How to identify competitors in the market

The most common line in pitches goes like this: “We have no competitors.” To investors, that's a red flag: it means either that the market doesn't exist or that the founder hasn't studied it well. Competitors almost always exist. The only question is how to find them.

Start with the simplest thing: ask your customers. During CustDev interviews, find out what they currently use to solve their problem and what alternatives they have considered. The names that keep coming up in these conversations are your first competitors. Often they aren't startups or services at all. If people keep records in an Excel spreadsheet, your competitor is Excel.

Hence the first rule: competitors should be divided into two groups. Direct competitors solve the same problem for the same audience. Indirect competitors are any other ways people meet the same need: spreadsheets, manual work, messaging apps. It's the indirect ones that first-time founders forget about most often.

The second rule: look beyond a Google search. In its guidance for student entrepreneurs, New York University recommends studying launches on Product Hunt, accelerator batches such as Y Combinator's, industry trade shows and awards. The Y Combinator company directory, which can be searched by industry and topic, is handy as a map of what early-stage teams are already working on.

The third rule comes from academia: assess not only individual companies but also the forces that shape the market. Harvard Business School professor Michael Porter identified five such forces: rivalry within the industry, the threat of new entrants, the threat of substitute products, and the bargaining power of suppliers and buyers.

Netflix is a telling example. While experts were expecting a war with Disney+ and HBO, the company told investors in its shareholder letter for 2018 that Fortnite takes more of its viewers' time than HBO does. And earlier still, in 2017, CEO Reed Hastings said that Netflix competes even with sleep. The idea is that a competitor is anyone who takes away a customer's time, money or attention, not just your “category peer.”

And finally: don't be scared when you find strong players. YC partners note that competitors are rarely as perfect as they look from the outside.

Sources:

1. NYU Entrepreneurial Institute — How can I learn more about competitors
2. Allied VC — How Startup Investors Evaluate Your Competition
3. Y Combinator, summary of a partners' lecture — How to compete with Amazon and Google
4. Michael Porter (HBS), the five forces — CBS News
5. Netflix — CNBC, letter to shareholders and Entrepreneur, “the competitor is sleep”