What to do when you discover a well-funded competitor

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When we invest in a new company, there is often limited existing competition. We tend to invest early, and the founders we work with have usually identified white spaces in a market that has been forgotten or overlooked.

But that doesn’t mean there isn’t competition. Usually, there are other people who have identified the same broad opportunity. And chances are, there are some other qualified teams that are quietly going after a similar problem. And if there are truly no competitors, competition will quickly follow into the space.

It’s no surprise then that within a year of our investment, founders often come to us saying, “We just learned about a well-funded competitor.”

I’ve seen a number of different reactions to this. Here are the most common:

• “They aren’t really a competitor.”
• “They’re taking XYZ approach, which we know isn’t right.”
• “This is great news because it validates our market opportunity.”
• “Startup X isn’t really our competition. Incumbent Y is. Besides, it’s not a winner-take-all market.”
• “Meh.”

None of these is inherently right or wrong. But all of them tend to lead to some sort of brief debate. Here’s what I recommend founders think about when faced with this situation.

Remember that product-market fit is as much about “who” as it is about “what”

When a new competitor emerges, I find that teams are most worried when the competitor is targeting the same type of customer with a different product. In this scenario, the focus is on how the product or strategy stacks up.

But for a really early-stage company, I think it may be more frightening if a smart team is going after a slightly different customer with a product that is similar. Maybe they have identified a better part of the market to focus on that your team hasn’t fully appreciated. Or, maybe they just think it’s going to be easier and wiser to start with a different customer niche to gain early traction before expanding into your target market.

In either case, it’s helpful to test your customer hypothesis if you haven’t already done so, rather than dismiss a competitor as irrelevant because they’re going after a different “who.”

Don’t assume your competitors are dumb, slow, or static

I’m often amazed at how quickly teams dismiss their competitors’ approach when their information is by definition incomplete and outdated. They also tend to bake in expectations of their own roadmap, but don’t do the same for their competitors.

When it’s your own product, it’s easy to say, “We know it isn’t great now, but we are going to be doing X, Y, and Z.” But when talking about a competitor’s product, it’s easy to just see what already exists and ignore the fact that they’re also working hard on a pretty smart product roadmap of their own.