I thought the same thing in 2003, when me and one of my current cofounders decided to build an AOL IM firewall. Then AOL announced they were going to package AIM and offer it to companies with access control and management, and we said "ok we're doomed".
AOL mothballed the project, and the leading AIM firewall companies now make mid-high 8 digits.
The two key features of an AIM firewall are filter rules about who can talk to who (or, in corporations, whitelists), and direct relay of messages between people in the same company, so company information isn't hitting OSCAR.
I should have been clearer, but, we gave up. But check out:
I had this happen to me with my last startup right around the time we were dealing with some angel investors.
Every single of one of them called me to say "Well, Microsoft is going to be doing this now, we don't want to throw our money away."
It's one thing to have market validation by companies you could theoretically catch up to; it's an entirely different beast to try to compete with Google or Microsoft.
Every single of one of them called me to say "Well, Microsoft is going to be doing this now, we don't want to throw our money away."
That thumping sound you just heard is a bunch of diehard Apple shareholders -- the ones who bought on Steve Jobs' first day and held on -- falling off their chairs in helpless laughter.
But I feel for you: I'm sure it's nigh-impossible to look your potential investors in the eye and tell them that they don't understand how business works. I'm sure they're all so focused on becoming the number-one player in a small and obscure market that they ignore the advantages of being the second (or third, or twelfth) player in a large and buzzing market.
Well, frankly it worked out for the better that the Angels shied away. My startup was too ambitious, and there wasn't enough focus in the product, we were focusing too broadly.
Someone mentioned in another comment that startups should be more agile than the big corps, and they were absolutely right. In the vein of 37signals, we should have been focusing on one problem instead of a class of problems.
I think in many cases outpacing the big players might be true, especially when the big players are known for mucking new pursuits up, but in this particular case, the startup is trying to take on niche functionality of search which Google is already very established and very good at. The odds Google mucks up flash indexing are practically nill.
But I certainly think it's plausible that a startup could out-develop Google in a relatively unexplored area over the course of a year or two—and that's all they need, since their exit strategy is (presumably) getting bought out, not IPOing.
