Slide 8 in your business plan pitch presentation addresses competition and risk – specifically, the risks you anticipate, and how you plan to preempt and react to them.
What’s the biggest risk? There’s no catch-all answer. When helping clients with this slide, I start by asking “When you think about what could go wrong here, what keeps you up at night”? Risk will vary from venture to venture, and may include the following:
Development risk. If you are developing a new product, and going through design, prototyping, testing, etc. you may encounter unforeseen obstacles that cause delays and/or cost overruns. If you don’t build in enough margin for error here, you can run out of cash and then it’s game over.
Adoption risk. If the product or service is very innovative, there’s a risk that consumer demand won’t be as strong as expected. I learned this lesson the hard way. I started a company that helped small businesses manage their human resources online. The market research and beta tests went well, but in the end, it turned out that small companies were not ready to store sensitive data online. Being early isn’t always a good thing. Some say the pioneers are the ones with the arrows in their backs.
Marketing risk. Even if demand is strong, it may cost you more than expected to accomplish marketing goals, like driving awareness, trial, purchase, or repeat purchase. Media businesses can be tricky in this respect. Let’s say you want to start a parenting website. Your plan is to create a website with content, attract parents to read and contribute to that content, and then sell advertisements to companies that want to reach the parents. The key here is a kind of arbitrage—you’ve got to attract each parent at a low price, and then sell access to advertisers at a higher price. If you predict that it will cost an average of $25 per new subscriber, but it actually costs $40, your princely opportunity may turn into a frog.
Competitive risk. Competition is a tricky topic. There are times when it’s good to have competitors. As we’ve seen in the chapter on evaluating new opportunities, competitors can reduce risk and cost for a startup, by proving that customers will use/pay for the products. But of course, competition can be problematic, too. Competitors can make it tough to close sales, drive down prices, capture limited resources like employees and distributors, etc. But there’s another problem. If you are raising money, your investors want a return on their investment. That typically comes from a “liquidity event,” like going public in an initial public offering (“IPO”) or being acquired. Acquisitions are much more common these days than IPOs. When a big company looks to gobble up a smaller company, they often look for the one with the most market share, fattest margins, biggest accounts, best technology, and/or fastest growth. You want that to be your company, not your competitor’s company, or they will get acquired instead of you.
When discussing competition, you may want to point out which competitors are likely to make the most trouble for you. Be prepared to describe their strengths and weaknesses, and their most likely reactions to what you are planning. Will they come after you? Drop prices? Change sales and marketing tactics? You can’t know for sure, but it’s worth thinking through the next few moves on the chess board.
Warning: Some entrepreneurs march into investor pitches and declare that their ventures have no competitors. If that’s true, be absolutely positive. Nothing crushes your credibility like an investor throwing out the name of some direct competitor you didn’t know about that just got funded. Also, keep in mind that your audience may have different perspectives than you do about competition, and that if you want their money, their perspectives are what matter. You may not view a particular company as a direct competitor, but your investors might. Be prepared to demonstrate how you are different, in ways that are meaningful to customers—not just in your own mind. This is an area where you will get better with every pitch, and may have to continually tweak your slides and comments.
Another important consideration is substitution. Sometimes your biggest competition doesn’t come from a competitor at. Restaurant chains may have lots of competition, for example, but when the economy tanks, people may cook more to save money. Cooking becomes a substitute that steals market share from restaurants.
Once you’ve identified risks, explain how you’ll mitigate them. Can you establish barriers to entry to reduce competition? Barriers to entry are defense mechanisms, like patents, long-term exclusive contracts with customers or distribution partners, or strong brands. Coca-Cola is a classic example. They sell sugar water, more or less. It’s probably not that tough to come up with a new sugar water drink. But try to bring your new drink to market, and you’ll learn a painful lesson about barriers to entry. You’ll find that Coca-Cola has forged exclusive relationships with distributors, retailers and restaurants. They’ve also spent 100 years building one of the most well-known and regarded brand names on Earth, so customers all over the world ask for the product.