How to compete?
Don't fear VC-backed competitors; they often just waste funds on branded hoodies and LinkedIn-addict product managers
You know what not to do
First-time founders spend a ridiculous amount of time scrutinizing competitors. How many clients do they claim to have? Who is their CEO? Do they have more funding? Who are their clients? Gaining basic market intelligence is not useless. It's better to know the typical price for the services you are offering and review general client satisfaction with your competitors' products. What do people who pay for my competitors' solutions instead of mine like about them?
When studying a competitor, your sole focus should be to answer the following question: what have they understood that I’m still trying to figure out? If the answer is nothing, yet your competitor is ten times bigger than you, then you are delusional. A competitor that outperforms you in market share knows something you don’t about your potential clients. That thing is usually simple: incentives. They must have understood something about their potential clients' incentives and what drives them to opt for their services. It doesn’t need to be rocket science.
Consider the PayPal war against Elon Musk’s X.com1 (originally Confinity) in the 1999 peer-to-peer payment solution market. The main, if not the sole, advantage of X’s go-to-market strategy was the better referral bonus provided to both the referrers and new clients. It wasn’t a great trick: $20 instead of $10. At that time, a large portion of their respective clients were on eBay, the auction platform. People would sell $30 products and refer the potential buyer, earning almost twice as much as the product's price, while offering the client a discount of more than 60%. Incentives govern the world, and they are usually simpler than you think.
The story should not sound inspiring. This strategy worked primarily because PayPal and X.com1 eventually merged, and because X.com had tens of millions of dollars to fuel inflated hypergrowth. More often than not, opting for hardcore discounts and expensive referral programs will deplete your company’s finances and lead to failure. As I've stated many times in this serialized book, losing money with each new client is not a viable approach for a bootstrapped company. If one of your competitors – a rich kid from an MBA, or an ex-big-startup, VC-backed company – is throwing thousands of dollars into unsustainable promotions, let them do it.
Time to shine
I urged you not to compete on price, and, by extension, on expensive referral money strategies. However, there are cases where competing on price is feasible, and even the best strategy. For example, you may have unfair access to raw materials and a more efficient production process. Nevertheless, more often than not, it's preferable to focus on having a better brand and product, for your lifestyle and for the odds of survival. A brand is a more free, permissionless, leveraged asset than pretty much anything your production and logistic process may give you.
In some cases, price competition makes sense when you change the how. Let me give you an example. Imagine that your company offers on-demand support agents for software companies to outsource. Big SaaS companies are fed up with incompetent, sleep-deprived support agents on the other side of the world; they want real help, the kind of help that tells you exactly what to do when you are stuck on their products.
Now, let's say you've found a way to transform software documentation into competent, technically-capable chatbots. In this case, you have every incentive to significantly lower prices. Even better, you can integrate your users' heatmaps and API journeys to understand their actions and methods. You could train a robust chatbot on thousands, if not millions, of use cases, and then deploy it: now, you have a 24/7 support buddy who knows every single thing about the software2.
In this scenario, you're not just competing on price; you're competing on the how, not the what. You should slash prices, because your competitors are no longer those giant call-center promoters; you temporarily have no competition, as you've brought innovation.
Let’s dig into that magical word that too many founders forget.
Here's the unvarnished truth: Innovate better than your competitors, and you win. It doesn't matter if they're backed by VCs, Y Combinator, industry giants, or are startups born from the Greek’s gods. The key is true innovation – the kind that genuinely serves the customer. That's your ultimate weapon. And to pull the trigger, all you need are your brain and a bit of courage3
What does innovating mean? If your company, like most, aims to solve a problem faced by potential customers willing to pay for that solution, you likely aren't the only one identifying this problem. However, in most cases, many of your competitors will focus solely on reinforcing herd mentality, reaching their innovative limits once they've established their startup idea.
Nobody innovates
Why exactly most companies don’t innovate? Because it is fucking hard. It requires a list of thing that 99% of your competitors do not have : The key to innovation lies in understanding relevant market knowledge and its core components to identify real pain points and the ability to sound and look silly.
Surprisingly, many founders enter markets they are not even really interested in, attracted only by their “size”4 and potential fundings. Sometimes, these founders even secure investor backing. The market is riddled with overfinanced founders by incompetent VCs, attempting to build solutions in markets they clearly don't understand. Predictably, they often fail. Markets are complex, chaotic, non-linear, and filled with complex feedback loops and actors. Knowing how to innovate is just as crucial as knowing where to innovate.
For decades, traditional banks poured billions into retail branches for new sofas and advertising. In contrast, neo-banks developed simple apps that any major bank could have built, if not for bureaucracy and a lack of incentives. Surprisingly, these banks often lacked a deep understanding of their customers and their needs.
Innovation is akin to scientific invention's business twin, characterized by painful iterations, trial and error, and multiple failures. It requires the freedom to think as well as the freedom to fail. Without this, innovation is just a dream. Embrace the potential for dramatic failures—it's for the better.
Innovation demands technical skills and the incentive to use them. Many companies, led by hotshots with business degrees, only have a vague notion of what being innovative entails. True innovation means moving chaotically, erratically, breaking things, attempting to code the untried, or branding in unprecedented ways. It's about taking technical and marketing risks. In companies led by MBAs, potential innovators, often brave developers, are buried deep in the hierarchy with no incentive to deviate from the non-innovative roadmap set by non-innovative founders.
Conclusion, and fintech use-case
The current fintech world is a glaring example of misplaced innovations. Companies are obsessively focused on the payments sector, lured by superficial calculations like "1% of 100 billion in payments equals 1 billion in revenue"4. But what are they really offering?
Yet another payment terminal, bringing pretty much nothing new to the table.
Another bank for SMBs, without any real innovation except easy access to credit the lender can’t afford without VC money.
Just another payment platform or link, with only marginal features.
Some all-in-one finance and treasury solutions that fail to add value as they handle all the easy tasks.
The truth is, the marginal improvement these new fintech solutions offer over traditional systems is negligible. Compare them:
Old versus new payment terminal? Hardly a difference.5
Traditional bank versus new SMB-focused bank? Barely distinguishable on a daily basis.
Old school payment platforms or corporate ones versus the new ones? Virtually the same.
Cash flow analysis with some good old Excel? Even worst, as most cash-flow software provide terribly dull indicators you can find in any old-school acounting solution. They invest in ads, not in data science.
In the VC-backed landscabe that should prioritize innovation, we instead witness a deluge of investment in fintech ventures that are essentially zombies in an oversaturated market. They fail to innovate and merely contribute to the clutter. This isn't progress; it's an opportunity for innovative founders. Against this backdrop, bootstrapped entrepreneurs have the opportunity to quietly concentrate on true innovation and steadily accumulate profits, leaving the fame-obsessed LinkedIn aficionados to their superficial battles.
Before aspiring to replace Twitter, X.com was, back in 1999, an "all-in-one financial service platform" in theory. In reality, it was a gigantic, messy SQL database tweaked as a transaction ledger, lacking compliance and KYC checks
It is, at this stage, not very feasible. I do think it will be in the near future.
Not always, some very innovative founders never wrote a line of code.
Friendly reminder that the adressable market size is complete bullshit. If you think the contrary, you may be a name-dropper, or a bullshiter.
In fact, I opened a restaurant and initially purchased a system from Bold Colombia, only to cancel it and request an older model because Bold couldn't print vouchers or provide an interactive payment history of the night. Older customers insist on their physical vouchers, and the waitstaff needs to close the night with a summary with the sum of your transactions … Well and it has no integrations. Not a single one.