The Double-Edged Sword of Competition when Fundraising
Sophisticated potential investors always ask about a startup’s competition. A well-developed answer is essential because “no competition” is not a good answer, and “too much competition” is also challenging.
When investors investigate a startup’s competition, they are looking at the startup’s opportunity from at least two different angles:
1. Having Competition Validates Your Market
Perhaps the worst answer a startup leader can give to the competition question is, “We have no competition.” That betrays a simplistic understanding of what it takes to sell an innovative product to paying customers and build a high-potential business. This is an early test of the entrepreneur’s competence.
Knowing your competition demonstrates to potential investors that the startup’s leaders are paying attention to the market they are targeting, seeking to understand what their target customers want and need, and working hard to develop a differentiated solution.
If you are solving an actual unmet customer need, then you have “competition,” even if it is only in the form of the status quo ways your future customers currently solve their problems. And, likely, there are some “less than great” semi-solutions out there, at least. The existence of others trying (even poorly) to solve the same problem set as you are at least validates the existence of the problem you seek to solve. This is reassuring to investors trying to validate that there is indeed a market for what you are proposing to sell.
It is critical to articulate the existing ways customers solve the problem you are proposing to address, with a much better solution, of course!
2. Knowing Your Competition Enables You to Differentiate Your Offering
The flip side is that when you have actual competitors, it will be critical to describe your competition thoughtfully, recognizing their strengths and weaknesses. Then you must crisply and clearly articulate how your solution is better.
Ultimately, investors doing diligence will want to speak to actual or potential customers to validate that they also perceive the value proposition that you are offering. Investors will likely ask you for the names of customers or prospects they can talk to – and they will also likely use their own networks to reach out to some potential customers you haven’t spoken to yet to see what kind of first reaction they get. Successfully navigating this process requires you to be clear on your differentiators as you educate prospective investors on your solution. You need to equip your potential investors so that when they engage with prospects who have never heard of your novel solution, they do it well enough that the prospects get excited about the positive potential to solve their problems. This process can be very credibility-enhancing when your investors replicate your customer discovery and hear the same things you have been telling them.
So do not be afraid of competition, unless what you are doing isn’t better. If it isn’t, then be very afraid and consider whether you should be building this company at all. Alternatively, if it isn’t, can you redefine your target market according to what you do exceptionally well? Or, can you innovate further to stand out from the crowd in ways your potential customers are ready to sign up for?
