“I Have No Competition!”

By Dave Shen

Posted December 30, 2012

This must be the favorite sentence uttered by entrepreneurs. But who can really lay claim to this statement being true? Could someone truly have no competitors?

Usually what happens is, after the pitch I go back to our research team and after their digging, we find a mass of competitors. How could that be?

In thinking about competitors, I find there is generally a difference of opinion between me and the entrepreneur that is driven by the different types of competition, and whether the type of competitors that exist matter to us investing or not. Then add to that how market forces shape competition and this all gets pretty complex.

The Different Types of Competition

What are the different types of competitors? Looking out on the Net, I found these categories of competition:

Direct/Existing Competitors — usually the easiest to find, these are companies with products who are the same are very similar to yours, and attempt to serve the same need.

Entrenched direct/existing competitors are those who have been around for a while and have grabbed a lot of market share before you showed up.

Indirect or Mindshare/Category Competitors — these are companies who provide alternatives to the need your product solves or the resources that your using your product would occupy, but it may not be obvious that they are taking away share from you.

“Just because your offering is unique, doesn’t mean it is unique in the mind of your prospects. To a prospective customer a marketing strategist, web designer, direct mail specialist, graphic designer, video producers, and print shops may all provide “marketing”.”

[sources: 4 Types of Competitors, Different Types of Competitors by Peter Halim]

Potential Competitors — these are companies who have the capability and the will to enter into the marketplace with a product and become a direct or indirect competitor to you.

Replacement Competitors –

“A replacement competitor is something someone could do instead of choose your product, but they’re using the same resources they could have committed to your product.”

Budget Competitors –

“Even if your products and services are truly unique, you still have to compete for the same budget dollars that other service providers are vying for.”

This also applies to the regular consumers. How hard is it to get customers to part with their money, if there are other choices possible? How many subscription services can a consumer have on their credit card before they say enough is enough? Advertising agencies have set budgets per year; if it all gets spoken for, you may not get access to valuable ad dollars simply because it’s been all committed.

Doing Nothing — In the face of certain situations, it may result in a potential customer doing nothing as a way of deciding. This may result from having too many choices, or too difficult choices, or somehow being prevented from making a decision comfortable to the customer. It is worthwhile to ask, how can you eliminate this type of competition?

What Matters to Us in Investing

You’re probably thinking — Wow, Dave, that’s a big list! Isn’t that being a bit unfair to a fledging startup? Wouldn’t the world be our competitor if we lay this kind of analysis on my startup?

You’re partially right — as investors we like to look at your project from all angles and weigh the odds. What’s the probability that a competitor, or competitors, will emerge and make life difficult or impossible for a startup we’re looking at?

So taking those categories of competition above, we try to see who is there and who is not.

Direct/existing competitors are the worst. You have to come up against them and fight head to head for market share. Some of them are entrenched and thus you could have a tough time grabbing share from them. On the other hand, if they are traditional, slow moving big corporations, you may have an advantage in being a quick moving startup entering with a significantly better product. Competing against other startups — that’s sometimes much harder.

The other categories are much harder to judge. We have to make a personal call as to whether or not we think the risk is too high or low enough to give the startup a fighting chance.

Market Forces Confound the Competition Analysis

The only problem is…there are too many internet startups now. There has been an explosion of entrepreneurism which complicates the competition problem.

Previously, we talked about Mindshare/Category Competitors. This was when your competitors could come from a broader category and those could become your competitors inadvertantly. However, with the enormous number of startups out there, the Category becomes so broad to emcompass all internet, meaning the fight for customers becomes the battle for attention where everyone is your competitor.

The Last Category: Everyone is Your Competitor

While this is probably true to some degree at any time, it jumps to the forefront in times like today. That’s what is happening now; there are too many startups for both consumers and B2B customers to process quickly. If they cannot choose you fast enough, then your growth is stalled, causing you to burn through your cash before you can get to breakeven. Time is the enemy of startups — you cannot wait for people to process too many choices; you need them to use you quickly and they simply won’t. This is why we see startups needing 24–30 months to get to someplace of stability, or to get to their next funding event.

This makes the investment decision much harder to process. What’s an investor to do?

We could wait for times to change. The world moves so fast now — it is possible that within a year or two, the battle for attention may abate. Or it could get worse.

What it does mean is that for now, as we evaluate startups, the best we can do is to acknowledge the battle for attention is very real but we are being very picky now.

At this point, we try only to pick startups that have really no direct competitors, or have only old, traditional entrenched competitors. The world of internet startups has reached to almost every corner of every major industry; however, we are still finding some unturned stones, businesses and markets that have not been touched by internet startups yet. This is where we are finding the last remaining internet startup opportunities that literally have no direct competitors, or at best, competitors that are old, traditional companies which we are betting cannot move as fast, nor have the expertise or innnovative spirit of a startup.

In the old days, investors picked startups who had no competitors. The internet wasn’t around back then and competition was different in other industries. With the internet, competition pops up with great ease and speed. We now look for those rare, few startups that have still no direct competitors and advise them to stay stealth, just like in the old days, to avoid other internet entrepreneurs from creating competitors literally out of thin air.

Originally published at launchcapital.com.