Raising Capital: Competition, Part Eight

In our last article, we looked into sizing the market and the distinctions between TAM, SAM, and SOM. This week we will dive into one of our favorite topics—competition—and why it’s a hot button for investors.

Competition

In most every initial funding meeting, investors want to know about the market and your competition. This helps them understand the difference between your serviceable addressable market (SAM) and your projected share of market (SOM), and determine if your Compelling Case for Customers™ is good enough to help you capture a larger slice of the total available market over time.

When you’re asked about competition, here’s an example of what not to say:

“Our product is so ____ (unique, wonderful, amazing, fabulous, or whatever) that we really don’t have any competitors.”

Unless you just invented a machine that allows time travel and is well-protected by patents, answering like this will close the door with most investors.

Key point. There are always substitute products available to your target market customers. It’s your job to identify them and figure out how you’re going to thrive.

Substitute Products

A substitute is any product that can be used as an alternative. Substitutes fall into two categories, namely direct substitutes and indirect substitutes.

Direct substitutes: A product that is essentially the same as yours. The New York Post and NY Daily News are direct substitute newspapers, sensationalism and politics aside, if you want local news and are flying out of JFK airport.
Indirect substitutes: A product that is not the same, but satisfies the consumer’s need. The product may be quite different—or may even be a service—but it does what the customer wants and achieves the same end goal. In our example above, substitutes for the New York Daily News newspaper include WCBS NewsRadio 88, television station NY1, and even a WiFi Internet connection, which can provide local news from a wide variety of sources.

You’ll likely find that direct substitutes are easier to identify and define than indirect substitutes. While teams sometimes fail to identify indirect substitutes, it is a telltale sign to investors that you haven’t effectively thought through your business strategy. They’ll immediately wonder what else you’ve missed.

Another competitor that’s frequently missed is that your customer may decide not to buy any product because the perceived benefits aren't compelling enough. We’ve seen entrepreneurs so enamored with their product—commonly called “drinking the Kool-Aid”—that they can’t fathom this happening, causing them to significantly overestimate their sales projections.

Key point. Your biggest competitor may be that your customer decides to take no action and buy nothing. In this case, your compelling case for customers may not be robust.

Bottom Line

When developing your business plan and strategy, dive deeply into competition and substitute products. Don’t let your excitement about your product get in the way of seeing the big picture and looking at all aspects of competition. Get creative and think about every possible way that a customer can get what they want besides buying your product.

To help identify substitute products, we’ve found it extremely helpful to have one-on-one discussions with a good-sized sample set of target market customers. After trying your product—virtually or for real—ask them what they are currently using or doing to get the benefits that your product provides and how else they could get these benefits or outcomes from other products.

Remember that your largest competitor may be apathy.

Until next week!

All the best,