A common mistake made by new startup founders and new investors alike is to be too concerned about competitors. Sometimes, all it takes is one competitor already doing something similar and a new founder will decide that’s one competitor too many.

Often, a new investor will think first-mover advantage (being first in the market) is everything and forget about ‘execution advantage’ (a team that executes faster and smarter beats a slower, dumber team that was first to market every time).

Experienced startup founders and investors will tell you: competitors are a great sign — “You’re still in pre-launch and already you have three competitors? Maybe that’s just market validation — a sign there’s a market out there for what you want to do”.

Maybe yes, maybe no. Sometimes, the opposite is true. Sometimes, when you launch you’re entering a market where everybody’s making money, but often (particularly in small markets like Australia) you’re entering a market where nobody’s making money yet, and may never.

Long ago I was co-founder of a startup in a space that everyone was certain was going to be huge; there were six other startups in Australia doing something nearly identical, and similar businesses in the US were growing fast.

Yet none of these startups was making money; in fact, we were all losing it, some of us scarily fast. We were all betting on the market growing. Betting on early adopters leading to mainstream consumers. Also betting on our customer acquisition cost coming down as we tested marketing channels and creative. And we had a longer bet on raising another round of capital in 12-18 months.

It sure looked like we were making money — you’d see our logo and those of our competitors everywhere, in banner ads, search ads, newspapers, on the backs of buses and even on TV. But we all had one thing in common: we had a certain amount of money and time (‘runway’) in which to create a profitable business.

Startup people like to use the analogy of a runway — your startup has to get airborne before you reach the end of the runway, and getting airborne means becoming a viable business (or sometimes just raising more capital on a higher valuation) while the runway itself is the amount of money you have left to figure out what all that will take.

Like ours, your startup is on a runway, and like my co-founders, you are the test pilot at the controls. Your plane is burdened by debt — equity you’ve exchanged for investment, and the time you and your team have invested.

Every day you’ve got to keep an eye on that runway and be sure that you can be airborne before the runway ends.

If you’re in doubt, don’t wait too long before making difficult decisions. You might reduce costs (like people or office space) to make your plane lighter, or you could try adding better engines (like improving your conversion rate, or finding a new distribution partner) to make your plane take off sooner.

But the weight, power, speed, time and runway length are all connected — change one variable, and it affects the others too. Reduce your weight (in team members) and maybe your power (speed of iteration) suffers. Spend too much time closing that big enterprise deal and maybe you don’t have enough time to get up to take-off speed.

If you’re racing down the runway alongside your competitors, it might look like the start of an acrobatic display to friends, family, competitors investors and industry media, but most of these spectators aren’t expecting anybody to crash.

Some of these planes will never fly, but without knowing about cash burn rate, money in the bank and other key metrics, who really knows? Some of your competitors will keep getting ‘Top 10 Startups To Watch In [Market]” right up to (and even after) they have crashed at the end of the runway. Not all crashes are immediately obvious!

How do you tell whether you’re considering entering a validated marketplace or a nascent market already saturated by loss-making, high-risk ventures?

  1. Investigate the average CPA (cost per acquisition) and total marketing spend by copying the marketing channels, creative, calls to action, offers and conversion pages of your competitors in small-scale trials
  2. Guestimate the rent and staff costs by speaking to recruiters, real estate agents and angel investors
  3. If your competitor has a distribution partner, call that distributor up and ask what it would take to swap you in and bump your competitor out. Assume this is a little more than what your competitor is currently paying

As for my startup, we hit the ejector button and sold our passengers and their luggage to a competitor. We got away with all our arms and legs, most of the airframe, and enough to try something else once our hands had stopped shaking.

Ten years later, I’m still flying!

 

Filed under:   burn rate   competitors   validation