COLONY Lab ESF Due Diligence Helpkit (Part 4/8): Competition

Even if you have a good team and product, people may still choose not to use the product. If the user thinks another project will provide more value, or the switching costs are too high, they simply will not come. There are various underlying reasons such as switching costs, complexity of the product, yield, etcetera. The overall value of the product needs to be higher than the competition — from the perspective of the user.

A general rule-of-thumb that is used within investing ‘10x’. That goes from technological improvements from 0 to 1, or from 1 to 10 — thus 10x. It is the same for competition. A product generally needs to be a 10x improvement for users to switch over. For context, here is a list of why a user may not switch over to a superior product. These are more examples to why people may not switch over as most aspects are not as present in crypto as in meatworld.

• Familiarity; People often prefer what they know and might be reluctant to new products. This is not as strong in crypto as we all love learning and are ever-curious. Still, there is plenty of idle capital in old projects that may be more productive elsewhere.
• Switching costs; Switching to a new product takes time and effort. Extra time and effort that people may not want to spend
• Brand loyalty; In other words, tribalism. There is plenty of that in crypto, even though we are ever-curious
• Perceived risk; A product they don’t know may not perform or work as expected, or its security may not work out. There are a lot of unknowns to a new product
• Social influence; This is also present in crypto. If everyone in your circle uses TraderJoe, but you see a new promising DEX, social influence might be a consequence.
• Habit; We are creatures of habit after all. People might continue to use a worse product just because that is what they have done before.

When doing your due diligence on a project, it is important to factor in the competition and how this product stacks up against them. You will want to check if the solution and value of this product is not yet being offered in the market. And if it is, why will this product win out? It is always useful to have a broader picture. Who knows, maybe you will even find an interesting project that might be more attractive.

How extensively you want to research the competition, that is totally up to you. You could copy paste this entire process to the competition, or solely focus on a few aspects to save time. The ones we focus on are product and roadmap.

Product

The competitors may already be live, so we can take a look at their product. For a fair comparison, we will look at both products’ their problem statements and how they solve these problems. This would translate to the value they provide their users. Remember that value is anything that products offer their users; ease-of-use, yield, security, or even fun or more engagement. Beauty is in the eyes of the beholder, so place yourself in the shoes of the user.

Projects will include one or more of the following aspects we can evaluate. These aspects may be 1) problems/challenges in the market, 2) solution to problems in the market, 3) advantages or benefits to users, or 4) value proposition. As a useful example, we could compare DeltaPrime and Steadefi. Both products offer undercollateralised lending, hence the comparison. DeltaPrime offers full control of a user’s strategy, with which may come active management and more upside. Steadefi offers an automated fixed strategy, removing the need for active management, but also control over the strategy.

While they both offer undercollateralised lending, they have a distinct difference. This difference may also lead them to appeal to a different target audience, which in turn also has an impact on the prospect of growth and success of the product.

Ultimately, the market will decide what they value more. However, if a competitor is already offering the same value as the project you are researching, you need to factor that in.

Roadmap

The aspect is the competition’s roadmap. A new flashy feature is always nice to see in a project. However, if a competitor is already building a similar feature, you will want to know about it. This comes back to the idea that users may not switch over to a new product. It is all about perceived value.

Here, we could take GoGoPool and BenQi as an example. Imagine researching GoGoPool, a project that offers a cheaper way to launch subnets, among other things. In isolation, it seems like an excellent opportunity with no project having a similar feature. However, BenQi was already working on ‘Ignite’, which also offers a cheaper way to spin up validators and thus run subnets. When you find out about Ignite and see that BenQi already has the largest user-base for liquid staking on Avalanche, this might pose a challenge to your investment in GoGoPool.

When a competitor is building a similar feature, it poses an extra challenge to your project as they might possibly be entering a market that does not need your product anymore. That is certainly a tough spot to be in

General conclusion

Competition matters. It is important to evaluate if your project is truly offering value in the market and if it will gain traction. Here, you also need to consider the effort it takes for users to switch over to your product, which is usually a bigger hurdle than you think.

The most important question here is: “Do competitors in the market already fill the same need that the project I am researching is building for?”.

In order for users to flock to your project, it needs to stand out and provide real value over its competitors. While comparing the value of both projects, you haven’t made any investment. If you are open to making the best investment, this exercise will allow you to critically compare the projects and pick the best one. There is no right or wrong answer here, only the wrong mindset. If you find a competitor that provides more value than the project you are researching, you need to be able to realise and admit that your project may not be as strong as you had hoped. Never fall in love with a project. If it turns out a competitor provides more value, you have an even better project to research.

In the following document, you can find questions to evaluate a project with to help you do your due diligence. https://docs.google.com/spreadsheets/d/135AN4Pk2x-6m4Ldg-y3exbcuJPX_MkX-qqjQWk_U-ZU/edit?usp=sharing

And if you are curious to the previous two parts; Team, and Product, you can find these here;

[embed]Colony Lab ESF Due Diligence Helpkit (1/8): Team When evaluating a new project, the team is by the most important aspect. They are what makes or breaks a project; they…medium.com

[embed]ColonyLab ESF Due Diligence Helpkit (Part 2/8): Product The product that a team promises to deliver is a close second in your assessment of an investment. The product is what…medium.com

[embed]Colony Lab ESF Due Diligence Helpkit (Part 3/8): Roadmap So far, we have looked at the team and what they are able to do, as well as at the product and what they promise to do…medium.com