A little bit of competition—especially from other early-stage companies—is a good thing: competition validates that a market exists. Hopefully, the company in question has some well-articulated advantage over the competition. Crowded markets are more challenging for investors and companies because it is harder to define a clearly superior product or differentiated value proposition when there are lots of products in the mix. Even if it is a clearly better widget, it is hard for new entrants to rise above the noise and gain significant mindshare.
In addition to looking for a first-to-market advantage, investors often look at whether the company can build barriers to competition. If the idea proves great and the company begins to get traction, they will also gain the attention of potential competitors who could move to address the same market:
Can the company lock up key customers, distributors, or vendor relationships?
Do they have intellectual property that will act as barriers to competition?
What hard problems has this company solved that will be hard for competitors to duplicate?
We’ll talk more about competition in Business Due Diligence for Angel Investments.
Intellectual Property Assets
We mentioned intellectual property as a barrier to competition above. Intellectual property may include traditional forms such as patents or trademarks or even a particularly effective domain name. Often an early-stage company will only have filed provisional patents, but this can be an indicator that there is some real innovation in the company’s technology or approach. While an early-stage company would likely not have the resources to defend their patents, a strong patent portfolio might make them an attractive acquisition target for a company that could leverage and defend those patents.