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Let's talk about competition. What does it mean when a VC says that they're passing on your startup due to competition?
A few thoughts:
A few thoughts:
1) Most startup founders think that competition is about other companies that are doing exactly what you're doing. E.g. Let's say that I have an e-commerce company that produces ultra-vegan fish food.
2) It may be that there are 0 other established companies doing this exact product. But that doesn't mean there is no competition. In fact, there may even be a lot of competition.
3) Alternatives is the biggest source of competition to a startup. What is it that your customer persona is doing today to solve a problem? What products or solutions is he/she using?
4) In the case of the vegan fish food, alternatives encompass a lot of products / solutions: other fish food (non-vegan), worms even (for people who fish), other food that isn't classified as pet food, kelp maybe? (not a food but what a fish might eat if in a big tank)? etc...
5) When I think about competition, as a VC, I'm thinking about competition for attention and competition on customer acquisition spend.
6) This means that if a fish food company has a lot of cash and is spending up the wazoo on Google Ads, it's going to be hard for a startup to compete even if the product is not the same. You can't compete on $$ for customer acq.
7) Ad channels are the easiest to see this in action. I backed a company that was paying $1 per click & later, a larger company that was moving into the space (& arguably not a direct competitor) threw so much money into the acq channel that the cost went up to $300 per click.
8) Ok so what about non-ad acquisition channels? Eg. SEO takes years to develop, & even though ppl think SEO is free, it's not. To make SEO a repeatable customer acquisition system, you need to pay for writers and pay for BD ppl to get the backlinks you want and do this at scale.
9) We can go down the list of all the "free" acquisition things you can do, but all the scalable ones require a process, and a process requires money (people).
10) The point is - you don't want to be going after an audience of people that lots of other companies are going after because it gets expensive. So does this mean that things are hopeless? Because there are similar things everywhere...
11) Not necessarily hopeless. It just means that you to do 2 things in your pitch. 1) You need to address right away that you recognize the space is crowded and 2) You need to think about your cheap wedge into a space.
12) With regard to the latter, it could be going after an angle that no one else is interested in and then upsell like crazy. A few examples:
12b) E.g. Selling ED products has always been highly competitive. A few years ago, one leader in this space oriented their ads around other things like hair loss and then would upsell on ED.
12c) E.g. A co that makes a lot of money on things like 409A valuations & now fund-of-fund admin used cap table software a few yrs ago as their wedge into this highly competitive space. Not many players doing cap table software, because you can't make much money off that directly
13) It's not a bad thing to be in competitive spaces. But it means that you need a lot of money. If you have a pedigreed background, then you can go out and raise a large competitive round right out of the gates and compete on acq
14) If you don't have that background, you need a wedge into your market, and good wedges tend to be around complementary products / services that are not necessarily good money makers themselves but have strong retention where you can build customer rapport and cover acq costs.
