Angel financing – What angels look for in a company: Competitors and barriers to entry (part 3 of 6)

So now that you have generated interest in what your product does and its market potential, the next question from investors will be who are your competitors and what are the barriers to entry? This area of your business will be the most dynamic, especially if you have yet to launch your product or service. You will not be able to predict all possible new companies that may enter your space or how existing companies will react. As such, investors are both trying to understand how your company stacks up against competitors as well as gauge your ability to assess and position your company against competitors. This will determine the comfort level they will have that you will be able to properly identify and react to competitive threats that may arise in the future.

In our iPod case example, as it’s a pretty mature market, you would want to list off the main companies that produce cases, outline their respective market share, and discuss what your company’s advantages/disadvantages are against each competitor. When you outline the market share of each competitor, you should compare this to your financial projections on what market share your company is targeting. Investors will be using this as a benchmark to assess how realistic your financial projections are. For example, if you are in a fragmented market with many established competitors, none of which have more than 10% share, and your financial projections assume you gaining 25% share, investors will want to know why you think your company can achieve this when all your competitors could not.

Even if you are fortunate enough to have a product or service that is truly ground breaking and no other company produces anything similar, do not say that you have no competitors. Although you may have no direct competitors, your target customers probably have a variety of choices for other products or services that address their problem. For example, the Segway personal transporter may have no direct competitors. However, the target customers for Segways have many choices as to how they solve their transportation requirements: they can take public transport, use a bicycle, use a car. You would want to assess the companies that provide alternate solutions and provide commentary on your product’s advantages/disadvantages. You will also want to provide commentary how will these companies will react if your company starts to take away their customers. Will they look to stem the outflow by reducing cost of their product, attempt to lock in their customers, or will they try to develop a similar product to the one your company offers? You should also discuss other companies in un-related industries that may have expertise in some aspect that is important to produce your product. In the Segway example, a potential competitor may come from an aerospace company that has expertise in gyroscopes needed to implement the balancing mechanism. If they see your product taking off, will they want to build off this expertise and try enter your industry with a competing product?

In order to fend off companies trying to produce a similar product to the one your company offers, you need to realistically assess what is the unique expertise that your company possesses that gives it the ability to produce your product. Do you have key employees with the technical knowledge, do you have key suppliers or partners that develop parts of your product, do you have intellectual property that the company has developed. Based on this, you will want to erect barriers to entry to make it harder for a competitor to come in and duplicate your product. This can take the form of employment contracts, patents, trademarks, or exclusivity arrangements with suppliers. This will make it easier for your company to focus on growing market share rather than fending off competitors trying to offer a directly similar product at a lower price point.

One tip, although money is stretched thin in a start up and often the focus will be on funding the development of the product, it would be wise to get legal counsel early on in terms of the intellectual property protection strategy your company will take. Understanding what is patentable can be a complicated area and is something you will want a seasoned legal professional to give you advice on. This is important because when you start to engage other people (investors, partners, suppliers) in discussions about your company and what it does, you need to be careful what you disclose. If you provide information into the public domain that you may want to patent in the future, you will not be able to claim a patent anymore. Having a strong patent strategy can significantly increase the attractiveness of the company to investors, provide justification for a higher valuation, and give potential competitors a reason to buy your company rather than try to work around your patents.

In my next article I will speak about the area that is probably the most important in terms of what investors look for in a company – its management team. As always, if you have any questions, comments, or suggestions for future articles feel free to contact me: craig at mapleleafangels.com