By J. Gary McDaniel, Jan 2021
"The idea of competition, particularly in a creative atmosphere, is always there; if you don't acknowledge that, you are doing yourself and the process a disservice." -- Jake Gyllenhaal
As an Angel Investor and a mentor to early-stage companies, I have read hundreds of business plans and seen countless pitches. What do I look for when evaluating a company? Essentially I evaluate three things – the product or service, the market opportunity, and the management team. In a previous blog “Management Teams Matter”, I discussed why the makeup of the management team is one of the most critical factors in a company’s ability to achieve success.
In this blog, I will discuss a very specific area of market opportunity – competition. When evaluating a company’s market opportunity, I try to look beyond the usual, and necessary, questions like: How big is the market and how fast is it growing? (Size of the Opportunity) What are the market needs and does this company’s product or service address those needs (Product/Market Fit, Value Proposition)? Who are the competitors, what are their strengths and weaknesses, and why are you better? (Differentiators, Competitive Advantage)
These are all great questions and help give me a good feel for the opportunity that a potential investment provides. But the answers to these questions tell me what I REALLY want to know – Does the management team fully understand their market?
All too often I have heard a company’s CEO or CTO tell me, “We have no competition”. “Our [product/service/technology] is unique, nobody is doing what we are doing”. Red Flag! These kinds of statements are like fingernails on a chalkboard to me. They tell me that the management team doesn’t understand their market. If I am evaluating an investment…McDaniel out! If I am mentoring…I know it’s time to roll up my sleeves and begin a discussion of Competition 101.
There is ALWAYS competition – in everything you do!
Status Quo. Maybe your product or service is unique. Congratulations! So the question is - What were your customers doing before your unique product or service came along? They had to be doing something. Therefore, one competitor that everyone has is the status quo. There is safety and comfort in the status quo, in doing things the way they’ve always been done. Regardless of how wonderful it is, your new product or service upsets that status quo and represents a risk to the customer.
Indirect Competitors / Substitutes. You can usually spot direct competitors pretty easily. They look a lot like you, offer similar products or services, and go after the same customers and market areas. Substitute or replacement competitors, however, are sometimes harder to identify. They don’t necessarily offer the same product or service, but can and do compete with you.
Take the example of a bakery. As a baker, your direct competitors are clearly other local bakeries. Other fairly obvious competitors are the bakery sections of grocery stores. Digging a little deeper, however, uncovers the bakeries found in restaurants like the Cheesecake Factory or Panera Bread or in coffee shops like Starbucks. Plus, there are the small home-based businesses selling at local farmer’s markets.
Besides their bakery sections, grocery stores harbor additional, less obvious, competitors in their aisles. There you will find Betty Crocker, Pillsbury, and Duncan Hines competing with you with their DIY baking mixes. You will also find wraps which compete with bread for making sandwiches and ice cream which competes with cakes or pies for dessert.
Stealth Competition. You also have to watch out for less obvious competitors — known as stealth competitors — who serve the same customers you do, but in different, sometimes unexpected, ways.
For example, cell phones are a different market than that of digital cameras, but no one would dispute the fact that phone manufacturers like Apple and Samsung are competitors to Nikon, Canon, and Kodak.
And today, apps like Zoom, Webex, and Microsoft Teams are competing with the travel industry. Business travel is down, Zoom meetings are up.
Stealth competitors exist for our bakery example as well. Consider the case of dieticians and the authors of weight-loss books. While they don’t sell baked goods, they compete against bakeries by selling products and services that endeavor to steer people away from baked goods to healthier alternatives like fresh fruits.
Search Engine Results Competitors. Today, customers, both individual consumers and corporate buyers, routinely search for products and services using online search engines. How often have you done a Google search only to find that what you were looking for was way down the page, or God forbid, was on the second or third page?
Beyond business competitors, there are also those sites clogging up the keywords you want to rank for. They can be anything - Wikipedia pages, magazine articles – anything that’s stopping you from hitting the top spot. You need to be aware of those competitors so that you can fix your keyword targeting. These competitors may not be redirecting your customers’ cash, but they are most certainly funneling valuable Search Engine traffic from you, and as such must not be ignored.
Capital Competitors. Every business needs to raise capital. Investors have capital. Seems simple enough, right? However, investors have choices. They could invest some of their $100 million venture fund in your SaaS business, or in a solar energy company, or that funky new craft brewery downtown. All of you are competing for the investor’s attention, and ultimately their dollars.
Bottom line – There is competition in everything that you do. You have to understand that reality, identify who your competitors are, and make plans to address that competition in ways that position your company for success.
"You've got to keep reinventing. You'll have new competitors. You'll have new customers all around you." – Ginni Rometty, IBM CEO