🥈It’s OK for Your Startup to be #2 🥈

By Micah Rosenbloom, Managing Partner

🎉 Good News: You’ve just founded a startup with a unique take on the market. Sales are humming and you raised from a top seed firm!

☠️ Bad News: You’ve got three direct competitors that each raised 3X as much and are getting better PR.

What do you do?

The overstuffed VC market has led this scenario to play out at least a dozen times over the last few years. A competitor raising a bunch of money and even taking an early lead in the market doesn’t mean the end of your startup. If you play it right…

Few startups actually have winner-takes-all/network effects dynamics. Casper Mattresses leads its space in metrics like money raised and public awareness, but *TWO* of its competitors have been acquired for over a billion dollars — each!

It’s tempting to use your competitors fundraising success as an incentive to go raise your own war chest. This is almost always a mistake. Eric Paley explains why here:

One way to keep focused is by paying attention to your customers. Is there a customer profile or acquisition that’s just not performing? Fire these customers ASAP. You’ll take a short-term hit but will have more money for high-value growth.

Often, when startups raise a lot of money, growth at any cost becomes the mantra. This is fine as long as the investors stay confident, but eventually, patience runs out. Hopefully, by then you’ve unlocked profitable growth engines.

There was a time when Reddit was thought to be *doomed* because Digg raised a lot more VC. The easy money ended up killing Digg, and Reddit is now a top 10 web property. Be patient!

Playing the long-game is the right play, but you do need to keep your team/VCs believing that you’ll win in the end. Spend some time rethinking your startup’s positioning. Try to create a new category so you’re not bucketed with everyone else.

When you’re losing the PR battle, your existing VCs will become critically important in pitching the next round of investors. Give them crystal clear bullet points about why you’re the next big company, not the also-ran.

A lot of this advice is based on the premise that the market leader is using capital as a crutch and doesn’t have a path to viability. If the company is out to a major lead *and* executing well, it may be worth kicking off an M&A process.

There’s nothing more galling than having to explain your startup by referencing another startup. But remember the fable of the tortoise and hare. The basic lessons apply in this startup scenario as well.

In summary:

😡 Don’t let frustration dictate your fundraising

📈 Focus on unit economics and product/market fit, not scale

📓 Find a new way to tell your story In time (and with a little luck) you may swap silver for gold.

Have an idea for a market-leading product (or a strong #2)? Reach out at Contact@FounderCollective or follow us on Twitter @fcollective.

Our mission is to be the most aligned VC for founders at seed. #ProudInvestor in @Uber @TheTradeDeskinc @Buzzfeed @Cruise @Diaandco @PillPack @SeatGeek & more.

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