Who Startups Truly Compete With — Each Other
When a founding team is raising institutional money — either an institutional seed or Series A/B round — those founding teams may have a slide in their pitch deck which shows the competition in their market or sector. This is often referred to as “the competition slide.” Yet, while many investors do want to know what other incumbents and upstarts are competing in the space, oftentimes the startups pitching miscalculate who their real competition in that moment is. For instance, say an education marketplace company is about to pitch a firm for their Series A. That team may assume they’re competing for investment dollars against other education marketplaces who seek money. It’s slightly true, yes, but what is often more true on the ground is that startup is actually competing with every other single investment opportunity an investor sees on a daily or weekly basis.
I’ll illustrate with an example. September and October are historically months where many GPs at firms will strike for a Series A investment. A GP may have capacity for only one deal. So in that two-month period, that GP will tee up intros, take referrals from the summer, build up his/her own list, and start meeting teams, talking to customers, and seeing how different investment opportunities develop. While that GP may be taking a deep dive in a specific vertical, my observation is that’s rarely the case — instead, they’re spending time with folks they are naturally drawn to and those who have been given strong referrals and recommendations. As each week passes, they’ll go over their notes, think about the “shape” of an investment ($5M to own 10% vs another deal where $10M gets me 20% ownership, etc.) and refining the list down to a few candidates. Rarely are those final candidates from the same specific sector.
So, yes, that education startup does somewhat compete for its business with other education marketplaces, but in the early-stage throes of getting financed, that education startup is often competing with a diversified hodgepodge or cohort of startups who are also seeking funding at the same time from the same investment firms. The “competition slide” is important, but at same time, the investor is building his/her “cohort slide” — and that presents the real competition.