Q: Dear SaaStr: How Do I Compete with a Company that has Unlimited Capital — and I Don’t?
First, does your highly-funded competitor have a dominant brand yet? If not, it may not matter. There is no “winner” yet. The #1 brand trumps capital.
But if they have the strongest brand and you aren’t even at scale yet … yes, it can be tough. They’ve started to reach escape velocity, and you haven’t. Even “worse”, don’t get the math wrong on who is growing faster. If your big competitor is at $50m ARR growing 70%, and you’re at $5 growing 150%, you aren’t really growing faster. Why not? Because they are adding $37m in new bookings a year, while you’re adding just $7.5m. That means they are adding share vs you.
Still, SaaS and Cloud are much bigger today. Today, every category can have multiple vendors doing $100m+ in ARR.
You have 4-5 related choices if you have a large, direct competitor at scale.
All can work well:
- Be cheaper. As a space evolves, the leader generally gets more expensive. This almost always leaves room at the bottom. Salesforce is $200/month now for the edition you’ll likely use. That leaves a lot of money for a $20/month product. Cheaper alone doesn’t usually win in SaaS — software is rarely a commodity. But there are times it can help you break out once you already have something. See, e.g. HubSpot CRM or Pipedrive.
- Have the best and most flexible API. If the market leaders aren’t API-focused, you can be. Make it 10x easier (and potentially cheaper) for them to integrate your service. This isn’t always a large enough market on its own. But when it is, it can move the needle.
- Be more expensive (by that I mean, really, More Enterprise). The leader sometimes isn’t the most upmarket. That also leaves room at the top. If your competitor is $500/month. Can you build a $5000/mo version that is more “enterprise-grade?” This can work well if you have the right enterprise DNA — and your bigger competitor doesn’t. If you don’t have this DNA though, it’s really, really hard to pull off.
- Be #1 in a vertical. Gorgias isn’t as big as Zendesk, for example. But it is the #1 contact center for Shopify. It’s bigger there, in e-commerce. See how they got their first 1,000 customers below. Many folks took off by doing something like this in ecommerce, or insurtech, or many other key verticals. Klaviyo similarly became a $10B ecommerce-focused Mailchimp competitor. Veeva did this originally in CRM for Pharma. Pick a vertical to win in, and build the specific features that vertical needs. You can often carve out a large niche that more horizontally-focused folks miss.
- Focus on a part of the market too small for the big guys. At least for now. Any BigCo at say $1B in ARR just can’t focus on any segment of the market not worth $100m ARR a year. Not really. 10% is roughly the threshold for materiality. So focus on a segment of the market that is still sizeable, but too small to really be of interest to your Bigger Competitor.
- Be 2–10x better — at just one important thing. (The rest of stuff, for now, you can be merely OK at). You don’t have to achieve parity with your Ultrafunded Competitor in everything. But if you have one important thing they don’t — a critical integration, localization, an important mobile app, a special dashboard, who knows — that the customers will pay for … you can still win those deals.
Fighting parity, with a hyper-funded start-up, is frustrating.
(note: an updated SaaStr Classic answer).