If you ask an investor what the weakest part of business plans they read, many will say it is related to competition and the business’ competitive advantage. If you want to lose investors’ trust, tell them that your technology has no competition, or noting can do anything like what our technology can do. As a matter of fact, investors get nervous if there is no competition. Every idea, every technology has competition.
Of course, competitors can be a big threat to your business and can frustrate your efforts to grow. But competition offer investors validation that a market for your product actually exists. If the market is still in its infancy, then the presence of competitors demonstrates market potential. In a mature market, competitors’ sales and earnings provide a reliable measure of market value. Competitors may also represent potential partners and acquirers for your business.
Experienced investors want know as much as they can about the competition. In fact, before investing any money into your business, they will almost certainly do their own competitive due diligence. So do not try down-play the competition; you run the risk of losing credibility. The business plan should provide an honest and comprehensive appraisal of the competition you will likely encounter.
Who are your competitors? Think of competitors as anybody else that solves the same problem as your technology. It might be a low tech alternative or something more advanced one. There are often a few direct competitors and many indirect competitors. Be sure that you get to know them all.
The business plan should describe not only who they are, their products and services and their customers. Instead the plan should focus on their strengths and weaknesses and how they differentiate themselves in the market. What features and benefits does the product(s) deliver to customers? What is their level of market visibility? How well are they serving customers? Are they well-funded? Sources for this kind of information can include company web sites, online searches for articles, patent filings, competitors’ presentations. Arguably, the best information comes from direct conversations with competitors, their suppliers and customers, and with industry experts.
Investors will want to know where your competition is strong and how you will avoid going head-to-head against them. At the same time, you can also identify opportunities for collaboration and partnerships. For instance, one of the competitors you identify might have a large base of loyal customers and may be willing to provide your business with access in exchange for rights to your technology.
Investors, of course, also want to know where the competition is weak. Your business plan should highlight where the openings or competitive “soft spots”, whether it relates to technology or ways of doing business. The openings might be clear – competitors selling last-generation technology or ineffective medical treatments. Other openings might be less evident. Competitors might suffer from poor quality or customer service might be slipping.
The business plan, finally, needs to demonstrate how you stand apart in the market and, more importantly, why this difference will prompt customers to buy your product. Having assessed the competition, what is your competitive advantage? Does that advantage lead to purchases? Too many companies get tripped-up by thinking that a clever technology – one that gets the R&D team excited – necessarily excites customers. Investors want to see strong evidence that the company’s competitive edge will translate into real sales