An awesome product and a promising market won’t cut it if there is someone already doing the exact same thing. It is crucial to understand the competition the startup is facing and what makes them better than their competitors.
Competition is something all companies have to deal with at some point and it can be either direct or indirect. The difference is that direct competitors offer the same or a very similar solution to the customer, while indirect competitors offer a solution to the same problem but in a different category.
For example, Lyft is a direct competitor to Uber but public transportation is an indirect competitor. Lyft is offering a very similar service to Uber but public transportation is an alternative to it. Therefore, it is important to take both types of competition into account when determining the competitors within the market.
Who are the main competitors?
A wise thing to do when analysing the competition is to figure out, who the main competitors are. As an investor, knowing the competitors gives a better idea of who the startup is competing with and what their chances for success are.
There is a difference whether a company is directly competing with a big corporation or some small players. The latter is a less risky option because big companies can more easily crush small startups by simply copying the idea and rolling it out to the market faster.
To begin your analysis, try to first find the companies who are offering the same or similar solutions to the startup—the direct competitors. This is usually more relevant to companies operating in existing markets.
- What are their advantages?
- What is their history?
- Their marketing strategy?
Then look for the indirect competitors, especially when the startup is in an emerging market.
- What are the alternatives to the solution that the startup is offering?
- What are the benefits of those advantages?
- What are people using now to solve their problem?
Every startup should know their competitors and be aware of what they are doing. This gives them a better overview and helps to make wiser choices in marketing and product development. It is not important for just the startup but also the investors to understand what is going on competition-wise.
What makes them different than the competition?
The key to beating competitors is having a competitive advantage. Something that differentiates the solution, which the startup is offering differently from others. Added value is the magic word here.
Therefore, it is worth asking, what makes the startup unique? What differentiates them from their competitors? How does the startup compare to its competitors regarding price, features, and performance?
Understanding what differentiates them from the competition, makes it is easier to evaluate how wise it is to invest into such startup.
If the advantage is just based on price, current competitors could just lower their margins and the advantage is lost. However, it is much harder to copy a unique feature or product/service.
For example, PepperTap, an online grocery-delivery service, had to shut down due to a highly competitive industry and low margins making them unable to become profitable in such tough conditions.
“There are only five ways to defend your market from competitors: economies of scale, network effects, regulatory protection, brand, and habit.” — Nir Eyal
The Competition Checklist
In closing, the main things to keep in mind when assessing competition is the types of competition, key competitors as well as their advantages and disadvantages, and the startup’s differentiation from the latter.
As a part of your startup evaluating process, consider asking yourself the questions below.
The Funderbeam Guide for New Investors
In case you missed the previous chapters in our series and want to know more, check them out here:
- Investing in Startups: 10 Checks Before Your First Deal
- 1) The Problem — Analysing Your First Investment
- 2) The Solution — Does It Solve The Problem And Can We Make Money Doing So?
- 3) The Market — Who Is Going to Buy The Solution?
- More coming soon!
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- Free data intelligence on investors and startups
- Tools for startups to raise funds and for investors to co-invest
- A marketplace for investors to buy and sell their investments
Our vision is to provide everyone in the world with equal opportunities, whether you are building a company, or looking to fund the next big thing. What if the next Silicon Valley is not a place, but a platform?
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