Last week, Christian mentioned you should remove VC firms who have invested in your direct and indirect competitors from your shortlist.
First things first, there is a statute of limitations. When a VC-backed company is acquired or IPOs, investor shares will convert into shares in the new (or now public) company. In some instances, those shares will be exchanged for cash. Regardless, the VC presumably has a path to liquidity and will eventually sell those shares and completely exit the competitive sphere in question. Note that this won’t be instantaneous – different investors will have different philosophies on when to exchange stock for cash and holding periods will vary. At a high level, though, if one of your competitors has provided an exit for investors, those investors might still be reasonable candidates to invest in your startup.
Competition indicates that there exists a market for your product/service, in some form or other.
Drilling a bit deeper into the competitive sphere, founders often get tripped up on how to define, evaluate, and communicate their competitors. Understanding competitive risk is important beyond building your competitive quadrant slide; it shapes your strategy, messaging, pricing, sales cycles, available market, viable partnerships, access to talent, IP strategy, and many other factors.
I bucket competition into three groups:
- Share of wallet competitors. This is the highest level of competition, and the one most often ignored by founders. Within an organization, you’ll exist as part of a larger buying process grouped into specific buckets on the company’s overall P&L. Consider who your buyer is – are you coming out of a technology platform budget or a marketing budget? Has budget been allocated for this specific purpose, or are you capturing dollars from an unrelated platform?
Regardless, any dollar you’re spending can be spent elsewhere, and that opportunity cost is your competition. As part of this exercise, you’ll gain insight into general buying trends within that share of wallet. Is your buyer influential (ie. what compliance wants, compliance gets)? Does your buyer have a shrinking budget? Is spend amalgamating across different departments? For consumer companies, you should think about this in terms of mindshare. What core need are you filling for your user base, and who is currently filling that need? A minute of time interacting with your product is a minute not spent doing something else, and that something else is your competition.
- Direct competitors. These are the competitors solving the same problem you are. They might be starting with a different segment of the market, expressing their ROI/value proposition differently, leveraging different technology to solve the problem, or meaningfully differ along a pricing dimension — but they’re all your direct competitors.
- Status quo. This might include non-purposed tools (ie. Excel), human capital (be wary of this one if you’re selling to the public sector or a group sensitive to replacing labour with technology), or simply a lack of urgency. These won’t necessarily make it onto your ecosystem map, but don’t discount organizational stability. Creating change is hard and a new alternative likely needs to be 10x better than the status quo to convince buyers the challenges associated with disrupting the status quo are worth it. If your product only needs to be 1x or 2x better, than you’re replacing something with low switching costs. Be mindful of how you can build higher switching costs into your product to prevent your eventual displacement from a marginally better (or cheaper) competitor.
To identify these competitors, talk to your customers! Who were they using before you displaced them? If you have greenfield sales, how did they solve this problem before your company existed? Once you have an initial list, research those companies to find out who their competitors are. Who’s buying AdWords against them? Who’s listed alongside them in Gartner reports?
Once you have your competitive landscape defined, evaluate the threat they present and how your company will be perceived in return. How much have your competitors raised and when? Capital is a weapon; a tool to be deployed. Some industries are highly capital intensive, some industries are sales and marketing intensive, and some are relatively lean and unique insights or credibility (or virality) are more important than capital.
Has it been a few years since your competitor last raised? That might mean growth has slowed, but it could also mean they’re profitable and able to self-fund. Regardless, their bank account will have an impact on their ability to respond to you. Don’t discount bootstrapped companies here, especially in less capital-intensive industries.
It’s also helpful to understand the public profile your competitors have built. Are they top of mind with customers, built a thought leadership presence, and landing key reference customers?
Ultimately, be thoughtful about why your competitors’ approach is both worse and better than yours along different variables. Every decision has tradeoffs and it’s rare for a company to be absolutely superior on every dimension.
Now that you have a deep understanding of your competitive landscape, you can communicate it to your investors. Most importantly: be transparent. Saying you don’t have competition is a rookie move that implies 1) you don’t understand buyer mentality and consumer behaviour, and 2) you’ll ignore strategic shifts from adjacent companies in your ecosystem that turn them into more direct competitors.
Be open about the areas where your competitors are outpacing you, and how your fundraising plan will allow you to bridge that gap. Leaning into the why your strengths are the right ones to have will help craft your story and convince investors that your approach is the one that will lead to success.
I’ll add a third — and potentially, most important — reason why you should never say you have no competition.
Fundamentally, competition indicates that there exists a market for your product/service, in some form or other. If, after meticulous analysis, you genuinely believe you have no competition, there is an extremely high likelihood that what you are doing has no positive economic conclusion. By that, I mean regardless of any advantage (economies of scale, government subsidies, etc.) there exists no minimum price of production and delivery that isn’t higher then the maximum you can charge clients for your product or service. In most cases, this is because (A) there exists no customers or (B) those customers who do exist won’t pay more than $0, which equals no positive economic conclusion.
A doomed outcome is especially true if, in the past, there have been competitors in your space and they have gone out of business. In which case, there is every likelihood the future of your company has been pre-ordained, and it ain’t positive!
Thus, going into a pitch and telling the potential investor you have no competition is the worst possible answer you can give. It either means (A) there is no business here or (B) you are clueless about who your competitors are. Neither conclusion leads to an investment.
Photo via Unsplash
StartUp HERE Toronto is a publishing partner of Betakit and this article was originally published on their site.