Dear Founder

GUEST LETTER BY ADAM GOLDSTEIN, CO-FOUNDER AND CEO, HIPMUNK, A WEBB INVESTMENT NETWORK PORTFOLIO COMPANY

Dear Founder,

When you started your company, you were familiar with the existing competition, and you had an idea of how you might beat them. Yet sometimes, out of nowhere, an established company in a different industry decides to start competing in yours. It can come as a particularly nasty surprise and the news causes chatter both inside and outside your company, and it’s not clear how—or even whether—you should respond.

Less than six months after we launched Hipmunk flight search, Google spent $700 million to acquire a different travel company and start building a product that competed directly with ours. The announcement came with little warning and raised doubts among our investors, employees, and even my co-founder and me.

You might be tempted to give up on your company in hopelessness, but be careful not to overreact. An announcement isn’t the same as an existential threat, and when a big company rushes to market in a space it doesn’t know well, the product is rarely compelling right away.

Assuming you decide to plow ahead with your company, here are some things to keep in mind:

Accept that fundraising will get harder for a while.

Here’s a tip: When every investor asks you if you’re worried about a new competitor, you can be sure that all of them are worried about the new competitor.

More to the point, every investor is worried that every other investor is worried. That matters a lot. When investor sentiment turns on an industry, even promising companies struggle to raise money because investors don’t want to fund a company that won’t be able to find future investors. In this way, investor worries can become self-fulfilling.

There’s no way around it: This is bad news for you. Don’t pretend nothing has changed; recognize you need to change your approach.

If you don’t need to raise money, consider waiting. Everyone assumes the worst when news first hits, but when the world sees the shortfalls in your competitor’s effort, you may find investor sentiment turn in your favor again. If you do need to raise money, consider looking for less and lowering your valuation expectations.

Consider also talking to established companies in your industry, which might themselves feel threatened by the new entrant. They might be willing to invest in you as a hedge.

Also, read the “When you have a crisis” letter!

The enemy of your enemy may be your friend.

The funny thing about Google entering the travel industry was that it scared everyone else in the industry into working together in ways they never would have considered before.

Besides investing in startups as a hedge (see above), established companies like Priceline and Expedia did partnership deals left and right with companies that they thought could give them an edge against Google. For those startups with the right combination of skill and luck, the entrance of Google was a blessing in disguise.

Look for the companies in your industry that have the most to lose from the new entrant. Start regular conversations with them. You never know what might happen.

Set the right tone with your investors and employees.

When big companies enter a new space, they sometimes fail, but they usually don’t fail right away. For better or worse, you should expect to see this company continuing to make headlines in your industry for a while.

That’s why it’s important to set a tone of respect and curiosity right from the start. Not dismissal and derision, but also not obsession and despair.

Don’t wait for investors and employees to ask what it all means. Talk to them proactively. Tell them, truthfully, that you view it as a sign that the market you’re in is a big opportunity. Acknowledge that it may mean new challenges, but demonstrate the optimism that you can overcome them, just as you’ve overcome past challenges. Make sure everyone feels that you’re in touch with what’s going on, and also feels reassured that you’re not overly perturbed.

Over time, you may be able to learn things from your competitor’s approach. Use their products, and talk to customers about what they like about them. Encourage your employees to do the same. Keep in mind there’s so much you don’t know yet about your competitor’s strategy. For the sake of your credibility, don’t pretend you have it all figured out.

Finally, depending on how threatening the new company is, you may even be able to use them as a rallying cry for your team. You, the David to their Goliath, are slowly beating them.

Be ready for more.

When one big company moves, other big companies often follow. Brace yourself for more surprises like this one.

In anticipation, consider reaching out to other companies before they enter your space. You may find them interested in partnering or investing.

But also keep in mind that tech industries don’t remain ultracompetitive forever. Sooner or later, companies will die, or else merge to build up scale. The same fundraising headwinds you’re facing are going to affect everyone else, too. Keep an eye out for good companies that you can buy up cheap.

Finally, as odd as it might sound, make friends with your new competitor. They’re entering your industry because they’re interested in your industry. Maybe their first product will be a failure, but they’ll still be interested in the industry as a whole, and you’ll be growing by leaps and bounds. Maybe their first product will be a success but you serve a slightly different market segment and they’ll realize they want the expertise you have.

You’re in a battle, even more so than before the recent news. Make the most of your chances by moving fast and making allies.

All the best,

Adam Goldstein
Co-founder, CEO Hipmunk