PS#104: A 4-Step Guide to Building Competitive Landscapes (Part 1)
As I mentioned in the previous issue, understanding competitive dynamics is an important part of the investment process for venture capitalists.
It’s also a bit tricky because you’re attempting to understand competitive pressures both today and well out into the future. Similar to market sizing, being able to think through competitive landscapes from several different perspectives is key.
Over the next few issues, we’re going to discuss the following…
Purpose for this analysis
Timing in the diligence process
My 4-step guide for competitive landscapes
Alright, let’s get this started.
Purpose of this analysis.
As I mentioned, competitive landscapes are about figuring out who will win (and why).
Sounds relatively straightforward, but the devil is in the details. We’re trying to understand why this “ability to win” will be true today and how it will be maintained over time. In order to do so, we need to have a strong understanding of the current competitive forces at play and their trajectory. As with market sizing analysis, this analysis will feed into other pieces of our diligence, helping build the broader picture.
Ultimately, competitive landscape analysis will provide insights into the following…
How hard it will be to build a $50-100M (or venture backable business)
Whether this is a “winner take all” or “multiple winners” market
What’s working/not working (or winning/not winning) today
Where the opportunities lie for disruption
How the market is evolving
All of this helps give us a better understanding of the market opportunity and the chances a startup has of succeeding over the long term.
Timing in the diligence process.
Similar to market sizing, competitive landscape analysis falls into the preliminary diligence stage of the investment process.
However, depending on your approach to investing, there’s no reason it can’t start much earlier. Personally, I’m often building my competitive landscapes AS I’m diving into a new space. I’m attempting to piece together the players and where the opportunity lies.
This means that building my competitive landscapes could start all the way back in the initial sourcing or market mapping stages. There’s a whole host of benefits to getting started on this early, including…
Better understanding of the problem/solutions in the market
Identifying new or adjacent opportunities by studying large competitors
Honing your judgement of what will “win” compared to what’s currently available
In addition to building your analysis and identifying opportunities, there are reputational benefits to starting this process as early as possible, including…
Prioritizing opportunities that fit your (better informed) thesis
Being more knowledgeable about the space in calls with founders
Speaking with competitors early in the process, before diving into the weeds
A couple of things to call out here.
Identifying new or adjacent opportunities by studying large competitors.
I’ve talked about this in a previous issue of Preferred Shares. Some of my best investment theses have come from studying large incumbents in a space. More often than not, they’ve done a lot of things right over the course of the company’s life. They may have grown stagnant and outdated, but they’ve identified a whole host of problems worth solving. Usually, those problems can be better addressed with a new technology, business model, approach, etc.
Being more knowledgeable about the space in calls with founders.
I’m not sure anything in my career has been more beneficial than this point right here. I’ve built my career as a thematic investor. I’ve studied spaces in depth in the hopes that I can have engaging conversations with founders on their level. I’ll never be able to match an individual founder’s intimate knowledge (since they are living it every day), but I’ve found being armed with deep knowledge of a space will make you a much more valuable (and better) investor.
Speaking with competitors early in the process, before diving into the weeds.
I don’t think this last piece is talked about enough with investors. For me, there is a level of integrity that we need to uphold as investors. Due to our power position (i.e., capital), we are able to get intimate knowledge about a company. In my opinion, we should try to survey the broader competitive landscape, make our decision, and then dive deeply with a selected company. I’ve seen differing views on this throughout my career, but I strongly believe this job is a privilege. We earn that privilege every day with our behavior as investors.
OK, now that we’ve set the stage, let’s talk about the process…
My 4-Step Guide to Competitive Landscapes.
My 4-step guide for competitive landscapes is as follows…
Research
Taxonomize
Reference calls
Synthesize
Each of these steps has several substeps, but we’ll dive into those in more detail in the coming issues. We’ll talk not only about how we understand the current competitive dynamics, but give our best estimate on how these may change and evolve over time (as great investors do).
