How do you evaluate the competitive landscape before building?

We had this problem at my present company. The wide competitive landscape made it particularly challenging to sort through what to attack. The method we used was:

• Segment the Markets in Verticals: We came up with over 45 different verticals that we could attack.
• Research the Top Competitors: For us, this was pretty easy since even though there were tons of vertical applications, the top 5 guys played in the ones that mattered.
• Competitor Gaps: Looking at where the competitors are placing their bets is a good way to spot a niche that you might be able to exploit. A big company, like Google, needs to grow a multi-billion dollar business, which means they need $1B dollar opportunities. You might be content with $100M dollar deals, so look for those.
• Technology Uniqueness: Thankfully, we had a unique technology idea that showed promise over the competitors. We just had to figure out what characteristics would fix which customer pain.
• Find a Real, Unmet Need: This is the hardest and most time consuming. When you look for a need, it has to be something that a customer will pay money for. This is tricky to gauge but doable if you dig into the customers business.
• Think Platform: Even though you focused on a vertical, our technology is a platform that can expand easily into another vertical. The biggest challenge in attacking a new vertical is not the technology implementation but rather the market and customer knowledge.

Using this criteria, we narrowed down those 45 verticals to 1. We are now building for that vertical and so far, it's working out great.

When you're evaluating the competition you can look at a few different factors:

1. Size - in some cases, if a competitor is simply in the same space as you, but not in the exact same product, their largeness may actually work to your benefit. For example, Hertz has been trying to get a car-sharing line running, but they're so big that they actually get in their own way, and ZipCar can better operate in this niche because of their small, agile startup nature. However, taking on Hertz directly in the car rental industry may not be the best idea, unless you have a really strong differentiator.
2. Profit margin - if your competition is a public company, you can look up their financials on Google Finance and see their profit margins. Especially if they are in the exact same product space as you, this is a good way to see if the opportunity is actually a profitable one in the first place.
3. Number of competitors - is the market already crowded? If so, find a niche or an alternate market.
4. Customer satisfaction - sometimes even though your competitor is large, the market may not be happy with their product and may be looking for something better. Mint's ability to outdo Intuit is a great example of this.

The past 3 ideas that I've shot down have been for the following reasons:

1. The direct competition was too big and we didn't have enough of a differentiation or the funding or passion to legitimately take them on. [Edit: In this case we were first time entrepreneurs, we didn't bother doing any market research, and part way through our development Google released Hello, which was pretty much the exact same product we were building. We were doing it as a side venture & gave up at that point. Google has since decommissioned Hello, which I think means we made the right decision.]

2. There wasn't any direct competition (which is usually a red flag in itself), and after doing some research, the profit margins for the target customer industry were too small (i.e. the businesses we wanted to sell to didn't have a large profit margin to begin with, which would make our sale to them even more difficult). [Edit: This one was a web platform that needed the buy-in of the major shipping companies. Those companies also were looking at profit margins of around 6% at the time. The founder came up with the idea out of a personal need, but it wasn't her industry, so she ultimately decided that given the challenges, she didn't want to proceed (which is an important thing to be able to do).]

3. After talking to enough industry experts and potential customers, we realized there wasn't actually a market need. [Edit: This one was a workflow system for operating rooms. Hospitals had a potential need, but their profit margins are low and the number of surgeries happening in hospitals is drastically decreasing. We looked at the outpatient surgery center market (which is a growing market), and they are already so efficient that they didn't need it (this was determined after talking to several managers). I left the project because I didn't feel it had enough growth potential & the technology was subpar in my mind. My partner has stuck with it & is trying to pursue the hospital market.]

The project I'm working on now, however, has a healthy amount of competition (not too much, not too little) and we have a very strong differentiator compared to our competitors. We did a lot of market research and came to the conclusion that there's enough of a market out there that if we're able to get just a small slice of the pie, we can have a viable business.

I think researching what potential competitors are doing isn't as useful as researching the question, "How can we redefine a market?"

