One of the counter-intuitive concepts I’ve picked up over the last two cycles of coaching for the NewSpace Business Plan competition is the idea that a little competition is actually a good thing. For a given business plan, the statement “I don’t have any competitors” is actually a big flashing red warning light for most investors. Most typically it means that the entrepreneur doesn’t really understand who their competition is, and what the substitution goods are that people could use in lieu of their product. But in the case where they really don’t have any competition, it makes investors wonder: Is there really a market demand then for what you’re doing?
On the other hand, having one or more competitors tells investors that you’re providing a service that’s targeting a real market need. Now you just need to show how you have a sustainable competitive advantage. What about the existing solutions are existing customers unhappy about? Are there important inefficiencies about how your competitors are running their businesses? Are they leaving some niches poorly served? Do you have a new business model, or a new method of acquiring and servicing customers for significantly less than they can? And if you get an advantage like that, do you have some way (patents, trade secrets, sales channels, etc) of keeping your competitors from immediately copying you? Or making it cheaper for them to acquire you than routing around you?
If you’re trying to raise money for a startup, you will still have a high hurdle to clear of proving that your concept is sufficiently compelling to justify the risk of funding a startup, but having a little competition may actually make at least one part of that story easier–if you have competition at least your investors know there’s probably a real and addressable market.
Jonathan Goff
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Absolutely right. The way I’ve told people over the years is, where should you put your pizza place? Find a place that already has two or more pie joints and build it there. If people want pizza, that’s the place they’ll think of. If you do your job right you will get plenty of business. Competition is always good. I’ve seen it in practice.
My folks use to have an Italian restaurant across the street from a diner. For some reason he wanted to put my folks out of business so he spent heavily advertising his Bucket-O-Spaghetti promotion. He brought more business into my family’s restaurant and we never spent a dime on advertising. It helped that the food she made had some regulars driving 8 hours from Los Angeles every weekend to eat it. We were full during the week as well (one trick was to all come in separate cars and park out front until the customers started coming in, then park somewhere else.)
It works in all areas of business. Smart business people encourage competition (but not the crony competition government fosters.)
You’re likely well beyond it, but if anyone comes by looking for advice on starting a company, they’d be well served to read The Art of the Start (Guy Kawasaki, 2004). A lot of it is quite simple and obvious stuff that anyone who has interacted with startups would know, but there are clever bits as well.
There’s three pages on acknowledging competition when trying to raise capital. In the hardcover it starts on page 125 thusly:
“Acknowledge, Or Create, An Enemy
“Many entrepreneurs believe that investors want to hear that the organization has no competition. Unfortunately, sophisticated investors reach one or both of the following conclusions if entrepreneurs make such claims:
* There’s no competition because there’s no market. If there were a market, there would be others trying to win it.
* The founders are so clueless that they can’t even use Google to figure out that ten other companies are doing the same thing.
“Starting an organization to serve a market that doesn’t exist or exhibiting cluelessness is not conducive to raising money. A moderate level of competition is a good thing because it validates the market. Furthermore, the fact that you are aware of your competition shows that you’ve done your homework.”
The next section is “Tell New Lies”, which is one of my favorites. Old lie number 1 is “our projection is conservative”.