How Do We Think Of Competitive Forces In Our Evaluation Process For Startups?

November 2019

Over the last one year, we have expanded on various factors that we, as investors, look at while evaluating an investment opportunity. We have shared our thoughts on two very important aspects: the team and the market opportunity. Once we derive comfort with the team and size of the market opportunity, it is time to focus and understand the competitive landscape.

We cannot highlight the number of times we have heard, “We are totally differentiated. We do not have competitors. '' Well, guess what? In today’s day and age, competition is a given fact of life, unless you are an innovator working with the sciences or cutting-edge technology that you have patented. The world is indeed flat, as far as competition is concerned. What an entrepreneur is creating in India has real-world competitors from the Silicon Valley, Israel, China and practically from all over the world.

To discover where one’s place is under the sun, it is very important to have a very good understanding of what you are doing. It sounds very simplistic, but the reality often differs from theory. Any entrepreneur worth his salt has undergone painstaking effort and research before diving headlong into a business idea. It is critical to analyze and coherently characterize the vision for the business.

As investors, it is vital for us to be cognizant of the competitive landscape before gaining exposure to a particular sector or company. We adopt a slightly differentiated approach and step into the shoes of various stakeholders of the business – customers, shareholders, management, employees etc. We look to analyze and see the competitive positioning of the company’s business model vis a vis their competition.

We start by defining the problem statement and identifying a list of businesses that can solve it. These can be direct competitors that are going head to head against the target company’s product or any substitute products that a customer may choose to solve their problem. We seek to answer the following questions to provide us with a rough framework for our research: 

- How does the company seek to solve the problem? We look to their service/product and compare them to their competitors’ in terms of features, UI/UX etc. 

- How does the company generate revenues? We spend a lot of time contemplating the sensitivities of a product’s revenue model and pricing strategies in the context of their target market 

- What is the company’s procurement and distribution strategy? We seek to see how different sourcing and distribution strategies can be used to sell the product/service

- Has the company been capital efficient? Perhaps, the most important question of all, we seek to see whether a company has been efficient in its capital allocation to get the most bang for their buck 

- Have competitors managed to scale in the business? Many times, we see a competitive landscaping analysis carried out to showcase a business in a better light rather than their true competitive positioning in the market.

We would like to take this opportunity to debunk two myths:

"A superior product leads to a superior business" 

While a superior product may be ideal, a superior business model with other components working together seamlessly stand a greater chance to succeed in this market

"One should resist talking about well-funded competitors

We often come across attempts by companies to showcase themselves as the superior player in their respective markets and very often this is what we see:

While capital may be the most coveted item on an entrepreneur’s wishlist and can cause a furore in the near term, it is not a true competitive moat in the long term. We truly believe that businesses that use technology to build a moat around themselves will be the giants of the future. Additionally, talking about a well-known, well-funded competitors may make a compelling case for the business as there is a case study they can point to when someone asks about the validity of their business model. 

We are cognizant of the chaos that encompasses startups in their early days and the fact that no business is perfect. We take a rather holistic approach towards evaluating a business’ strengths and weaknesses to see the gap between where it stands today and where it ideally should be. Bridging this gap is a function of equipping the company with the right amount of capital and strategic inputs. This is a starting point to capital efficient, sustainable scaling, but that is a conversation for another time.