What is competitive advantage when it comes to getting investors?

When you boil it down, you really have to convince an investor of only two things: (1) the war you’re fighting is worth winning and (2) you’re the one who is going to win. I want to focus on the latter here, and will address the war itself later.

Loosely construed, your odds of winning a battle or a war are based upon your competitive position or, ideally, your competitive advantage. Unfortunately, as a startup, your competitive advantages will be generally limited—and subject to some skepticism. So play it straight in your business plan and cover some or all of the following, making sure you put your biggest strength first:

  • The Competition – First of all, never tell me there is no competition—or even imply it by saying that there may be competition, but you are unique or highly differentiated or blah, blah, blah—unless you can prove this beyond a doubt. Markets without competition are not markets. But I do want to know why you are better. So what’s really critical here is educating me about the competitive landscape and how you fit into it. If, as a potential investor, I’m interested in the war you’re fighting, I’ll probe this issue in much more depth as we move along the process. So stick to the basics; there’s no need to turn “research analyst” on me at this point.
  • Your Product or Service – Once again, provide a solid big picture with illustrative examples. If you have a patent, it must be critically important to your business strategy for it to be a true competitive advantage. Owning patents just for the sake of owning patents is relatively useless in the vast majority of companies (with more exceptions to that rule in life sciences, obviously)—and it is the rare startup that can afford to prosecute patent violations anyway.
  • Your People – This is an obvious one. Everyone has told you that investors invest in people, not companies. But in reality, if you were the kind of person who had investors beating down your door, you wouldn’t need this tutorial. Since very few have earned that free pass, the “people” issue is one that can trip you up.

If I’m a potential investor, I want straight answers to three questions:

  1. Do you have the right people, at this precise moment, to do what you need to do for the next several months—whether that be technical, sales, or even operations?
  2. What are the gaps in your team and how do you plan to fill them? Out of a top management team of five to six people, you can’t afford more than one first-timer. And be honest about this—don’t list people as part of your company if they plan on joining only after you’re financed.
  3. What do you honestly see as your future role? This is a touchy subject that will probably be explored later in much more detail by a potential investor. But in general, you need to recognize that most investors don’t look at the person across the table from them as the permanent CEO unless he or she has filled this role before. If that’s not the case, show your willingness to do what’s best for the company.

Always remember that any interested investor will be doing much more due diligence in each of these areas, so whatever you say now can come back to haunt you later. Keep it simple and to the point, and always expect lots of questions and meetings in the future that will really allow you to shine.

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