Thoughts on startups by investors that
fund them & entrepreneurs that run them

Who’s The Real Competition?

Perhaps the most misunderstood topic in the world of startup investing is the question of who the competition is and isn’t.  And angels get this wrong just as often as entrepreneurs do.

Of course, we’re all familiar with the inevitable pitch slide on the topic, which features some sort of grid or circle image with – how fortunate! – a blank space in the zone in which this particular company characterizes itself.  Great, one less thing to worry about.

The reason such charts are often misleading is that they usually compare existing feature sets, rather than capabilities and audiences.  The ensuing discussion then revolves around overstatement by both sides: entrepreneurs, regarding how long existing companies would need to adjust to the new entrant’s capabilities; angels, with respect to the motivation of existing players to do so.

The really vital question, instead, is whether the startup has the knowledge to understand that a valuable market segment is meaningfully underserved; and the ability to address the gap in a way that will genuinely engage the target users.  In any reasonable business, there will certainly be others who could attack the same point; the question is whether they have the expertise and motivation to do so. If they lack either one, there might just be an interesting business opening.

The most classic business case on the subject is probably Sony transistor radios.  When this startup (yes, it was one once) broke into the radio business with its cheap, low-quality, portable radios, the existing giants didn’t counter, for to do so would’ve disrupted their very profitable “serious” radio business.  And other startups lacked Sony’s then-proprietary transistor technology, so they couldn’t compete directly.  A star was born.

Today, one often hears this investor question after a pitch: “Gee, couldn’t Google do that?” Hilariously, the entrepreneur often then explains why, no, not really…it would take Google a very long time to replicate this technology. Absurd! Regardless of the tech (and, sorry to say, patents) it would take Google five minutes to develop fantastic competing products… if they chose to.  The correct answer is: “.

You’re Not the First or the Only – Howard Morgan” href=”http://videos.gust.com/video/Youre-not-the-first-or-the-only;search%3Atag%3A%22know-thy-market%22″>Sure, but why would they? We’re the ones who really get this market and can drive the iteration where it needs to go. And once we prove just how big a success this will be, some division head in Google will decide that, instead of wasting time and resources to knock us off, they’d rather write a check that’s tiny for them and huge for us”.

The converse is also true, however.  Even microscopic competitors can be very genuine threats if they operate in the same space and understand the target market as well.  Then, neither a few features nor a few bucks will insulate Newco.

Moral: Competitors are not measured by size or existing feature sets; they are measured by sector expertise and business motivation.

Written by Bob Rice

user Bob Rice Managing Partner,
Tangent Capital

Bob is Managing Partner of Tangent Capital, a registered broker-dealer and merchant bank focused on alternative assets and strategies. He is the resident industry expert on early stage and other private investments for Bloomberg TV, appearing daily as Contributing Editor on “Money Moves.” Bob is a Director of asset management companies with over $2 billion in AUM. Bob began his career as a trial attorney at the U.S. Department of Justice and then became a partner at Milbank, Tweed, Hadley & McCloy, where his practice centered on financial products. He left the law in 1996 to found a 3D graphics technology startup that eventually became the publicly traded Viewpoint, provider of the web’s first “rich media” advertising platform. He has been an active angel investor and startup mentor since 2004. Along the way, Bob also served as the Commissioner of the Professional Chess Association and authored the business strategy book Three Moves Ahead.

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