Case in point: Google when it started went up against a competitor that owned the "search market"- Yahoo. Google redefined what search was (of the net itself, not a directory) and won. Other examples: IBM PC, the Mac, the Apple iPhone and the iSlate, mint.com.

"You don't win the next war by fighting the last war" is an equivalent truism from history/military science. The same can be said for startups.

Research-based reasons for rejecting startup ideas are important, but they come into play more when you have enough of an idea to get some people together to scratch heads about something. I'm not sure what your situation is, but many folks with entrepreneurial ideas either get lots of ideas all the time, or they get this one idea that has really captivated their attention but they aren't sure how to make their case more convincing to others who might then support some more serious inquiry. Since you've already had a couple of people give you some good research-based advice, I'll ratchet it back to the basic "dreamer in the shower" phase.

For me, there are a couple of red flags for this stage of early conceptualization. This first red flag is a generalized, abstract sense of the market - as "people" (understood abstractly) or what linguists call "institutional" subjects (like the "they" in sayings like "now they say coffee is actually good for you"). This is especially deadly for private sector projects. If your idea has a lot of vagueness and "theys" in it - if stakeholder groups are just categories one mentions via hand-waving, then your idea is not ready for prime-time yet.

I relax this rule a bit if someone is thinking about a proposal involving institutional funders (e.g. for an arts, cultural or academic project). Funding institutions have more tolerance for projects that sound good on paper, so long as there is a tight fit between the proposal and the funders' mandate. So it depends what kind of thing you want to launch. For private sector proposals, especially for mini-cap, bootstrapped enterprises, your sense of who your stakeholders are should be so concrete that you could without hesitation march up to the door of exactly who you are thinking of, and be correct about what their frustrations, resources and preferences are.

My second red flag flows out of the first one. If the new idea involves a sudden moment of conversion where everybody "gets religion" and changes their behaviour, then I'd suggest what you have is a long-range dream, not an actual startup concept. If in your visioneering you think "...then all the people will (x)", don't cash in your savings bonds yet! The behaviour change you expect people to take has to be small enough to insert itself into their lives as they are being lived now. So, assuming people won't change their behaviours very much, will your idea still work?

Here's an example of how these two red flags might work. If Mark Zuckerberg and co. had tried to launch Facebook to VCs on day one, saying "one day everybody will be using this network! Grannies will sign up in droves to share photos of their kids and discuss transcultural spirituality!", that would have been dumb, even though this is now an accurate description of part of what happens on Facebook. If, from day one, the founders were trying to create that global behemoth from nothing, for "people all over the world" to "connect and share everything", it would not be an actionable plan. It's an okay vision, but if your opportunity is mostly vision, it's not actionable enough for concretization. Both the market and the action they may take are still hypothetical.

Of course, Zuckerberg and co. initially designed their network for a very concrete group of people - Harvard students - to do something they were already doing; looking up people in the (at that time paper-based) Facebook, a document that let you put faces to names of people on campus to make it easier to find and interact with them. Facebook then expanded in waves to concrete groups of people each time (Boston-area only, then Ivy-League only, then Universities-only) until "everybody" actually became a meaningful category. By then, "Facebooking" was something people were already doing, and didn't necessarily want to stop doing when they graduated. The activity was no longer new - it was known by reputation outside its user group by this point - so it just became a question of taking down a door; people were by this point waiting to get in.

Before determining if you have a good opportunity or not, you have to be sure that you are looking at a concrete opportunity, not an abstract one, and that means thinking in terms of people you can actually shake hands with. In fact, if you have a really strong concrete set of stakeholders which coheres in a reliable way over time, and they are underserved in some way, I think you can actually bootstrap yourself into a theoretically crowded niche as a new player. But the really sweet opportunities require you to have both the abstract, globalizing dream-potential and the concrete, on the ground action-context for sustainable first steps. The vision offers a compass for keeping your bearings, but you need something more solid as a base to actually start your journey from. Without that starting point, you are not actually looking at a new business opportunity, just a vision.