Table Stakes

Table stakes is one of my favorite investing terms. Basically, table stakes are what your product needs to offer in order to be considered a legitimate alternative by your customers. For example, table stakes for an email service in 1998 were that you could send and receive email. That was it. If you want to compete with email clients in 2013, you need to be able to send and receive email, but you also need email labels, great spam detection technology, a mobile version of your product, and so on.

High table stakes can be a great barrier to entry. If you want to start a new email service next year, you have a long, uphill battle ahead of you, which is great news for incumbents like Gmail and Hotmail. In fact, one of the most valuable things that a company can do is to raise the stakes in a category where stakes have been low for a long time. For example, in early 2005, online mapping tools all looked pretty similar: you could get directions between two addresses and you could look at static map images. Then Google released its game-changing Maps product, which was much more sophisticated and interactive. Google didn't stop innovating and gradually added a myriad of useful features like satellite views, point-of-interest listings with user reviews, Street View, location history, and traffic information. Now, any company that wants to offer a new mapping service needs to spend a lot more time up-front to be considered a viable alternative. If your company can raise the stakes in some area, your customers will be very happy and your competitors will be very unhappy — an ideal outcome.

Just like raising table stakes can be a great defensive move, lowering them can make for a great attack on another company. For example, Common Crawl provides a free repository of crawled web pages. If someone has an idea for a better search engine algorithm, Common Crawl lowers the barrier to entry from "you need good algorithms + months and months to crawl the web and collect data" to "you need good algorithms." Similarly, Google's Android OS removes most of the software challenges from launching a new cell phone. Google could have gone head-to-head with Apple by creating their own proprietary version of an iPhone, but instead they released a free, high quality operating system software so that any company would have an easier time competing with Apple. This is a great offensive move.

Whether you're an investor, an entrepreneur, or an employee, thinking about the table stakes in your specific niche is a valuable exercise. Making it harder to compete against yourself and easier to compete against your is a great strategy for success.