s imagine a contest between an obscure company founded in 1969 and Google. Both are battling for supremacy in providing digital mapping services and software to enterprises. Google has hundreds of billions in revenues and the ability to hire the best engineers in the world. The older company has zero name recognition and a fraction of the revenues. Who wins and why?
Spoiler alert, it wasn’t Google.
Beating Back a Giant
Esri, founded in 1969 and now with about $1.5 billion in annual revenue, is the company that survived Google’s assault. The company survived due to its extreme focus on the digital mapping and geospatial needs of its enterprise customers. Although Google had vast resources and was successful in simple consumer applications (i.e. Google Maps), the features in its enterprise product were relatively lacking.
Key differentiators between the two firms' products did not sit at the margin. For example, Esri's product could handle more complex data structures, multiple map layers, mapping of property boundaries and pipeline infrastructures, and vehicle route planning. In the case of vehicle route planning, this was technically available with Google, but it required proficiency in programming languages. This is exactly the type of extra expense a SME-type client seeks to avoid. The list of key distinctions amounted to a tangible edge for Esri, which bore out in the numbers over time.
When asked about Google’s failed effort, Esri’s founder Jack Dangermont replied:
"I don’t think Google intended to take me on.…But when they became interested in creating mapping and GIS [Geographic Information System] software for enterprises, they did venture into our market. If you’re not spending a quarter of a billion dollars like we are on R&D, it’s hard to compete. So they found out it’s more complicated than they thought. So they backed away from it and asked us if we would work with them.
When companies focus on small, niche markets, they become far more intimate with their customers over time and respond more readily to their needs. A tiny company can defeat a competitor as large as Google in a head-to-head match-up this way. David can beat Goliath. In this case, Goliath (Google) stopped supporting its product in question in 2015 and transitioned all its enterprise customers to the underdog (Esri).
Detecting a Pattern
Other companies have thrived despite Google’s presence in their sandbox. For example, by focusing exclusively on cloud content management and file sharing services for the enterprise, Box and Dropbox continued to grow even after Google launched Google Drive. The two now have combined revenue of $2.4 billion. By focusing on retargeting technology for online advertising, AdRoll carved out a niche that should have been Google’s. AdRoll now has 37,000 customers and over $300 million in revenue. Present day examples of our broader point abound and it's become core to Andvari's investment process.
Andvari is on the lookout for companies focused on small niches because, more likely than not, they will have dominant market share and above-average financials to show for that position. Companies operating in niche spaces are also less likely to attract huge competitors because the available opportunity may not move the needle for big companies. This is attractive to us.
When a huge company enters a niche market, it's easy to assume they will aggressively take share by virtue of a deep war chest and a highly visible brand. We don't accept that idea as the norm. In fact, we find the odds still favor the company who focuses its efforts on one product and who knows its customers better than anyone else. These characteristics can create meaningful defensibility for a company (and an investment) even in parts of the market like software that are prone to disruption and disintermediation.
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