Early-stage startup investors all ask the same 4 questions:
» How big is the problem you’re solving
» whats special about the founders/team
» how much traction do you have (paying customer growth)
» whats your competitive advantage
That last one is always the kicker.
“Whats your competitive advantage” really means: Whats going to prevent some other better-funded better-connected startup or incumbent from doing this better than you?
Its a classic ‘gotcha’. Say the niche is too small for competitor to care about and you make your TAM look uninvestable. Acknowledge that the space is big and competitive and investors will call it crowded. Heads they win tails you lose here.
It’s also kind of a silly premise to begin with - at the earliest stage almost every startup’s main advantage is the same: speed + focus (Ive written about this here). Early on there is no moat, only velocity. The rest is fluff.
If you ask Paul Graham he’d say you shouldn’t pay much mind to competitors in the first place. They’re a distraction. And if you are moving fast / growing enough it doesn’t really matter what anyone else is doing anyways.
But early-stage investors love to get hung up on this question anyways (if I had a dollar for every time an investor has asked us this we wouldnt have needed to fundraise in the first place).
So you should have a passable answer. Here are a few things to know:
1) Know when its genuine vs a cop-out
If you are deep into late-stage investor conversation and their last hang up is “Im just not sure about the differentiation” - its generally code for “youre not making enough money yet for this to be a no brainer”, ie theres not enough velocity. Thank them for their time and move on, no amount of clever positioning resolves this objection.
2) Know what they’re actually asking.
If it’s a real question, they’re looking for you to steel man why someone else wont do this better than you, and they’re testing to see whether you’ve thought about this for more than 20min. They want to how speed becomes structural.
In your response you’re not allowed to say “we have a better team” or “we have a better product” - those are answers to the wrong question. Everyone says this, it tells them nothing about their actual question.
3) The correct answer starts with: incentives.
A better framing is: Incumbents don’t have an incentive to build this / compete with us. Changing their approach would either A) eat into their current margins or B) require way too much effort for a segment they don’t prioritize.
The main incumbent [Google or whoever] is way too big and too general to waste time competing on this hyperspecific niche. And if they ever did decide it mattered? They’d rather buy us than build it themselves.
4) The framework: wedge → compound → structure
Instead of just saying “incumbents are too slow / misaligned” you can take this a step further and say “their incentives prevent them from building this wedge”. In other words, our speed lets us capture this things that compounds into something structural.
That is the middle layer that most founders dont grasp. The wedge.
It looks like this: early-stage, you find a way to do the 'things that dont scale’, high-touch, manual, intensive work faster/cheaper/better than anyone else. That gives you insight into what can be used to create a structural advantage over time.
This may be
» some sort of proprietary data layer that improves with scale
» distribution that gets cheaper over time
» embedded workflows that create switching costs
» network effects
» brand authority in a given niche
They key is to convey that you will use your current speed as a wedge to bypass the disincentivized incumbents on the path to creating [XYZ structural advantage] before they are able to do anything about it.
5) And If someone competes with you? Good.
If you are able to paint that picture, then you may also be able to make the argument that when said incumbent/competitor enters your space, it grows the industry.
It validates the problem you're solving. It brings attention and credibility to the category. And you're still more focused, still more agile, still closer to the customer.
Takeaway:
Early-stage advantage is not structural, its behavorial.
Late stage advantge is structural.
What matters is whether the first one can forseeably lead to the second.
There is no moat the first day of building Rome.
There is only momentum.
Speed without compounding is a treadmill.
Speed with compounding gets you to the top of the mountain.
The real answer answer to ‘whats your competitive advantage’ isnt about what you have today. Its about what your velocity builds that wont unwind.
Understand what it is and believe it.
Cheers,
Ramsey