Editor’s note: Jonathan Friedman is a partner at LionBird, an early-stage fund investing in digital health, commerce, and enterprise software. He blogs at Venture Capital Point of View.
While declaring “competition is for losers” has become fashionable among unicorn-chasing VCs, most founders still reject this line of thinking. They know there is a gray area, and that large markets with multiple similar companies can produce multiple success stories.
Nevertheless, any startup that can’t explain why they will be 10x better versus their competition on a meaningful, tangible, difficult-to-copy parameter will have a hard time fundraising. Below are a few common examples of how startups trip up when facing VC doubt about whether they are adequately differentiated and how they can improve.
We will have more features
All startups have product roadmaps with plans to add features that put them ahead of what their competition is offering today. Of course, competition does not keep still, and even if it did, most product features are easy to copy.
What’s more important if claiming this as a differentiator is whether this translates into something that the competition can’t do because it goes against something fundamental to it. For example, would copying you cannibalize the competition’s current profitable business line? Require a different go-to market strategy? Entail more focus versus their current approach?
Tactically speaking, everyone agrees you need to focus on your customers and not your competitors. But strategically speaking, VCs want to know how your roadmap will make you truly different, not how it enables you to compete better in today’s paradigm.
People hate using competitors‘ products
When speaking about competition, startups will usually start by claiming they have a better “user experience.” This is highly subjective and hard to evaluate without proof points such as user engagement metrics, speaking to target users, and benchmarking.
So unless you are speaking to design driven investors that really “get it” or unless you have a radically different product versus the competition that’s obvious to anyone, you need to bring evidence of this makes you truly different in a way that matters.
The market is large enough for several big players
This is usually what startups resort to saying when their arguments about why they are different are falling flat. And while it’s true that not all markets are winner takes all, many markets that VCs like to invest in are “winner takes most.”
This means those with the most market share also create the largest profits long-term. In fact, it’s been proven that market share to ROI is strongly correlated, meaning in many markets, most of the value is captured by the leaders.
Since VCs rely on outliers to pay back their portfolios, they don’t get excited by startups that aim to be “among the leaders” in their industry. So be prepared to answer in credible terms why you will be the one to “take most.”
Don’t be a loser
Fast-moving, tech-driven competitors that are similar to you and significantly ahead of you in the market can scare away even the best VCs. So if you are entering a crowded industry and trying to raise VC money, don’t underestimate the importance of questions about the competition. Be ready to articulate your unique angle and why it’s meaningful, tangible and difficult to copy. Or run the risk of being labeled a loser.