Is Your IR Firm Advising You to Acknowledge the Competition?

Jason Gold
April 8, 2018
5 min read

As a corporate leader, you surely get questions about your competitors. I've spent nearly 20 years as an investor listening to CEOs and CFOs talk about their competitors, and I can say this with certainty: always acknowledge your competition - you lose credibility with investors if you down-play their relevance, mock them, or dismiss them altogether. All too often however, I hear CEOs and CFOs do exactly this - and they come to me as their IR consultant wondering why their stock isn't getting "the multiple it deserves." While there are often many reasons why a stock is suffering, one of the easier fixes I see in my IR strategy practice is a change in the way my clients discuss their competition.

What a Good Director of Investor Relations and the Best IR Consulting Firms Will Tell You

It might be counter-intuitive to some people to think that acknowledging (or even going out of your way to respect) your competitors can instill investor confidence and drive higher multiples. The reality is that in most instances, illustrating the existence of viable competition validates your market, and signals to investors that the market opportunity is real. Absent legitimate competition, investors typically ask "if the market opportunity is so great, how come this is the only company doing it?"

Additionally, unless your company is growing by leaps and bounds, skeptical investors (you should presume that all good institutional investors are "skeptical") will wonder "if you have no legitimate competition, shouldn't you be growing a lot faster?" That is not a question you want to have to answer because it changes the tenor of the meeting and puts you on the defensive.

Of course, there are exceptions to this rule. Apple famously acknowledged IBM's entrance into the personal computing market back in the 1980's as a validation of their market, and then ceded nearly the entire market to them over the ensuing few years. Companies with monopolies or intellectual property domination can also be exceptions. Be sure that your acknowledgement of the competition isn't likely to elicit a gaping hole in your strategy (e.g. perhaps these competitors have far deeper pockets, far wider distribution, and more resources to out-maneuver you).

However, the vast majority of companies have some form of competitor and it's far better to be truthful with investors and focus on your competitive advantage or differentiation rather than dismiss them entirely.

Focus on the Differentiation

One of the best responses I've heard when one of my IR consulting clients was asked about competition went something like this, "Our two largest competitors are Company X and Company Y, and both are excellent companies. In fact, they keep us on our toes with respect to new product development, marketing activities, and pricing. We see one of these two competitors in about 40% of our new business opportunities and we win approximately 70% of the time (that's up from about 50% 12 months ago due to our new feature). In the remaining 60% of new business opportunities, we are either uncontested, or we face a myriad of much smaller competitors since our market remains highly fragmented. It's also important to understand that we believe we have some structural advantages vs. our competitors with respect to scale and in our product design.  Additionally, the unit economics of our go-to-market strategy are different from our competitors and result in a higher profit margin for our distributors and reseller partners. Finally, we keep up an active recruitment pipeline, and some of our best recruits have come from these competitors - this gives us some good insight into their strategic direction as well, which allows us to remain one step ahead."

Notice the acknowledgement of good competitors, yet the focus on the differentiation. This is the kind of answer that investors like to hear.

Compare this response to one I heard recently from one of my IR strategy clients, "Competition?  Of course there are competitors, but our product is like a Gulfstream and theirs is like a Cessna.   We're just dominating the field and we think we will continue to gain share."

There are a few glaring problems with this statement, and a few more subtle issues that I worked with them to correct.

The first issue is that not all investors will understand the Gulfstream/Cessna analogy and so they might have no idea what you're talking about. Even if they do understand it, the statement is reasonably obnoxious and would only be stated by someone who flies private. And who likes people who talk about their jets? Nobody. Certainly not investors (even though many of them have jets of their own).

The second issue is that it lacks any detail about the product's differentiation. There isn't a data point that investors can go into the field and validate to determine if, in fact, which product is better and why. Investors love companies with structural advantages - things like the network effect, the flywheel effect, intellectual property, or particular features are what get investors to pay attention.  Absent some verifiable and quantifiable advantages, investors are left to wonder, "are there any barriers here or will this become a very crowded market very quickly?" Stocks in crowded markets with little competitive differentiation often command materially lower multiples than their peers that show more differentiation.

This statement also lacks any detail about market share, win rates, and trends - so investors have no frame of reference and investors love to understand trends.

Don't Mock Them

Though I wouldn't call the previous example "mocking," it's certainly dismissive. While I see those types of dismissive statements a lot, I also see some of my IR consulting clients actually make fun of their competitors on their earnings calls, in investor meetings, or during conferences. I try to remind them that the audience of people reading the transcripts of these events is far larger than those they see in the audience and that their comments will be scrutinized and circulated among analysts and investors. On many occasions during my tenure as an investor, I'd get an email from a colleague who showed me a corporate leader's remarks about competition and juxtaposed it against the obviously contradictory comments made by a customer or competitor. That CEO now becomes someone we know we can't trust - he either doesn't know what his competitors are doing or won't acknowledge it - both are bad for the stock's multiple.

Not only does mocking the competition make you look childish, it causes investors to wonder, "if this is how immaturely and flippantly he deals with what I know to be a reasonable threat, how does he deal with other threats that I don't know about?" Investors are always asking themselves philosophical questions like this....they only get to see a small window into your psyche as a corporate leader and often-times, their questions are meant to "bait you" into revealing more of your true self than you've done during your prepared remarks. Also, the best investors typically know the answer to the questions they're asking you before they ask dismissing or down-playing a competitive threat that an investor has diligently researched only weakens your credibility (you should presume that any time an investor asks you this question, the meeting they had just before seeing you was with your key competitor - that way you'll always have the right mindset).

In summary, despite the desire to try and illustrate that your company is "the best," it's often wiser to illustrate the data that causes you to believe it, rather than to come out and say so directly.  Acknowledging the competition validates your market opportunity, provides you with credibility, and gives you a forum to segue into the details of your product strategy and allowing investors to conclude themselves that your company is worthy of a higher valuation.

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Jason Gold
April 8, 2018