Whenever we are creating new business concepts at High Alpha, one of our major points of consideration is how the rest of the market looks and works. It might be counterintuitive, but we see having competitors as a positive rather than a negative.
Obviously, there’s a bit more to it than simply having competitors being good — certain large competitors or a multitude of competitors may make a new industry unattractive. For example, I may not be too excited about a company trying to become the next search engine and compete head-to-head with Google. Startups who are going after new markets are often better served, though, by having competitors. It provides necessary validation and helps establish a market more quickly than any one company can do on its own.
Years ago, I served on the Board of Directors for Compendium (sold to Oracle). In the early days of the company, we struggled with the high cost of acquiring new customers as we were literally making a new market. We paid prospects (in Starbucks gift cards) to take demos because we were creating something they had never heard of. After a couple of years, new competitors entered the market, prospects began to seek out our type of product, and our sales timelines and overall cost of acquisition decreased significantly. In other words, competition helped our business.
Below are five reasons why startups should look to have a competitor or enemy.
1. Market Development
Any startup that’s trying to create a brand new market knows how difficult it can be to market a product to customers that solves a problem they didn’t know they had. If a company has a great deal of clout like Apple, it’s a bit easier to convince customers you’re right, but if you’re a startup, it’s an uphill battle to evangelize your product and create fans. Having some sort of incumbent or competitor in the market can significantly help the process of customer development, which makes selling and marketing a lot easier.
2. Market Validation
Another really important part of the Market Development is that this creates an easier go-to-market strategy, which attracts potential exit opportunities. Without competitors, it’s difficult to prove efficacy of a model or idea in a new market. If other competitors have raised capital or, even better, gone through an acquisition or IPO, a startup has a ton more credibility from a funding and valuation standpoint.
Having incumbents or competitors is also a great way to benchmark your company — understanding what levers drove success of the competitors helps to create a path for success for yourself. Ultimately, this defines pretty clearly how to grow a company in the market effectively and also establishes possible points of differentiation from the competition.
Having a major competitor also helps new startups focus on a few features that create a meaningful value-add or a new product that is meaningfully different than the competition. Rather than boiling the ocean, it allows for niche products or tangential products.
5. Sense of Urgency
Likely the most important reason why competitors are good is that it drives a sense of urgency — if another company is competing for the same contract or the same market, you know you have to be hungrier, more protective, and ultimately more aggressive to keep pace and advance in the market. It literally forces your entire company (sales, product, etc.) to stay on top of its toes and continually benchmark, compare, and compete. Competition breeds the best products and creates the best strategies.
Competition breeds the best products and creates the best strategies.
Competition drives the best out of new startups and also allows for market development and environments for success. So when your startup suddenly finds itself with a fleet of new competitors, don’t fret and don’t spend too much time worrying about them. After all, the one who executes with the best precision will win in the end, and those competitors may ultimately help you do that.