On differentiation

Storytelling goes a long way in fundraising for your company.  One of the biggest components of this is differentiating your product / your company from others.

Differentiation is very difficult — there are so many entrepreneurs who are doing something similar to you and also so many alternatives that achieve the same results as your product / solution.  Even if no one has the exact same product as you, surely if you’re solving a problem, there is someone else providing a different means to the same end result.  And if there isn’t…are you really solving a problem?  So, differentiating your company well is tough.

So it’s important to think deeply about this.  Take the time to really hammer out a clear story on why your product / company is differentiated.  Here are a few areas entrepreneurs ought to think about differentiation:

1) Focus on results not features

The top way I see entrepreneurs differentiating their products is via features.  “Our UX is easier to use than the competition.  ABC product is so clunky.”   Or, “we have DEF feature but company XYZ doesn’t”.

Most of the time, features really don’t matter. Ultimately, consumers and businesses use products as a means to an end — they want to achieve X faster or cheaper or something.  It may be that your user interface makes it easier or faster to accomplish X.  But, people don’t care about what buttons your product has.  They care about that end result.  Focus your story around that.

Case in point: In the late 90s, Google was something like the 7th or 8th major search engine to emerge.  Their feature set was different from Yahoo’s — it was just one search box with nothing else on the screen.  Although UI was simple, that’s not why consumers switched their searches to Google.  That’s just a feature.  Consumers switched because they could get search results a LOT faster – orders of magnitude faster!  Consumers didn’t have to leave the computer to get a snack while waiting for their search results to load over their dial up modem connection!


Originally posted by archiemcphee

2) Your results should be 10x better than competitors or alternatives not incremental

This brings me to my next point.  When entrepreneurs do focus on presenting results, I find that they often tend to be incremental improvements.  In an investor’s eyes, incremental improvements are not interesting.  This is because incremental results are often not enough to get a consumer or a business to drop everything and make it a priority to switch from what they are already using to your product / solution.

In the case of Google, their results were not just a little bit better but an order of magnitude better.  E.g. Altavista seemed slightly faster than Yahoo (at least to me), but when Google came along, it was a no-brainer to use Google all the time.

Now, sometimes, you may need reframe your story here.  It’s not always possible for all your numbers to be an order of magnitude better.  You may need to pick a different result to differentiate on.  For example, let’s say you develop a new kind of airplane with less 2% less drag.  This, in itself, may be a small number.  But it could have an order of magnitude of effect on your gas costs for the plane or whatnot.  It’s important to think about what axis you want to compete on.

3) You may need to differentiate your company on something other than your product

This brings me to my next point.  Sometimes, it’s just not possible to compete at all on any numbers being an order of magnitude better.  Not all great products are an order of magnitude better.  And, that’s ok.  But, it means that you need to differentiate on something else.

You will also need to do this if you’re in an industry where people can’t look under the hood and believe that your results are actually better en mass.  For example: lead generation.  There are so many lead generation startups (I had one too!).  And they all say they provide awesome leads.  And they all say their leads are 10x more cost effective than everyone else.  How is this possible?  Who is telling the truth?  Probably everyone — for certain customers, specific lead generation platforms and services are better than others.  But it’s not possible for an investor to verify this en masse, so many investors will pass outright, because they don’t believe this differentiator is true and won’t be able to prove it.

For businesses like these where an investor cannot actually verify your differentiator, you will need to get creative in your story.  Usually, the best way to do this is to incorporate your personal story.  If you have unique insights or domain experience, maybe this is what you use to differentiate your company from others.  Don’t use a story that your competitors can use.  For example, in the lead generation industry, a story I hear all the time is about how “Martha runs a flower shop and didn’t have customers.  Then awesome lead gen platform ABC came in and got her customers.”  All of your competitors / alternatives are telling that same story.  Your story should be unique to you — a story that none of your competitors or alternatives can tell.

To come up with such a differentiated story, in many cases, you may want to make it about yourself or your personal insights that are unique.  What is interesting about you?  And why are *you* doing this lead generation business?  If you can’t think of anything, spend the time to think long and hard.

Here’s an example that a CEO gave me the other day.  He’s building a company in a vertical that is pretty crowded.  He said, “Let’s take a step back – before we dive into my business, I want to tell you a bit about my life.  My mom was a single mom.  And I grew up poor.  And I could not get into college.  And everyone wrote me off as a loser.  And so I had to take a job after high school to make ends meet.  And, I ended up in ABC industry taking the only job I could get.  From there, I did XYZ, and eventually I realized from working in this business that a) I wanted to prove myself – that I was not just this poor boy with no future.  And b) that I knew more about the ABC industry than most people in the world, and here are my insights on it. And this is why I’m starting this company.”

His story was incredibly compelling.  Even though his product insights were not unique, he was able to differentiate his company from many of the other ones I’ve heard pitch, because I believed he knew more than other people about this industry.

4) Think about future differentiation

Once you’ve established why your company / product is different, think about how you’ll continue to be different.  Investors call this your moat.  You don’t need it now — most companies are not really defensible when they first start — but investors want to know how you think about this and how you’ll work towards this.

Your strongest story will be about how you’ll continue to keep your company ahead of the pack.  For example, if you have data that feeds into your algorithms to make them stronger, then your story is about growing your data access so that you’ll continue to improve your algorithms.  If your story is about network effects of people on your platform, tout that story.

But there are a lot of stories about improving your product that I hear from entrepreneurs that are pretty weak.  Saying, for example, you’ll continue to improve the user experience on your platform, while may be true and important, is NOT compelling.  Investors would expect you to continue to improve the product, and any newcomers or future competitors would do the same.  Your head start is likely minimal, so it’s moot.  Any competitor can come in and build a better product than you or play catch up with a better UI.

In most cases, where you don’t have network effects in your product or viral loops or whatnot — and most companies don’t — you’ll need to tell a story about a thesis that you have.  A thesis, by definition, needs to be both compelling and arguable.  In other words, a good thesis will get some people excited and passionate to join your journey but will be alienating to others.  Your job isn’t to get all investors to like you — your job is to find investors who believe in your vision of the world.  This is hard to do, because as a fundraising entrepreneur, it’s tempting to want to tell a story that everyone will like.  But, I’m saying you shouldn’t — you should come up with a thesis that at least a few people love and most people completely disagree with.

5) Don’t differentiate on price

Lastly, don’t try to differentiate on price.  Price is icing on a cake but is not the cake itself.  Your product should be differentiated in other ways, and it’s nice if it’s cheaper.  But it shouldn’t only be cheaper.  That’s the easiest way for another company to compete with you.

Good luck!

Cover photo by Randy Fath

One thought on “On differentiation”

Leave a Reply