Due diligence scoring - competition

If you read my last post about diligence data, you might remember that “competition” was a surprisingly large determinant of whether SCAN members choose to invest.

Where is “market size”, which so frequently appears on the list of key factors to consider when investing in startups? Well, it’s there, but the "delta" is roughly 10% of the delta for competition. Why?

A couple of potential explanations. First, market size is one of the highest scoring metrics we evaluate – our #2 highest scoring criterion and with little variance. This is because market size is fairly easy to evaluate in the screening and pitching process: if it’s not immediately obvious that the market is large enough to support a company’s growth to a 10x return for investors, the proposal isn’t getting through pre-screening. (Charlotte’s angel fund manager agrees.) We obviously verify and quantify in due diligence, but niche products have been screened out already. “Market” scores are therefore consistent and high.

Competition is harder to evaluate from a pitch. We usually take the presenter’s evaluation of the competitive environment at face value - unless it’s wildly implausible or a SCAN member owns the market leader in the space! But once in diligence, finding your established competitors, recently funded peers (thanks Crunchbase!), or other well-capitalized companies exploring the space is easy. The score can then be pretty good - if the company looks like it can compete and has some barriers to entry - though if the entrepreneur portrayed the situation inaccurately, the score can be very low.

This metric is one of the hardest to score well on. The world is a competitive place generally – and for startups it’s hard to avoid the question “why can’t I and $100,000 replicate what you have in two months” because that’s often essentially what the entrepreneur did. And if you describe your business as “the facebook of {soccer moms, cyclists, families, pet owners, or college students (yes really)}” it will be hard to score well on competition.