How Do You Know You Have Too Many Competitors?
“What other startups have gotten funded in your space?” I asked “Ray” during one of our first meetings.
Ray said, “There are a lot of them. I think there are around 50, the last time I counted.”
“50! That’s a lot,” I said. “What are you going to do different?”
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There can never be too many competitors in a market when you have the right strategy.
Ray then walked me through a detailed technical explanation of the uniqueness of his product offering. It was inspiring to hear.
“Here, let me show you,” he said. “The other competitors are all brute-forcing incremental improvement. Maybe only 2X to 3X better.”
“Why is that?” I asked.
“Because they are getting to the limits of what conventional technology can do.”
Ray then went to the white board and showed me the problem conventional methods would have solving the problem. It made complete sense.
“Now, let me show you how we’re solving the problem,” he said. “We’ve moved the problem from the domain our competitors are all pushing to another domain. It simplifies the problem, and, at the same time, allows us to have breakthrough performance.”
Ray went back to the white board to diagram what he was talking about. It was beautiful and elegant. I grasped that if Ray could execute on his plan, he could dominate the market.
A large part of the having the right strategy is not just your technology, but your market choices.
I was still worried. When you’re competing against 50 other companies, surely one of them will come up a similar breakthrough.
I shared my thoughts with Ray. “I know you’ve got a great idea. Let’s assume, for the sake of argument, that you can execute and achieve the performance you expect.
“It certainly would be nice to eliminate some of these competitors by choosing a different way of competing. What can you do?”
Ray smiled and said, “I’ve thought a lot about that. There are two market choices. There’s the obvious choice of Market A, or there’s the not so obvious choice of Market B.
“Market A is already a billion dollar plus market, and it will grow to over $30 billion in the next five years.”
I nodded my head. Everyone knew about Market A.
Ray then continued. “But I really like Market B. Market B isn’t as big as Market A, but it’s still got the potential to be large. Plus, it lines up better for what we’re trying to do.
“Customers in this market will pay up for our performance.”
I nodded my head in agreement and smiled. I knew the dynamics of the end market Ray was focused on.
“I like it,” I said.
You have to have conviction when you are a contrarian.
At that point in time, Ray hadn’t even formed his company yet. In order to execute his plan, Ray was going to need to raise a bunch of money; hundreds of millions of dollars before all was said and done.
About six months later, Ray started meeting with VCs to raise his initial round of funding. The reaction was decidedly mixed at best.
Some VCs just didn’t get the breakthrough that Ray’s technology represented. The ones that did get Ray’s idea tried to push him towards Market A instead of Market B.
One of the Silicon Valley VCs I introduced Ray to wanted to fund Ray, but only if he focused on Market A.
This was the test.
“What do you want to do?” I asked Ray. “That’s (the money the VC was offering) a lot of money to say no to.”
“I don’t want to change my plan,” Ray said.
“Perfect!” I responded. “That’s what I hoped you’d say.”
You need investors who believe in your contrarian vision.
So Ray passed on the potential investment, and he decided to find investors that would back him. It took time, but eventually he found two sets of investors that wanted to back him.
The first group were two VCs that were decidedly not Tier 1 investors. The second group was a group of angels that were offering less money.
My advice was that Ray should take the smaller angel funding because none of us felt comfortable with the two VCs. However, Ray wanted to move faster and that required more money. So he took the risk and closed a larger amount of funding with the VCs.
That was four years ago.
Competition doesn’t matter if you execute your plan.
Since that point in time, Ray has raised over $200 million in additional funding. His company is worth over $1.5 billion. More importantly, he’s done an excellent job of executing his plan.
The Market B customers love the performance advantage his product gives them. Customer adoption and revenue is growing at a nice clip.
That’s the thing about competition. When have a superior product focused on the right market, it doesn’t matter what your competitors do.