Choosing the right market opportunity will make or break a startup. Unfortunately, most entrepreneurs choose to tackle markets that are over-saturated, not realizing their mistake until it’s too late.
I’ve listened to thousands of pitches from thousands of startup founders. Most of the time, these pitches don’t stand up to my scrutiny for one reason or another. Some don’t have differentiating features while others simply don’t tackle big enough market opportunities.
One of the biggest stumbling blocks that trips up most entrepreneurs though is their lack of market and competitive research. They come up with a startup idea and start writing code without even realizing that somebody has already done it. They start pitching investors without killer features that differentiate it from the competition.
I experienced this issue last weekend when I hosted the Angelhack hackathon. One group had a useful product they had been thinking about for weeks, but it was clear they knew absolutely nothing about the competition. I showed them three well-known and well-funded startups that did exactly what they wanted to do, and I could hear their hearts sink into their feet.
The problem is simple: too many entrepreneurs jump into fundraising long before they’ve done their due diligence. I had the founders of an acquired startup recently tell me that it took their team nine months before they even thought of raising money. They identified a market opportunity and took their time finding a product that would take off.
“When you do planning, research, experimenting, etc. without having raised money, investors think you are prudent,” well-known investor and entrepreneur Chris Dixon says on his blog. “When you do it with other people’s money, and don’t make what they perceive to be enough progress, the investors can quickly lose faith.”
Journalists and investors are walking startup encyclopedias. They’ve probably seen more startups in the last month than most entrepreneurs have in their lifetimes. They will quickly bring up potential competition. If an entrepreneur can’t quickly and knowledgeably talk about them and explain why his or her startup will differentiate itself from the competition, it gets messy very quickly.
This is not to say that entrepreneurs should give up on their ideas as soon as he or she finds competitors. In fact, competition can validate a great market opportunity. But founders need to put in their due diligence and be sure that what they’re building is different than everything else that is out there. Otherwise they will end up wasting months (or years) of their lives toward problems that have already been solved.