Friday, June 6, 2008

Always Be Looking Over Your Shoulder Or Your Startup Will Get Mugged

People often ask me:
"Paul, why don't VCs seem to understand that I have no competition?"
VCs hear this from entrepreneurs on a very regular basis. Claiming that your company has absolutely no competition is another sure way of shooting yourself in the foot when you talk to VCs. They don't understand it because they know it to be untrue, no matter how convinced you may be. Even if you don't have any competition right now, you most definitely will in the near future. 

Thus, making this claim hurts your credibility. VCs know that you have competition. Furthermore, VCs know that the probability of competition emerging is very high. Claiming that none exists signals to the VC that you just haven't done your homework thoroughly enough. If you haven't taken the time to fully understand the space you want to do business in, then why should a VC trust you with his money? A VC would much rather fund someone who has identified where the competition will come from, and what the plan is to beat them.

If, at first glance, it seems like your idea or business has absolutely no threat of competition, dig deeper. Here are some good places to look for potential competition:
  • Behind You: The incumbent is your most obvious competitor, and virtually all entrepreneurs fail to identify it. In fact, many don't even think about it. But changing the way people do things is very difficult. Incumbents are also dangerous because they could potentially evolve their product to match yours, with the added benefit of more established customer relationships. 
  • Above or Below You: These are vertical competitors. They are operating in the same industry, and likely have the same customers. However, their product or service addresses a different part of the value chain. It might make sense for them to branch out into a complementary product, one that competes directly with your own offering. For example, say you've developed a great new operating system for cell phones. Samsung builds cell phones (the hardware). Tomorrow, they might decide that they want to create an operating system for the phones they build. This would then directly compete with your own new product. 
  • Next to You: These are horizontal competitors. They are operating in a different industry, but likely have a very similar product (in terms of functionality and purpose). It might make sense for them to modify their product to serve the customers in your target industry. For example, say you produce high power transistors for the telecom industry. A company building high power transistors for electric cars might decide that it would require minor modifications to start selling and marketing their product to the telecom industry, thus becoming a direct competitor.

It is important to assume that not only will you have competition from day 1, but that it will be fierce. It's not enough just to be there first anymore. You have to show a VC that you've anticipated and thought about who your potential competitors are. Of course, it is impossible to predict every competitive move, but thinking about it makes you far better prepared to deal with competitive threats when they do emerge.

If you were walking home at night in an area full of muggers, alone, with your pockets full of money, and a bright future ahead of you, wouldn't you be looking over your shoulder?

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