When your competitor raises $50 million in venture funding, it's not a good thing.
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Here's the scenario. You've raised no money or very little money, say a couple of million dollars.
You wake up one morning and read in the paper that your competitor just closed a $50 million funding round with a venture capital firm.
In a previous article – Great news! My competitor just raised venture funding. – we discussed some positive aspects of a competitor's funding round.
But let's be realistic.
Bad News – Competitors Have Raised a Bunch of Money
Here are a bunch of reasons why a competitor's raising funding should not be taken lightly.
Their Product Development Will Leave You in the Dust
Perhaps you've got a better offering than the competitor. Maybe you are at parity. Regardless of where you are right now, prepare to be left in the dust. With their newly acquired venture money, the competitor will hire talented engineers and product development staff. They'll kick into high gear while you stay at low gear. With a better product, they'll capture more market share and you will experience a slow and painful fall to mediocrity.
They Will Speed Past You in Marketing and Sales Capability
Marketing dollars are wasted in some markets, but in others strong brand recognition and great marketing can lock up the market. If your competitor just raised money, think about whether increased investment in marketing on their part will put your company at risk. If so, you may need to raise money yourself in order to stay competitive. The same thought process applies to sales. Even if you've got a better process, you'll lose deals if they've got a better sales force.
They May No Longer Care About Profitability
When a competitor raises a large venture round, profitability may no longer be a top priority for them. They may offer huge discounts to prospects just to buy business – as a result, prospective customers will go with them, rather than you. They will lower prices just to put you out of business, and with money in the bank, they can afford to do it.
They Got the Stamp of Approval, and You Didn't
Some markets only have one winner – and sometimes that's not true but everybody thinks it is. Once one company in a given space gets a big venture round, there's a decent chance that other investors won't act like lemmings but will instead do the opposite. The logic goes like this: Hmmmm, if Kleiner Perkins is putting a ton of money into Company B, that company must be really good. They're sure to dominate the market, so we should steer clear of this space. Long story short, your competitor's getting a venture round may preclude your getting any funding at all.
This Might Mean You Have an Achilles' Heal
You can be the best founder and CEO in the world, with great engineers, great marketers and a great sales staff. But are you any good at raising money? If your competitor raises money, it's time to assess how good you are at doing the same. If bootstrapping is your strategy, no worries. But if you've been trying to raise money and haven't, the maybe it's time to bring in a new management team member who can raise money. Clearly, your competitor is better at fundraising than you are, since they were able to close their round. You need to recognize your weakness and take action appropriately.
The Bottom Line?
If your competitor raised money recently, it can be a good thing or a bad thing – or both for that matter. Your mileage may vary, as they say.
But, too be sure, many companies that have a lot of funding have been handily defeated by competitors with little or no venture funding.
When competitors raise money, you don't have to raise money too – but, without a doubt, you do have to raise your game to a higher level.