Who Are Your Main Competitors?

When I was a teenager, I had a mentor that was like a father figure to me. One day, he taught me that often simple questions hide ulterior motives. Like asking: what do you do for a living?

In typical geeky teenage naiveté, I asked Tom how could such a simple question hide anything meaningful. He told me that many people have the bad habit of instantly judging others by their current career. They make assumptions like:

• How much money you make
• How smart you are
• How accomplished you are
• Where you stand on the social ladder
• Whether you are worth talking to
• Etc.

If you have ever tried to raise money from angel investors or VCs, you have been asked this simple sounding question: Who are your main competitors?

This is a fascinating question, because the way that most entrepreneurs answer it is the opposite of what an investor wants to hear.

First Answer: We Have No Competitors

Entrepreneurs love to say this, but it is about the worst thing you can say to an investor.

The entrepreneur thinks: I have built something so unique and valuable that nobody has ever thought of before. It will take years for any big company to catch up. I am so far ahead of the market and that gives me a first-mover advantage.

The investor thinks: this person falls into one of 3 buckets…

1. Has not done his homework and does not know the market
2. Picked a market so small that nobody could ever make much money
3. Is too early to market… think of how many failed YouTubes there were before YouTube

Either way, this is a huge red flag to an investor and should never be used as an answer to this question.

Second Answer: There Are a Couple Small Startups Like Us, But We’re The Best

This is the second most loved answer by entrepreneurs, but it is also usually bad.

The entrepreneur thinks: I am able to move faster than big companies and I am the leader in my peer group of startups, so I’m not the only one who has figured this out, but I am the best of those that have figured this out.

The investor thinks: this person falls into one of 3 buckets…

1. Could be interesting, but the whole space is unproven with adds more risk to an already risky investment
2. Picked a market so small that nobody could ever make much money
3. Is too early to market… think of how many failed YouTubes there were before YouTube

Sometimes investors will believe in a trend or a potential market enough that they are willing to risk a small bet to see where it goes. However, most of the time this answer is just as bad as the first answer.

Third Answer: Here Are A Couple Big Companies and a Couple Small Companies

When you give a list of competitors, you should always start with the biggest most impressive company that competes in your space.

Why?

• It shows who you aspire to be when you grow up. You aren’t just playing for mouse nuts, you are aiming your sights at the big fat cats. VCs want to swing for the fences and invest early in the next big fat cat. They want you to think big.
• Most big companies are inefficient and slow to change, so if they are making a lot of money in a space already, one can believe that an startup competitor might eat their lunch if they build a better mouse trap.
• It shows you have done your research when you are able to explain how others make money in the space and why you think you have a competitive advantage over them.

Conclusion

I once read (I can’t remember where) that one famous investor always liked to ask “What if your biggest competitor launched this same exact thing tomorrow? Wouldn’t they just crush you?”

He always hoped someone would just say: “Bring it on, if Google launches this tomorrow, we are going to eat their lunch and here is why” and lead into competitive differentiators. But usually most entrepreneurs shrug or change the subject because they don’t know what to say.

Entrepreneurs fear that if their idea is already being executed by big companies, that it is not unique and disruptive enough. In reality, most of the biggest opportunities for startups happen when you take a unique spin on an crufty old way of doing business. When Richard Branson picks the next Virgin company, that is exactly what he looks for. He saw major airlines mistreating their customers and started his own airline with better customer service. He specifically looks for opportunities to take on large incumbents who are fat and complacent and slow to change.

Don’t be scared of big competitors, let them fuel you. Use their weaknesses as your strength.