Early Investing

Why Competition Is Critical for Startup Investors

Why Competition Is Critical for Startup Investors
By Vin Narayanan
Date September 7, 2022

I had a chance to play poker with some founders a few weeks ago at LA Tech Week. I mostly kept my mouth shut at the table. Between the game and flowing drinks, the founders were in a chatty mood. And I didn’t want to interrupt the flow.

One of the more fascinating conversations was about their shared hatred of certain questions that venture capitalists ask. And at the top of the list was, “What happens when Google or Amazon (or any corporate behemoth) decides to build this? Doesn’t your business just go away?”

Founders hate this question with good reason. Building a new product is hard — even if it’s within a company’s core competency. Building a new product in an adjacent sector is even more difficult. The competition for resources is fierce. And successful startup metrics — like spending $1 million to develop a product that generates $300,000 in revenue in year one — can look like expensive distractions at established companies.

That’s why Microsoft has been on a buying spree since Satya Nadella became CEO in February 2014. By my count, Nadella has made 99 acquisitions during his tenure as CEO. His three largest acquisitions (and Microsoft’s three largest acquisitions) were gamemaker Activision Blizzard ($68.7 billion), LinkedIn ($26.2 billion) and conversational AI company Nuance Communications ($19.7 billion).

If it was “easy,” Microsoft would have built these businesses itself.

Startups have also succeeded in directly challenging Microsoft. Both Slack and Zoom turned into successful companies despite directly challenging Microsoft (and Google, for that matter).

Microsoft isn’t the only company using acquisitions to grow. Amazon bought primary care network One Medical in July for $3.9 billion to accelerate its push into the health care space. And in August, it announced it was shutting down Amazon Care — the in-house primary care program it started in 2019.

Amazon also bought online pharmacist PillPack for more than $750 million in 2018. But it still isn’t playing in the same-day delivery space the way startup NowRx is.

CVS, which acquired MinuteClinic in 2006 to provide health care in its stores, just acquired Signify Health for about $8 billion. Signify provides in-home health care. And it significantly expands CVS’ reach into health care services.

Founders know just how hard it is to operate in whatever space they’ve chosen. They know that if it was easy to solve the issue they were working on, someone else would have already built the solution. They know that while industry giants have an advantage in funding, startups have the advantage of nimbleness, expertise and not being weighed down by existing infrastructure and operations. Most importantly, they know that a titan entering their space is something to be celebrated. It’s proof that the space they’re operating in is valuable. And that there’s a potential acquirer in the future.

That’s why Gatorade entering the clean energy drink space caught my eye recently. Gatorade, which is owned by Pepsi, is launching a caffeinated line of drinks called Fast Twitch. Fast Twitch is sugar-free and contains as much caffeine as two cans of Red Bull.

And last month, Pepsi invested $550 million in health energy drink maker Celsius. Pepsi clearly believes in the clean or health energy drink space. And that belief helps validate the market for Pureboost — a clean energy drink startup that I’ve been researching. 

Pureboost’s energy drink contains no sugar or sucralose. It tastes pretty good (I had some over the weekend). The real question is how big the market for a clean energy drink could be — especially considering energy drinks have a pretty bad reputation.

Pepsi’s recent investments into clean energy drinks suggest the market for clean energy drinks is quite sizable. And Gatorade’s move into the market shows that Pepsi understands the reputational problems energy drinks have.

This is good news for Pureboost. It’s entering a sizable market with big established players looking to buy or launch products. That means Pureboost could be acquired if it continues to grow.

Instead of fearing competition, startup investors need to embrace it. Founders, like the ones I met in Los Angeles, understand this. And they have every right to be annoyed with everyone thinking Apple, Google, Amazon or some other behemoth can easily make and sell what they’re building. 

Competition, especially big players, validates the market. It also provides potential exit opportunities, which is critical for investors. As long as startups operate at a high level (and that’s a big IF), there’s plenty of room to be successful.

Top Posts on Early Investing