Who Are Your Competitors?

When building a startup, one of the most common questions you’ll be asked is to describe your competitive landscape. Most founders, including myself when I started out, have an intuition that the right answer to this question ought to be “we have no competitors.” After all, what’s more promising – a startup with no competition, or a startup with lots of it?

Try giving this answer to an investors, though, and at best you’ll be looked at with something approximating pity. At worst, you’ll have committed a fatal error that gets you tossed out of the room.

Why is this? The fundamental principle – that less competition is better – isn’t exactly wrong. (Sure, a fiercely competitive field might indicate that the market is just that exciting, but less competition is at least better if you hold the market constant.) But the problem is that, while the nature of your competition can vary, you can’t ever have none of it.

At least, not unless a customer can acquire and use your product without spending any money, time, mental effort, or other resources of any kind on it. Which, even if it were possible, would mean you’re not earning revenue in the first place.

For the sake of clarity in this post, let’s talk about monetary costs, though the same logic applies to other costs too. Let’s say your product costs $25. That money needs to come from somewhere. And, wherever it’s coming from, that $25 is currently doing some kind of work for your customer.

Maybe it’s being spent on a different product. Maybe it’s in a savings account, earning interest. Maybe your customer has exchanged a $25 lower salary for more free time, so would need to “pay” free time to earn the extra money to buy your product.

No matter what it is, you need your customer to choose to spend their $25 on your product instead of what they are currently spending it on. Which means, whatever your customers (in aggregate) are spending that $25 on today…that’s your competition.

Now, in principle, money is fungible – $25 of cash can be spent on anything. What this would mean, if it were true in the real world, would be that your product only needed to be more valuable than the least value your customer was gaining from any $25 they spend. So, if they spend, say, $100 regularly – with one quarter of that spent on groceries, fun, housing, and “eh I guess I might as well spend this last $25 on a slightly nicer car even though I don’t really care”, then even if you’re selling a grocery product, you just need the customer to gain more total value from spending a total of $50 on groceries (with $25 going to you) instead of their current “meh” use towards their car.

Unfortunately, this doesn’t work in the real world. Behavioral economics has found that most people mentally earmark their money for specific uses. Exactly how strictly people adhere to this varies a bit – with the strictest drawing up formal budgets – but even those who never explicitly consider it end up mentally splitting up their funds for specific goals. More concretely, we can talk about you as a consumer budgeting $25 towards groceries, fun, housing, and transportation, at which point it becomes a significant mental challenge to really think about shifting dollars from one line in the budget to a different one.

This means in the real world, you’re competing not with the $25 barely-adding-value transportation spend; you have to convince the customer to spend their $25 for groceries on your product instead of their current grocery choice.

So your competition is whatever else your customer is spending the money from your line of the budget on. What defines the different lines of the budget? At the highest level, the answer is problems-to-be-solved.

This harkens back to one of my very first posts – all startups need to be solving a problem for their customers. Let’s now take the example of a typical video game developer. What problem are they solving for their customer? It can vary, but many games solve problems like “I have an hour of leisure time and want to be thrilled, what should I do?”

Say Nintendo has an idea for an entirely new kind of video game, unlike anything players have experienced before, which no other game developer has any hope of replicating. Do they have “no competition”?

Of course not! Even if nobody else could replicate their offering, there are plenty of competitors who can fight to solve the problem they are solving. These include not only other game developers, but also companies like Netflix – anyone who competes for the same kind of leisure time of consumers.

This was crucial for us to understand for Modulate, not only as we’ve spoken with investors but also as we think about selling. Our voice skins product is completely unique – to the best of our knowledge, we’re significantly ahead of any other company in terms of realistic, emotive, and real-time voice replacement. When we were starting out, this made it difficult for me to figure out what to say about our competitors. I largely focused on other companies which might eventually develop the technical expertise to replicate our product.

But the problem Modulate solves isn’t “replace your voice” – there are very few people who wish to do that for no deeper reason. Most of our customers are interested in solving problems like “many players aren’t comfortable sharing their real voice, due to fears around privacy or harassment, but we still want them to be able to participate in voice chat;” or “our players wish to immerse themselves deeply into the character they’ve chosen to play as, but their voices don’t match the character and so take them out of the experience.” To go even deeper, we can abstract these problems to things like “mitigate toxicity online” or “improve players’ immersion.” (Of course, one of the things we’re very excited about with Modulate is that game developers can solve many problems using our same core technology – beyond the two mentioned here, there are also things like fulfilling players’s drive for customization; augmenting the ‘fashion’ of skins and emotes; or improving the quality of storytelling by introducing a wider diversity of voices into the game worlds.)

Using this framing, it’s much easier to think about who our competitors are. It’s not the people who, in a few years, might catch up to our specific technology. It’s the other companies working on resolving toxicity, or improving immersion, or whatever other problem is driving a customer to seriously consider adding voice skins to their game. We don’t need to convince our customers, “Use Modulate, rather than waiting 2 years for someone else to come along.” We need to convince them “Spend that money earmarked for improving immersion on Modulate, rather than, say, on adding visual features or developing a new character type.” And not only is this helpful for us to e.g. talk to investors, it’s actually a more powerful way to sell. When we present our technology to game developers in a vacuum, the developers agree that it’s “cool”, but it can be unclear to them how to prioritize voice skins within the rest of their work. But thanks to our developing a clear picture of the kinds of problems they are focused on at a higher level, we’re able to get them far more excited by painting a clear picture about how we resolve the challenges that are already at the top of their priority list.

“Who is your competition”, to a founder, sounds a lot like “who should I invest in instead”, and so is understandably a scary question. But remember that the real goal of the question is to understand how well you know your own market. What problem are you solving, and how are your customers trying to fix that problem today? If you can give a strong, clear answer to that question, that’s when you know you’ve got what it takes to actually begin to sell.