Market leaders are generally valued at a multiple of their lower ranked competitors which makes understanding the competition a key part of due diligence (see here for more on exit strategy). Generally speaking, VCs are looking to invest in the market leader, or in a company that can become a market leader in their segment, as defined by revenue or occasionally internet traffic. Moreover, once discussions have started to get serious coming to the conclusion that any given company isn’t likely enough to prevail is probably the most common reason for deciding to decline to invest.
The key thrust of due diligence into competition is to establish a ranking of the players in the market. For most industries the ranking is based on revenues, but in consumer internet traffic is often a better proxy for value at the stages at which VCs invest. In the relatively common scenario where revenues in both the target investee and the competition are minimal we will look to a number of other factors including product quality, hype/buzz, amount of capital raised, and the quality and quantity of early partners and customers. These are all pretty subjective measures though and for early stage companies we tend to look more to the team and take a view on whether they will out-execute their competitors.
To read the full, original article click on this link: 50 Questions: How does a VC consider competition? « « The Equity KickerThe Equity Kicker
Author:Nic Brisbourne
