Tuesday, May 22, 2012

On the Importance of Having Competition

VCs like to see that a startup has competition. The standard reason given is that the presence of competition validates that a market exists. This is true, but competition is a key signal of a market's maturity, not only its size. Your product might solve a huge problem for a large market, but if your customers have never seen anything like it, you are going to have to spend tremendous amounts of money educating the market.

Netflix recently provided a great example of this. On last week's earnings call, Netflix CFO David Wells blamed a lack of competition for their sluggish growth in Latin America. From GigaOm: "Without other companies showing local consumers that “streaming video actually works,” Netflix endures the entire burden of marketing an consumer education [sic]." [1]

[1] http://money.cnn.com/news/newsfeeds/gigaom/articles/2012_05_16_netflix_cfo_really_we_didnt_kill_spongebobs_ratings.html

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