When launching a start-up, it seems obvious to avoid markets which already contain competitors. But, this should not necessarily be your default approach. In ecosystems, competition can be a good thing, driving diversification and building resilience. So what can our ecological environment tell us about the entrepreneurial ecosystem?
Competitors offer validation
First up, competitors show us where the resources are. For a species like an orangutan to survive, they need the basics, like food and water. But of course, local competition like gibbons are fighting for the very same essentials. Similarly, as a bare minimum need, a startup needs customers. It is simply not a viable business without them. With competing companies trying to get these same customers, it can be difficult to turn over profit. Instead of facing rivals, for an emerging startup it can seem a lot easier to look elsewhere for a less crowded market.
But do you see orangutans in the desert? No… And it’s true; there would be very few competitors in the desert. Not many gibbons swinging through the cacti. But that’s because it is essentially a barren wasteland. This environment is not just constrained by competition, but also by other stress factors like climate. Orangutans could not survive there.
In the same way, do you want to launch your startup in a market without a customer in sight? If there is no one already in the market, it may be a warning sign that it is not worth entering. Ben Yoskowitz, an angel investor, “If nobody is competing in your space, there’s a very good chance the market you’re going into is too small.”
So if other people are working on a similar idea, don’t get put off. They’re proving an idea has a potential market. That’s a good sign for you too.
By the same means, this does not necessarily mean you should launch yourself straight into the most crowded market around. You need to consider the carrying capacity of the environment. In ecological terms, this means how many individuals can be supported by a region, based on natural resource limits.
A desert may seem like a low competition environment, but it has a small carrying capacity and cannot support vast numbers of species. However, the abundance of food and water in a rainforest means it has a much higher carrying capacity and can provide for orangutans, gibbons and a multitude of other species. When deciding whether it is worth launching a product into a market with existing competitors, you need to consider whether the market is big enough to support you both. Does it have the carrying capacity if you jump on board too?
Competitive Exclusion Principle
Unfortunately, merely having the carrying capacity to support you is not enough. The Competitive Exclusion Principle says that species that use resources in the same way cannot coexist long term, as eventually, the species with the competitive advantage will overtake the weaker species.
As a business, you do not want to be overtaken. If you are a late entrant to the market, there’s a good chance your competitor will already have a competitive advantage. So you could find yourself in a tricky situation. But luckily, the world’s ecosystems have another lesson for us. Evolution.
If orangutans and gibbons ate the same seeds, in the same places at the same time, one species would eventually dominate the other. But they still manage to coexist. Incredibly the stressors of the competitive environment and the constant threats to survival have led to evolution. Orangutans have adapted so that they can manipulate fruit and crack shells, allowing them to eat the unripe fruits many of their ape and gibbon competitors cannot eat. This transformation is niche differentiation and allows the two competitors to coexist more easily in the same environment.
When you launch your startup in an environment with competitors, it is vital to differentiate yourself to survive. Burke and Hussels believe a challenging environment helps a startup focus on satisfying customer needs and keeping costs low. The pressures of a competitive market drive the kind of innovation and success which cannot occur with complacency. In fact, a study found that although failure rates were higher in the first year for companies in crowded markets, those who made it past this mark had a much greater chance of success after three years. Those that can survive the initial adaptation are stronger as a result.
Don’t be afraid to enter the competitor-filled rainforest; there’s a good chance it will have have the carrying capacity to support you, but be prepared to innovate, evolve and differentiate to find your niche.