Most startups fail. Some fail because they get outcompeted. Should competition be your main worry when you come up with a brand new startup idea?
According to CB Insights, competition is the fourth most common reason for the failure of a startup. Competition was the main cause of failure for 19 out of 101 analyzed startups in their dataset. The most common reason, however, was lack of market need – the cause of failure fор 42% of the companies.
In another independent analysis of 80 interviews of failed startups, competition was mentioned as a problem by 10% of the startup founders, but only 2 out of 80 stated it was the main reason for the failure of the project. Building something people don’t need was the most common fatal mistake, with 34% of the companies pointing towards lack of market need as the major reason for failure.
From these stats, it’s safe to assume that while competition is definitely not harmless for startups, it’s less deadly than lack of market need.
When you have a new business idea, the first thing you would usually do is to conduct high-level market and competition research. The interesting complication is that for brand new innovative startup ideas, a total lack of competition might be a bad sign because it could be an indicator of lack of market need, which as mentioned is a significantly bigger danger.
Up to 100 million new businesses open doors around the world each year. It is extremely unlikely that someone has not thought of or tried something at least remotely related to your new idea.
Paul Graham, co-founder of Y Combinator, believes that competitors are not the biggest threat for startups. He argues, “way more startups hose themselves than get crushed by competitors. There are a lot of ways to do it, but the three main ones are internal disputes, inertia, and ignoring users. Each is, by itself, enough to kill you. But if I had to pick the worst, it would be ignoring users.”
In this quote by Paul Graham “ignoring users” could be interpreted as the company failing to adjust to the needs and wants of its target market, and in doing so offering something that customers are not interested in.
So, in consequence, should you interpret the existence of competitors as a good sign for your new business idea?
The mantra that startups don’t fail because of competition and therefore founders shouldn’t worry about competitors too much is prevalent inside startup circles, but it could be misleading to a lot of entrepreneurs. Innovation is the key point here – not every new business is an innovative startup.
If you are launching an innovative solution, your lack of market need risk is extremely high. In this case, the existence of companies that are serving the same market and or trying to solve the same problem is more reassuring than worrying. Due to your innovation, your offering would be differentiated by default, which means that you wouldn’t be in direct zero-sum-game competition with these companies.
If you are planning to start an unoriginal business, however, big direct competitors in the same place or market niche is a bad sign because your lack of market need risk is much lower, and your lack of differentiation means that you don’t have a competitive advantage compared to more established businesses in your niche. So, even if people obviously need what you are offering, it would be very hard to wind them over from bigger competitors who can do the same thing better and, in many cases, cheaper.
Most startups would fall somewhere in between those two extremes. This means that when you are doing the high-level market and competitor research for your new business idea, it’s important to look for signs for both potential problems.
First, if no business is offering something similar to what you plan to offer, keep it in mind as a potential sign of lack of market need. In this case, make sure to validate your startup idea as best as you can before you start building and investing considerable resources into it.
Second, if established businesses are solving the same problem with a similar solution to what you plan on creating, think about ways you can differentiate your idea. Put something unique in the ingredients of your business offering so that you wouldn’t compete with established businesses in the market head to head. Even a small unique proposition could help you attract customers in a specific niche of the larger market.