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Competition Is Good

Posted by Seth Elliott On May - 13 - 2010

Finish LineI was invited to sit-in on a financing meeting the other day, which proved quite interesting for our purposes here at the Unchained Entrepreneur.

An eager entrepreneur was busily pitching a venture capitalist on the solution he offered. Our intrepid entrepreneur was seeking $2,000,000, primarily for sales & marketing purposes – though he also needed a bit to finish some commercialization features. Here is a snapshot of one portion of the discussion:

Entrepreneur: So, the interesting thing about this product is there is absolutely no competition. We are the only ones addressing the space. The opportunity is immense.

VC : Hmmm. So there is nobody with this type of solution. What type of competition do you have that is trying to address the customer problems in a different fashion?

Entrepreneur: No, no. I’m telling you that’s not it. There’s really no competition of any type for this market.

VC: {Pause} Perhaps that’s because consumers in this space aren’t prepared to pay for a solution…?

Entrepreneur: Nope. No. That’s not it at all. People definitely need this. They are crying out for it.

VC: OK. So what can you show me that will demonstrate that your prospective customers are prepared to pay for the product and also how much they’ll pay?

Entrepreneur: Right. Yes. So let’s go back to this market slide. See, the spending in this market space is in excess of $4 billion annually. It’s a significant market space.

VC: Uh huh. Well, that doesn’t really tell us the answer to my question though.

Entrepreneur: {Brief pause} Um. Yes. I see what you’re asking. Well, if you look at this, it’s clear that about 25% of that spending is within our gunsights.

VC: I see. Well, since you’ve indicated to me that nobody addresses this issue and you have absolutely no competition, those market numbers may not be applicable to you. You may have a market – but then again, you may not. So again, what can you show me to get me comfortable that there’s a purchase desire out there.

Entrepreneur: Um. Well, I really think those market numbers speak for themselves in regards to the size of the space.

VC (taking a look at an email on his blackberry): I see. OK, go ahead and continue with the rest of your presentation.

Needless to say, the rest of this meeting was largely perfunctory. The funding source had already lost interest.

This scenario illustrates a trap that many entrepreneurs fall into when describing the competitive space. Let’s take a look at some of the lessons that can be learned from this travesty.

Competition is Good

Most sophisticated funding sources I know like to see a space where there is competition. Don’t get me wrong – too much competition that is well capitalized, or that has a product that offers the same features and benefits as yours, is not a good thing. However, a complete lack of competition is a danger signal. If there are no existing entrants in the field (or at least somebody getting ready to enter the field), that’s a red flag. It very well could mean that the market you perceive doesn’t exist as you see it. Demonstrating a purchase desire and likely action become far more important in such a circumstance.

An example that comes immediately to my mind is Electronic Medical Records (EMR). In the late ‘90s there were a number of companies attacking the EMR space – and trying to integrate EMR into handheld devices in doctor’s offices and hospitals. At the time, there were varying degrees of resistance to this on the part of end users. A number of entrants ran into significant difficulties as a result. Many of the firms that failed simply hadn’t done the requisite work on their market space – and many venture funders were burned as a result.

Research is Critical

You’ve got to have a clear idea of your prospective customer. If you built an effective elevator pitch, you probably already engaged in the process of potential customer research. Understanding the potential purchasers of your product/service offering is one of the most important elements of a successful business venture. The more you know about your prospective customers, the more successful you are likely to be in making plans to reach them. Customers drive your business. Review the elevator pitch suggestions on customer analysis and follow through with extensive research.

You also need to focus your research efforts on building an effective competitive environment profile. Consider the following steps:

Identify. Prepare a list of all market entrants that operate in your industry. Take a broad perspective of what constitutes a market entrant. You want to include any company that might possible be a competitor. Essentially, if a firm addresses your prospective customer base with a general solution, they should be identified as a competitor.

Profile. Once you identify a competitor, you need to develop an understanding of their product/service offering. For each entrant, generate a comprehensive description of their product line – including a list of each product/service offered, features for each product/service and price point.

Customer Analysis. Perform a customer analysis for each market entrant. Wherever possible, you want to set forth the customer and market characteristics for each competitor, the same way that you did for your own potential customers. There’s no denying that sometimes this is not an easy endeavor. Try examining industry research, consulting with in-field experts and spending time observing physical locations (if appropriate).

Gather. Finally, collect any and all promotional and marketing materials that you can get your hands on. In particular, you want to obtain copies of any competitive advertising. For each market entrant, build a file that includes all the previous information plus copies of print advertisements (with notations regarding what publication and schedule these run on), websites and internet ads, notations (and ideally recordings) of any broadcast advertising.

If you present this material in a cogent form to financing sources, you’ll be ahead of many entrepreneurs seeking funding. Focus on the fact that there are clear purchasing actions by your prospective customers, and then differentiate your product or service offering from competitors. Use the existing market as a foundation to show why you have a “better mousetrap” that will resonate with a customer base that already spends money to obtain a solution.

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About the Author

I have spent the last 15 years advising entrepreneurs on starting and growing their businesses, as well as assisting in financing those growth efforts. I have also been an entrepreneur on several occasions myself. By writing this blog, I hope to provide actionable advice on how to achieve your goals and become more successful.