It’s 1 AM and you’ve been in pivot hell for weeks. Suddenly, you see it: a market where everyone is raising money and the competitor list is a mile long. You breathe a sigh of relief. Look at all that competition, you think, the market is clearly validated. You tick the PMF checkbox and start coding...
As a startup, building in a large total addressable market (TAM) often implies having a lot of competitors. It follows that, if you don't have much competition, there is a high chance you are building in too small a market, unless you are the first-mover in a soon-to-explode market.
However, what does not logically follow is that a high level of competition implies a large market. Yet, many founders (including myself, once upon a time) and investors may fall for the fallacy that competition makes finding PMF easier. Founders in the process of pivoting are at the highest risk of believing this fallacy. At best, competition is a pre-requisite for a large market, not a proof of one; in many cases, it's a signal founders should probably disregard.
In the rest of the article, I'll walk through a few patterns I've seen (meaning, high competition but a small or undesirable market). I have found that it's easier to reason about this problem if you consider that the startup, not its product, is the good being produced. It makes these patterns a lot easier to spot as a founder.
Why every startup vertical is crowded: the supply-side
Hint: it's not because every startup vertical has tremendous demand from customers.
Startups operate in at least 3 markets:
their actual market, where they transact with their users for cool features
their investment market, where they trade equity for cash
their founder market, which represents the supply and demand of founders excited about and able to build in the actual market
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