Scouting the Competition
How to understand & describe competitors, substitutes, and the ecosystem players that might mess with your plans
“I am concerned we’re not on the same page.”
That’s the message I got from the CIO at one of our corporate partners. We were preparing to discuss a startup opportunity with our investment committee, and it seemed like we might not be seeing eye to eye on how worried we should be about potential competition.
(For the record, I am always worried about competition)
He felt we had identified too many competitors. We realized, however, that we were using different definitions of the word “competition,” and this was creating an illusion of disagreement. Once we defined competition, we recognized that we were on the same page after all.
Our CIO was focused on whether the startup’s technology is differentiated — and it is. He was right that there are a limited number of competitors when considering the strength of the company’s product. But we were also focused on whether the company faces competition for customers from startups offering substitute solutions — which they do. Equally importantly, we were also assessing whether adjacent startups might be capturing mindshare from other sources of capital, and making it more difficult for our startup to build a quality investor base and team.
All three aspects of competition — technology, solutions, and capital — are essential to evaluating the risk profile of a venture capital deal.
It’s critical to assess a startup’s technology to determine if the company has a unique offering, and this is a good way to determine direct (or head-to-head) competition. This type of analysis focuses on the product or service itself. But this is not the only element of competitive diligence. It’s equally important to consider the other components of the company’s offering: pricing, distribution channels, and messaging. As many have noted, a company with a superior product doesn’t always win (James Clear and Nir Eyal describe why in this Heleo interview). Inferior products frequently win if priced more attractively, made more readily available, or established as better known.