The Strategic Importance of Competition

When I started in venture capital, one of the questions I learned to ask very early on was competition. Founders would often reply that competition validates the opportunity. At the time, I thought it was a canned response, a clever parry, to avoid answering the question directly. I’ve since realized I was wrong.

Let’s say you’re creating a category. You need to cross the chasm and reach the second half of the technology adoption curve. I found a beautiful technology curve online and have replicated it above. A small number of innovators and early adopters might use a minimal feature set product.

After that, the company must cross the chasm by building and selling a solution that the rest of the market wants to buy. How do you do this when creating a new category?

Recently, SaaS Office Hours at Redpoint had the privilege of chatting with Nick Mehta and Anthony Kennada about the way they created a category with customer success. Throughout Redpoint’s history, we’ve invested in lots of companies to create categories like NuBank, Hashicorp, Twilio, LaunchDarkly, Gremlin, Guild Education, Chorus.ai, among many others.

Both of those experiences have brought us to the same conclusion. Sellers and marketers need to spend millions of dollars to create a category. At the early stages of market creation, the most threatening competitor isn’t the startup down the street. It’s non-consumption. Simply put, the customer does nothing, buys nothing. Non-consumption is the most-worrisome failure mode.

Suppose it costs $200M of sales and marketing dollars to create a category. If you are a founder who can raise $200M because of your connections or your background or some other unique attributes, then you are an excellent position to be able to create the category solely yourself. You will raise the $200 million, and you’ll benefit handsomely from the winner take most dynamics.

But it’s far more common to see a collection of founders band together and pool their capital to create the category. Sometimes, this is an explicit collaboration, a group of companies that create an industry group to further the industry. Sometimes it’s more implicit or passive. But the dynamic is the same. In effect, they pool their capital to create the category.

Over time, I’ve realized how wrong I was in those initial meetings. The sales and marketing dollars are better spent growing the market, fighting non-consumption, rather than duking it out with competitors in a small, early market.