Why the Competition Doesn’t Matter for Early Stage Startups
When I first started investing in startups I thought that competition was the most important factor for success. At pitch events, I was the annoying guy in the audience who would always ask a founder “so what about the competition, what is your durable competitive advantage?”
Over time, as I have gained experience in the realities of what makes a startup succeed, I have come to realise that not only is competition not the most important factor for startups, it may not matter at all. In my experience, a lack of competition may actually be a sign that a startup is on the wrong path.
For a startup there are generally two kinds of competition. First, the existing incumbent companies that own the market. We regularly find ourselves telling founders not to worry about incumbents. After all, they already own the market, so the only way is up for the new entrant. Sometimes our startups worry about an incumbent copying them; we encourage them that their advantage as a startup is that they can move orders of magnitude faster. Large organisations necessarily have a lot of risk and organisational ‘red tape’ that startups just don’t have to deal with. Incumbents also often have legacy systems and products that need to be accommodated which makes agility difficult.
The second kind of competitor for startups is other startups. To that we say, the biggest burden on any new startup is educating the market that there are alternative options to the status quo. This is why the first new entrant into a space often spends all of their available capital educating the market only to be overtaken by a second or third player who leverages the newly educated market to their advantage. With this in mind, we see competing startups as allies who can share the cost of education the target market. If you are worried about the other startup that has an equally tiny share of the market, rather than the incumbents, then you are not being ambitious enough.
Ultimately winning in the startup game is all about execution speed and capability, which is why you will so often hear investors say that they invest in founders not ideas. The ‘competitor’ that really matters for a startup is user apathy. Like turning an ocean liner, overcoming the natural human inertia of potential customers to stick with their current way of doing things is hard, but necessary, if you are going to win any kind of meaningful market share.
While competition is one of the most important business dynamics for large established companies, startups would be better to focus their limited time on other things, like customer validation, and clarity of purpose, which I will write about another time.