Why It Matters
Misreading competition as validation leads founders and investors into low‑margin, limited‑growth markets, wasting capital and time. Recognizing the nuance helps allocate resources to truly scalable opportunities.
Key Takeaways
- •Competition indicates market activity, not size
- •Oversupply of capital fuels crowded niches
- •Easy entry tools inflate startup counts
- •High competition can mask fragmented, low‑margin markets
- •Use litmus tests to assess true market potential
Pulse Analysis
The prevalence of startups in a given vertical often reflects the supply side more than genuine consumer demand. When investors sit on abundant cash—driven by low interest rates or hype cycles—they deploy funds into any narrative that looks hot, spawning parallel ventures that chase the same thin slice of revenue. Simultaneously, the democratization of development tools, low‑code platforms, and cheap cloud services lowers entry barriers, allowing small teams to launch MVPs in days. This confluence creates a false sense of market validation, where the sheer number of competitors masks the underlying TAM.
On the demand side, many crowded markets are either highly fragmented or have reached perfect competition. In sectors like specialized project‑planning software, each client’s unique workflow turns the market into a collection of micro‑niches better served by bespoke consulting than by a single scalable SaaS product. Likewise, mature categories such as email‑marketing tools exhibit low differentiation; users pick the cheapest option, and margins shrink as incumbents compete on price. These environments can host hundreds of players, yet the total addressable revenue remains modest, and growth is often limited to price wars rather than innovation.
For founders, the key is to treat competition as a symptom, not a verdict. Applying practical litmus tests—assessing ease of replication, funding narratives, consulting‑type dynamics, budget elasticity, and the Me‑Too factor—helps separate genuinely large, underserved markets from oversupplied hype zones. Investors who internalize this framework can better differentiate between capital‑driven crowding and authentic market opportunity, ultimately steering capital toward ventures with sustainable unit economics and scalable growth potential.
Competition is not market validation
Competition Is Not Validation
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 fall for the fallacy that competition makes finding product‑market fit (PMF) easier. Founders in the process of pivoting are at the highest risk of believing this fallacy. At best, competition is a prerequisite for a large market, not 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 (high competition but a small or undesirable market). I have found it easier to reason about this problem if you consider that the startup, not its product, is the good being produced. That perspective makes these patterns a lot easier to spot as a founder.
Why every startup vertical is crowded: the supply‑side
Hint: it’s not because every startup vertical has tremendous demand from customers.
Startups operate in at least three markets:
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Their actual market, where they transact with users for features.
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Their investment market, where they trade equity for cash.
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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 six months ago and, since then, investors have been thinking new‑age task management is the next big thing.
As an aside, this 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 toward 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
Low‑code tools, “vibecoding,” and cheap cloud infrastructure 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 unbalanced with respect to demand.
A crowded room in a small house: the demand‑side
Demand‑side conditions can also lead to a lot of startups in a market without making that 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 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—the lack of scaling potential—only shows up later. 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
Some markets are so mature that they reach a state of perfect competition: all 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, private‑equity firms have started to buy and consolidate incumbents, etc. The main trap here is to think your idea is highly 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.
Litmus tests for a seemingly crowded market
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Ease of Entry Test: Could a motivated pair of engineers replicate my core value proposition in a month?
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Hot Space Test: Are startups in that space being funded based on a recent narrative, or because of a real user pain point?
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Consulting / Lack of Scale Test: Would my potential users actually be better served by a consulting company?
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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.
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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?
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