Buck Jordan here, and this week, I want to take a step back and talk about one of life’s most consistent features: competition.
From your little league days back home to the workplace today, competition is everywhere, particularly in the world of startups. It turns out that great ideas and markets often attract multiple entrepreneurs with dreams of capturing said market at about the same time (can you sense my sarcasm?).
For example, back in the 1990s, at the dawn of the search engine, there were dozens of different startups building search engines before Google even arrived on the scene! As we all know, Google won that race in glorious style.
Almost every single startup you do diligence on is going to have competitors, whether it be one, two, or dozens. That’s a fact of life and business.
In fact, almost every company I’ve invested in has had several direct competitors and many more indirect ones. Yet I still made those investments.
So how did I get comfortable that competition wouldn’t kill the company I invested in? Here’s a brief overview of how I evaluate competition when it comes to startup investing.
Size It All Up
The first (and quickest) thing you can take a look at is how many potential direct competitors a startup has. If the number is relatively small – say, one to five – that is generally a good thing.
On the other hand, if the number of competitors is much higher than that (like 10 or 20), then things get complicated. The more competitors there are, the more options a prospective customer has, and the harder it is to stand out.
Every single competitor will be battling to capture as much market share as possible, and your specific startup will be competing against the combined budgets of all its competitors in the quest to capture market share.
If you’ve read Peter Thiel’s iconic book Zero to One, you’ll know that it is hard to build a massive company when you’re always fighting off your competition. Think about restaurants, one of the most hypercompetitive industries out there. How many billion-dollar restaurants do you know?
The next thing to look at is the caliber of the teams that are building competitors. Are these teams significantly more experienced in the specific industry, do they have better credentials, or are they repeat founders?
At the end of the day, startups are a people game, and the best teams have a huge advantage when it comes to building successful companies. The better your network, experience, and operating abilities, the higher chance you have of making any startup a success. So, compare your startup team with the competitors to see if there is a big gap in caliber.
Lastly, you’ll want to see how well funded the competitors are. Have any specific competitors raised significantly more capital than your startup, or is everyone at about the same level?
No matter how good your team or product is, it can be hard to battle a competitor with a huge war chest. Capital can be a weapon in competitive markets, and sometimes you can discount your competitors to death.
So, pay careful attention to how much capital each of the competitors have. A useful tool I use for this is Crunchbase.
Is Your Startup Differentiated?
After getting a feel for a startup’s competitors, the next thing you need to do is refocus on the startup you’re doing due diligence on.
The key thing you want to answer is: Is your startup unique compared to its competitors, or are they pretty much the same?
If they’re almost the same with limited differentiation, then it is going to be hard to make a case for why your startup will win. Instead, all the startups in that market will likely fight tooth-and-nail for market share, and nobody will emerge a winner.
So, what are some measures of differentiation? Well, the first – and most straightforward – is product quality. Is your startup’s product significantly higher quality than competitors? If so, then it has a very good chance of capturing significant market share.
Think about the iPhone. It is definitely not the cheapest phone out there. But it is the highest-quality smartphone in the world. In 2021, Apple sold more than 240 million iPhones and generated an enormous $191 billion in revenue from iPhone sales.
Speaking of cheap and expensive, price point is another measure of differentiation that has a give-and-take relationship with product quality.
If competitors’ products are roughly the same as your startup’s but there is a huge difference in price point, well, I think you know what people will do. So, as part of your diligence, make sure to list and compare the price points of all the players in the market.
Another crucial measure of differentiation is customer acquisition and marketing. How good is your startup’s marketing versus its competitors? Does it have a strong brand? Does it have great marketing videos, pictures, and taglines? How effectively does it acquire customers versus competitors?
The cheaper it is for a startup to acquire a new customer, the more resources it has to invest in acquiring new customers and further product development.
Ultimately, competition shouldn’t scare any of us as investors.
In fact, I usually see it as a good thing, as it validates that the market and problem is worth the attention of multiple entrepreneurs and is a problem that many people face.
However, it is critical to analyze the nature of the competition a startup faces and how differentiated it is versus its competitors.
If differentiation is limited, then it probably isn’t a smart investment to make. But if the differentiation is deep, then competition is far less of a concern.
At the end of the day, keep an eye sharply on the competition as part of your due diligence, but don’t let it scare you away from investing.
Until next week!