Competition in Startup Companies: An Explainer

by | Feb 14, 2024 | Business Models, Fred Haney, Startups

bullseye and dart with man in business suit visible in background to illustrate competition in startup companies.

Why an In-Depth Understanding of Competition in Startup Companies is Necessary 

 

Competitive strategy is one of the most important aspects of creating a successful startup company, but in my experience, it is probably the least understood. Many startup companies, founders, and CEOs have a superficial understanding of what competition is. They need to know how to think about it, how to analyze their competitive environment, and how to develop effective competitive positioning strategies.

This article will address these issues and provide effective guidance for thinking about competition in startup companies. 

 

What Competition in Startup Companies is Not

 

First, let’s talk about what competition in startup companies is not. It is not a matrix that compares your product’s functions to those of competitors with similar products. Yet, this matrix is as far as most startup companies go with their competitive analysis. This can telegraph that the company really does not understand what competition is about to sophisticated investors 

 

The Types Competition 

The premise underlying all high-tech venture capital investing is, “sustainable unfair, competitive advantage.” Let’s pick the types of competition in startup companies apart to see what it really means in high-tech investing.

 

Chess pieces on a board to represent competitive advantage.

Competitive Advantage 

This is the most important criteria customers use to decide which product to buy. The startup with competitive advantage has a meaningful and measurable edge over competitive products. Not a small advantage, but a compelling advantage—enough to cause buyers to purchase the startup’s product instead of an alternative product.

 

Unfair Competitive Advantage 

This term usually refers to a strong patent portfolio that will prevent competitors from creating a similar product.  Unfair competitive advantage can also come from corporate trade secrets or from a manufacturing process that cannot be reverse engineered.

 

Sustainable Advantage

Another type of competition in startup companies is known as a sustainable advantage. This means that the startup’s advantage must be protectable for 15-20 years. Why so long? Today’s investors will expect to have an exit in about 5-10 years. A new group of investors buying the company after those 10 years will want to know that the company has at least 10 more years of competitive advantage. Thus, they can make a profit on their investment.

The High-Tech Mistake of Misunderstanding Competition in Startup Companies 

 

The classic mistake that many high-tech companies make is to assume that their earth-shattering invention is better than any other solution to the problem it solves. They also assume that its advantages are obvious and compelling to all. Based on this mistaken belief, they describe their technology with lots of jargon and highly technical language. Yet they forget to explain, in plain language, who their customers will be and why the customers will buy their product.

 

This assumption that ‘customers will beat a path to the company’s doorstep’ suffers from the following limitations:

 

  • Most investors and other people your startup might want to deal with do not have strong technology backgrounds.  If you describe your product in technical language, using technical jargon, they probably won’t understand it.

 

  • While you may be aware of the advantages of your product, advantages are unlikely to be obvious to people hearing about it for the first time. You need to explain what problem the product solves. You also need to explain exactly how it solves the problem, and exactly why the product has advantages over the competition.

 

So, what is the solution to this mistake? Creating elevator speeches, business plans and pitch decks that explain your technology and its value in language that any lay person can understand.

 

Now that the types of competition in startup companies is understood, the next step is understanding competitive analysis. My next blog will cover this in detail, including how to create a competitive positioning strategy.  In the meantime, more tips for creating a fundable startup, and useful tools such as templates, can be found on my website and blog page.