Dec 10, 2023

On Competition

Conventional wisdom tells founders it’s better to be a small fish in an ocean as opposed to a big fish in a tiny pond. For me, the thought of starting a new business when well-funded competition existed was daunting. Recently, I’ve changed my mind on this. Let’s explore why competition is an important indicator, and when it makes sense to enter a market with powerful incumbents vs. developing a new market.

Competition = Signals

I’ve often felt bad when I discovered a new problem I started looking at was already solved by one or more teams. While this meant that I wouldn’t be the first mover, existing competition gives a lot of useful signals. Most importantly, if other companies are successfully solving a problem, you get problem and market validation for free: You know real customers are experiencing the problem, and they’re willing to pay for a solution.

Growing markets attract new entrants

Sometimes, if a product category is trending (think internal low-code dashboards, sales intelligence, and HR platforms), it will attract new entrants to the market. This can be spotted when aggregating trends in venture capital investments, for example. At some point, the relevant market will become saturated, and further entrance will be harder unless the potential for differentiation or disruption exists.

You need to stand out in a crowded market

Unfortunately, merely coming up with the same solution for the same audience at the same price will probably not work. If users and customers already know and trust an incumbent brand, you will have to work harder to convince them to switch. The higher the vendor lock-in, the more value you need to provide.

Value could be product differentiation. A better product in terms of usability, relevant feature set, or efficiency could lead to higher ROI for customers. Alternatively, a lower price could reduce their spending while yielding the same benefits as the competition.

Sometimes, industries are ripe for disruption. If you’re not working on BNPL or SaaS spend management, chances are your competition is older, slower, and, while trusted, not a great fit for everyone. Sometimes, niche customers want to use the newest technology, even if it means buying from a company that may not exist a decade from now.

First mover, late mover

If you’re creating an entirely new market, it’s on you to figure out the technology, validate the market, and see if there’s an opportunity. In return, if you bet on the right market and execute well, you can become the representative brand for a market. eBay is one of the textbook examples of companies benefitting hugely from the first mover advantage. They became synonymous with buying and selling things online, and are still around to this day.

On the other end of the spectrum, you can enter existing, tested markets. You won’t have to put up R&D, as you can build on the progress of all the companies before you. Unfortunately, you’ll have to catch up with incumbents, while also developing a strategy to convert customers that trust the first movers (differentiation or disruption). While Yahoo! Search and AltaVista may have been popular search engines early on, a small company named Google was able to build a better product and outpaced every prior competitor.

Nowadays, inventing a new search engine seems nearly impossible, yet people have started to wonder if products like ChatGPT will disrupt the traditional search interface. It’s a continuous cycle.

If you look at history, there are numerous success stories from both first and late movers. Apple was the first mover in smartphones while being known for sitting out on first-generation technologies and letting other companies face the rough edges. Facebook captured a large university and college audience even though MySpace was around.

If there’s anything important to remember from this post, it’s that competition is an important force. It informs about the existence of a market and customers willing to pay. But if you’re entering a market, you’re facing an uphill battle, as you need to catch up and defeat incumbents with loyal customers. But just building a better solution doesn’t mean you win. You need to sell it and survive long enough to carve out a part of the market to serve.

If you’re out to create a new market, the upside is potentially unlimited, so long as you succeed in attracting customers. You’ll have to invest in R&D, convince people that they need something they don’t even know yet, and stay alive long enough to reap the rewards. Once success is on the horizon, you’ll have to defend yourself against late movers trying to piggyback on your work.