How to think about competition
One question VCs always ask is: tell me about your competition. We get a satisfactory answer 20% of the time or less. Even many VCs don’t know how to look at competition – I’ve seen plenty of investment memos that do not have a sufficient competition section. When VCs ask about competition, they want an analysis of the others in your space, how much of a threat they pose and why. They want an analysis, not a list, and reasons why they should or shouldn’t be worried about each one.
In an effort to put VCs’ minds at ease, entrepreneurs often claim they have no competition. This is a terrible answer. If you truly have no competition, there’s a certainty that you’ve got an immense amount of customer education ahead of you (which is expensive), and that there are no existing budgets to buy your product. But I’ve yet to find a business that truly has no competition. There are four ways you can look at competition, so the ideal answer segments your competition along these four dimensions and explains how your business beats each of them – or which of them you don’t yet beat, but have plans to.
Other Challengers – these are your most direct up-and-coming competitors, those against whom you sell every day. Who else is trying to disrupt the market you’re going after? Who else do you see at trade shows and competing for the same clients? Who else is in the same bake offs or RFPs? Who do customers reference when making a comparison for your product
Incumbents – Similar to the above category, but these are established companies where they have major brand and budgetary advantages, but tend to lack innovation. Oracle, SAP, Salesforce, etc – who created the last generation of product in your space, from which people are upgrading to your product? Who do you frequently displace?
Substitutes – Maybe their product isn’t exactly the same, but can be used to accomplish a similar end. PowerPoint wouldn’t compete with Microsoft Paint (or a similar product, if not both owned by the Microsoft juggernaut), but you could indeed use PowerPoint to create visuals if Paint were an additional fee. McDonald’s and KFC don’t both make hamburgers, but one could choose KFC instead of McDonald’s. Think of products that could be used to achieve a similar purpose (or a lack of products – inaction and spreadsheets would fall into this category) without having to buy your product.
Startups – There are usually a couple of other startups in your space. The answer to why you beat these competitors is always “we’re all early stage, whoever wins the customers and gets funding will ultimately achieve escape velocity, but right now we’re trying to get ahead.” With other early stage companies, the question isn’t necessarily who has the best product, but why you’ll beat them to gaining significant market adoption (and potentially funding that could crowd out the competitors).
You’re the expert on your business. You’re outselling every day. When we ask you about your competition, it’s a chance to show the depth of your industry knowledge and your vision for how to build a category winning product – not a question to be dismissed.