It’s 1 AM and you’ve been in pivot hell for weeks. Suddenly, you see it: a market where everyone is raising money and the competitor list is a mile long. You breathe a sigh of relief. Look at all that competition, you think, the market is clearly validated. You tick the PMF checkbox and start coding...

As a startup, building in a large total addressable market (TAM) often implies having a lot of competitors. It follows that, if you don't have much competition, there is a high chance you are building in too small a market, unless you are the first-mover in a soon-to-explode market.

However, what does not logically follow is that a high level of competition implies a large market. Yet, many founders (including myself, once upon a time) and investors may fall for the fallacy that competition makes finding PMF easier. Founders in the process of pivoting are at the highest risk of believing this fallacy. At best, competition is a pre-requisite for a large market, not a proof of one; in many cases, it's a signal founders should probably disregard.

In the rest of the article, I'll walk through a few patterns I've seen (meaning, high competition but a small or undesirable market). I have found that it's easier to reason about this problem if you consider that the startup, not its product, is the good being produced. It makes these patterns a lot easier to spot as a founder.

Hint: it's not because every startup vertical has tremendous demand from customers.

Startups operate in at least 3 markets:

• their actual market, where they transact with their users for cool features
• their investment market, where they trade equity for cash
• their founder market, which represents the supply and demand of founders excited about and able to build in the actual market

Oversupply of money

If investors have relatively too much money to deploy (for example, because interest rates are historically low, like during the past decade), they need to deploy it regardless of demand in the actual market. You could suddenly see 20 companies doing new-age task management, because one company raised a round 6 months ago and since then, investors have been thinking new-age task management is the next big thing.

As an aside, it does not mean investors are investing in everything, and it may still be very hard to raise a seed round in that environment. Even if there is an oversupply of money on average, the distribution of that money remains skewed towards the "currently hot" startups.

The lower the prevailing interest rates, the hotter the space, the higher the mechanical competition level.

Oversupply of founders and ideas

If it is relatively easy to come up with an idea and to build it fast, there will be more companies in that space. A famous example is event discovery or event management startups: almost anyone can relate to and therefore think of this idea in their personal lives, and the app is largely a CRUD wrapper. It does not mean that there is a gigantic market for event discovery (as far as I know).

Similarly, there may be times and areas where more people decide to found companies. A common scenario is highly-paid executives getting laid off during periods of economic contraction: they have more incentives to start a company, because the opportunity cost (their high salary) has tanked.

Oversupply of infrastructure

More recently, low-code tools, vibecoding, and cheap cloud infra mean that an MVP can be built in a weekend, so the barrier of entry for almost any idea is much lower than it used to be.

To summarize:

Markets with not enough constraints (too many founders, easy to have ideas, too much money, infrastructure that is too cheap, etc.) will have higher levels of competition purely because the supply-side is so unbalanced with respect to the demand.

Similarly, demand-side conditions can lead to a lot of startups in a market, without making this market large.

Startups that should be consulting firms

There is a specific type of market where users have real pain-points that almost look the same from 10,000 feet but have material differences when you zoom in. One example that comes to mind is high-level project / resource planning software for verticals like healthcare, auto parts, etc. Each company has idiosyncratic ways of planning, which means the main ways to win are hyper-specialized software (which I would call consulting) or bloated, customizable bricks of software (also implemented by consulting firms). It is particularly painful to build in such a market unknowingly, because at first it can look scalable: you found a real problem, real users who pay you, etc. The lack of standardization and network effects, i.e. the lack of scaling potential, only shows up later in the story. You may still be able to build a huge company, but it will look very different (more labor-intensive, lower margins) from a typical software startup.

A market might have 100 competitors because it’s actually 100 tiny, disconnected markets better served by consulting-type software

Startups in perfectly efficient markets

There are markets that are so mature that they reach a state of perfect competition: all the companies make a good-enough product that users buy, but nobody really makes money anymore. If there are 500 email marketing tools, it’s often because customers don't care which one they use as long as it’s cheap. These markets are usually easy to spot, because the dominant design in terms of product has been around for many years, PE firms have started to buy and consolidate incumbents, etc. The main trap here is to think that your idea is very differentiated and to enter these markets anyway.

Takeaways for founders

Hopefully this little supply/demand framework can help avoid the most obvious high-competition / bad market situations. To be clear: I am not suggesting you should only build in "Blue Oceans" where no one else exists. A total lack of competition can indeed be a signal that a market is too small or the timing is decades off. Instead, view competition as just one signal among others, and keep focusing on users and their pain-points.

I'll conclude with a few litmus tests you can use if you are preparing to pivot into a seemingly crowded market:

• The Ease of Entry Test: could a motivated pair of engineers replicate my core value prop in a month?
• The Hot Space Test: are startups in that space being funded based on a recent narrative, or because of a real user pain-point?
• The Consulting / Lack of Scale Test: would my potential users actually be better served by a consulting company?
• The "Budget Elasticity" Test: does this solve a problem that is currently budgeted, or am I tapping into a new pain that will force them to find new money? The former implies a zero-sum battle for an existing slice of the pie.
• The Me-Too Test: am I building this because it feels safer to follow ten other founders, or because I have a unique insight into why those ten people will fail?