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.

This last point — the branding, marketing communications, and messaging strengths of a startup — affects not just whether customers will adopt, but also capital providers, too. Capital contributors include sources of funding, potential employees (who represent human capital), and ultimately the startup’s potential acquirers. A company with marketing momentum and mindshare can “suck all the oxygen” out of a market segment, providing a very effective form of competition.

Three basics ways to look at competition

Understanding the competitive landscape is a key part of venture capital due diligence and should be equally important to entrepreneurs. The process for identifying and understanding competitors is fairly straightforward. First, use search tools and databases to look for companies doing similar things. You can also review trade publications to find relevant information about the sector, which will improve your understanding of the space and surface additional startups. Reviewing the attendee list from conferences can also be helpful.

Reference calls are an essential tool in venture capital due diligence, so speaking with entrepreneurs, investors, corporations, lawyers, and others ecosystem participants is a great way to understand what companies are perceived as competitors.

The last step is to look for patterns in the companies you find, and organize them visually. Common ways to do this include: 1. market maps, 2. feature grids, and 3. perceptual maps.

1. Market Maps

Market maps can be Venn diagrams, or the “logo splashes” similar to what you see from insight firms like CB Insights.

When creating a market map, divide the companies into direct competitors, substitutes, and tangential ecosystem participants. If you are running a corporate venture firm, it’s also important to relate your analysis to your core business. For example, if you know that the head of your manufacturing business unit considers low-power wireless capability to be an essential feature for a target commercial agreement, you should organize your presentation of competitors accordingly.

Here’s an example for a social trend discovery software-as-a-service company:

An example market map visualization

In this simple market map, the competitors and substitutes have been organized as follows:

Direct: companies that primarily develop software to identify trending posts or stories on social media

Adjacent: companies that allow customers to manage social content and provide analytics to identify successful posts

Tangential: companies that identify social trends on their own networks

Here are a few other tips:

  • Competitive landscapes should include at least 25 companies (the example above is deliberately simplified)
  • Even if there aren’t 25 direct competitors, show substitutes and other solutions the customer may use to solve the same underlying problem
  • Remember that large corporations may also have products or services that compete with the company you are evaluating

2. Feature Grids

Feature grids focus on the product itself, typically comparing technical features. To make a feature grid, list features in columns and companies in rows, or vice-versa. It’s important to try to be objective about whether a competitor’s product offering includes a particular feature. Often, feature grids are shown with green light, yellow light, and red light scoring. Green means a feature is present, yellow means partially present, and red means the feature is not present.

A typical feature grid with “green light” scoring

Since you may be showing the feature grid to team members who are color blind, there are other options, including simple check boxes to indicate whether a feature is present. While “green light” scoring offers three gradations, check boxes offer only two. So if you are seeking a more granular scoring system, it might make sense to use “Harvey Balls” as shown in the feature grid below:

A feature grid using “Harvey Balls”

Harvey Balls have been popularized by Consumer Reports and were invented by Harvey Poppel while he was a consultant at Booz Allen Hamilton. When I was a young venture capitalist, I had the pleasure to work with Harvey while he was an investment banker at Broadview, which is now part of Jeffries Securities. There is a free Harvey Ball font available at this link if you don’t want to make your own! Just be sure to PDF the document for any recipients.

3. Perceptual Maps

Perceptual maps are tools used by marketing professionals to show how customers (consumers or business buyers) perceive a brand’s positioning. In contrast to feature grids, perceptual maps tend to show perceived benefits.

In the simple example below, we’ve built a perceptual map for the hospitality market, specifically for renting hotel rooms or vacation properties. In this perceptual map, the two most important customer benefits are affordability, and convenience (in the chart, convenience is represented by whether it’s possible to conduct the transaction entirely online). It’s possible to determine what are the two most important benefits when validating a market with potential customers, or performing diligence with existing customers.

An example perceptual map, which organizes companies according to customer preferences

Here’s how to make a perceptual map:

  • Identify the two most important criteria to your target customer segment
  • Construct a 2x2 with these axes
  • Place competitors and substitutes in the relevant quadrants

Again, it’s important to be intellectually honest, which requires accurately identifying the most important benefits, and placing companies in the right location. It’s very common for startups to position themselves in a way that appears advantaged, but is really just arbitrary. If you complete this exercise and don’t find that your company is in the “magic quadrant” in the upper right, it might mean the company’s offering is not sufficiently differentiated and you should spend more time understanding the customer’s problem and whether your company (or target investment) can truly build a leadership position in its chosen market.

These frameworks should help you identify and understand direct competitors, as well as substitutes and other relevant ecosystem players. If you are an entrepreneur, hopefully this will help you avoid the faux pas of saying you have no competition. And if you run a corporate venture capital team, these definitions of competition should remind you to be patient with business unit executives who may be defining competition differently. Each of these perspectives are valuable when evaluating startups.

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Scott Lenet is President of Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help corporations launch and manage their investment programs.

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