David vs Goliath, Part II: Building where the Goliaths aren't

Introduction

In the fable David vs Goliath, David knew he was never going to beat Goliath head on. So he took a different approach to beating the giant:

• Chose an unconventional weapon (a sling instead of a sword)

• Used agility and precision to target a vulnerability

• Took advantage of Goliath's size and slowness

In order to find success, startups must employ similar tactics to minimize head on competition.

Especially with the well documented rise of startups disrupting previous incumbents, and wide availability of technology to new and existing competitors, incumbents are going to be even more capable of playing the innovation game.

But opportunities for startups to disrupt and create a defensible moat still exists. Where are they and what do they look like?

Swimming in the Blue Ocean

As defined by the authors of the “Blue Ocean Strategy”:

Startups can find blue ocean opportunities by redefining existing markets instead of competing head-to-head with incumbents. Cirque du Soleil, for instance, didn’t compete with traditional circuses despite . Instead, it created a unique form of entertainment by blending theater and circus arts, targeting a new, more affluent audience. By eliminating costly features like animal acts and focusing on artistic elements, Cirque offered a premium product while keeping costs low.

In healthcare, consider emerging areas like longevity and AI medical workers. Startups have ample opportunity to explore what the rules of this market are, and incumbents have yet to establish themselves here, likely because an non-existent market does not contribute significantly to their overall revenue.

These Blue Ocean Opportunities often beget new market opportunities as well. What new services would arise to service the new generation of 120 year olds? How would our healthcare infrastructure (hospitals, clinics, etc) change in response to always available AI doctors?.

Is there no opportunity in the Red Ocean then?

Again taking from the authors of “Blue Ocean Strategy”

But this is not to say there are not pockets of highly valuable opportunity within the vast, red ocean.

For example, consider the opportunity growing awareness of sustainability could create. There are 5.9 million tons of medical waste created in the US each year, a heavy burden on the environment despite its necessity in a safe and clean healthcare environment. Companies like Amorsui are creating the same exact “medical staple” products like Personal Protective Equipment (PPE) that other giants in this space like 3M and Dupont have dominated and commoditized, and are carving out a niche for the younger, environmentally conscious medical workers and health groups.

Consider also the medical billing market. While insurance payment attracts much of the attention from startups and incumbents due to its large payment volumes, out-of-pocket payments are a growing ($433B in 2021 —> $800B in 2026) yet often overlooked aspect of medical billing where startups can thrive. With rising deductibles and coinsurance, patients are shouldering more of their healthcare costs, creating demand for flexible payment solutions. Startups such as Clear Health that offer tools to simplify and manage these payments, such as prepay pricing estimators or installment plans, can significantly ease the burden on both patients and providers. By improving the patient experience in managing healthcare costs, startups can capture value in a space where large incumbents tend to overlook innovation.

Whatever ocean companies identify an opportunity in, we believe that successful opportunities will have these two qualities:

New Applications Requiring a Different Business Model

Incumbents like Epic didn’t start as industry giants. Like startups, they identified opportunities, scaled their business, and built a strong market position. But after their business has matured, their scale makes it difficult to pivot quickly without disrupting daily business, especially around existing revenue creation methods. This rigidity extends to their customers, who have optimized their own operations to support the incumbent’s business model.

The opportunity for startups lies in innovating beyond this model. Take the well known story of Apple’s iTunes Store, which revolutionized the music industry by selling individual songs for $0.99 instead of albums. This shift away from the traditional model of bundled music purchasing created a massive new market. Similarly, healthcare startups can challenge incumbents by offering novel models that incumbents cannot easily replicate.

In healthcare, the opportunity for new business models is why risk-bearing or value-based care (VBC) models has received so much attention. While still evolving and imperfect, VBC represents the first significant move away from traditional fee-for-service. Startups like Iora Health (acquired by One Medical/Amazon) and Chenmed are finding success by aligning care delivery with patient outcomes rather than volume, which incentivizes preventative care and long-term patient health. These companies are redefining healthcare delivery by embracing models that prioritize outcomes.

Technology or Cultural Insights Beyond the Reach of Large Companies

Incumbents aren’t just bound by business model, they can be bound by technology platform and the culture built around it.

Large companies can miss seismic shifts when they are too entrenched in existing paradigms. Microsoft, for instance, missed the mobile revolution because it was firmly rooted in its PC technology success, unable to pivot quickly to the rapidly evolving mobile market. In contrast, Facebook underwent a complete internal cultural shift to embrace mobile, refocusing its resources on mobile-first development. This flexibility allowed Facebook to catch up and dominate the mobile era, showing how startups can capitalize on shifts that larger, rigid companies may overlook.

Coming back to our favorite healthcare Goliath Epic, part of their new efforts aims to boost doctor efficiency by leveraging AI tools combined with ambient voice technology, in an effort to reduce administrative work for doctors. Undoubtedly, physicians will “empowered” by their organizations to see more patients, But with physician burnout continuing to be a pressing issue for the healthcare workforce, is the ability to see more patients what doctors want? The pressure to serve more people can feel counterproductive when what healthcare professionals need is time to deliver quality care.

Perhaps the right question for startups to build a solution on is not “how do we help doctors see more patients”, but rather “how do we help doctors see less patients” while delivering the same quality of care. Startups that focus on enhancing care quality over sheer quantity can carve out a valuable niche that larger incumbents might overlook in their pursuit of scale.

Conclusion

Goliaths will always hold advantages in resources, size, and market reach. However, true success lies in identifying what incumbents can’t or won’t do and developing solutions that respond to evolving industry demands and patient needs. For investors and entrepreneurs, the greatest opportunities to building a sustainable competitive edge emerge in creating innovative business models and staking claims in uncharted Blue Ocean markets where incumbents dare not venture.

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