Do venture capitalists choose companies that have no competition or ones that are trying to disrupt a competitive market? Originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
“Every one of you has competition,” I said. I was in the middle of a talk to a group of startup CEOs.
Before, I could get me next words out, someone in the audience interrupted me and confidently said, “I don’t have any competition.”
“I guarantee you do have competition,” I said. “But, tell me why I’m wrong.”
“We’re doing things totally different than they’ve been done before,” the CEO said.
I smiled and said, “Ah, the old, ‘we don’t have any competition because we’ve invented a new mousetrap’ story.” The audience laughed at my joke.
There’s Always Another Way to Accomplish What You’re Doing
“Let’s test your theory,” I said. “What’s your current market share?”
“Uh, we haven’t released our product yet,” the CEO said.
“So, it’s currently zero, right?” I replied.
“I guess it is,” the CEO said.
“What are your existing customers doing to solve this problem currently? Don’t you see! It might not be the best. It might not be very good. But that’s your competition.” I said, excitedly.
You Will Likely Lose Credibility If You Tell an Investor You Don’t Have Any Competition
“Investors know better than to believe you don’t have any competition,” I continued. “In fact, you’ll hurt your chances of getting an investment if you say you don’t have any competition.”
“Instead, explain how different you are from the old way of doing things. For example, when the automobile was invented, the competition was the horse. So, in this example, you’d differentiate yourself from the horse.”
“But we are the only one to do what we’re doing,” the CEO said.
“I get that. However, contrast what you’re doing to the old way of doing things,” I said. “It makes your position more powerful. Let me give you another example.
“Years ago, when I was an EIR (Entrepreneur in Residence) for a San Francisco VC fund, a really impressive CEO presented his company to the partnership. He went out of his way to present all of his competitors to the partnership.
“I’ll never forget what Mike, the managing partner of the VC fund, said to us in the debrief after the meeting. Mike said, ‘He (the CEO) told us about companies we hadn’t even heard of’. What do you think happened? How many of you think he got funded?”
A large group of hands shot up at once.
You Build Trust When You Explain Who You’re Competing with to Investors
“You bet the company got funded,” I said. “Now the reason obviously wasn’t only because the CEO did a great job presenting the competitive landscape, but it really helped.
“Look at how Mike reacted. When you’re so open and so unafraid of the competition, you’re making a powerful statement. Those are the type of CEOs that investors want to work with.”