Starting a company with a very similar competitor already in place

I have a tech startup I'm looking to do in the mobile applications space. I thought my idea was very unique and my business partner and I spent about a week coming up with planning, name, concept, etc.

About a week after we started we identified a competitor that we had missed in our initial searches for competitors. This competitor's application is nearly identical to that what we wanted to build. This was probably 2 - 3 weeks ago.

Now, this is the kind of idea where we were planning on actively pursuing investors for funding. In trying to think about how we differentiate ourselves, we came across the business model - the competitor was charging users of the app; but we were going to go a different way in order to grow the app user base quicker (free = good to the user, right!)

This afternoon while working on the biz plan I realized that they modified their business model so it no longer charges the user - putting it almost in line with our idea to a T.

There can certainly be more than one player in this space. This competitor has about a year's head-start on us and just received their Series A funding. They are also geographically segregated from us; although honestly this is really a nationwide kind of thing, although their focus has been on implementing in certain cities.

I'm guessing from an investor perspective, it's probably a + to see that the concept is getting funded. But also a negative to see such direct competition. Also, it makes me feel validated that my Idea is good. But it's also frustrating to see someone with such a headstart (and $$!). I have a few differentiation ideas but they are all related to product scope that I was going to put as "future enhancement" list in order to not slow down the deployment of our beta release.

My questions are; how will an investor feel about this and how do I tackle it? I'm assuming I need to think of some other level of differentiation... and I have one idea on the business model side (per-use fee instead of flat recurring fee).

And also - are there risks with IP that would spook investors? I don't have a patent right now; I don't believe the competitor does either.

Yeah market validation! Yeah -- jump for joy.

Really this is the same questions as we all see a thousand times which is what if someone steals my idea? The answer is of course -- so? it's all about execution.

Think of all the people who have to compete when they are selling the exact same item. Which flour will I buy? Humm, the white one with the puffy boy on the front or the one with the gold metals. My city of Minneapolis was built on the banks of the war between those two companies (Pillsbury and General Mills) They were selling the same product.

There are two grocery stores on my street. There are two different sodas in my refrigerator. My wife and I argue iOS versus Android. My kid and I argue Muppets versus Sesame Street (Let's hear it for the Green!). The USB cord that I got online was exactly the same as the one my neighbor got in the store and I am fairly certain they were both made at the same factory in China. (He paid a lot more.)

You will be different because you are different. Your team is different. Your branding will be different. Your sales process will be different. Your marketing will be different. The white papers you write will be different. Your organizational culture will be different. Your case studies will be different. Your customer support will be different. Your customer's experience will be different. Your referrals will be different.

I say let someone else worry about all of that same/different stuff -- keep your eye on the prize -- securing and satisfying customers.

Oh, and those VC? Silly VC. Here's a secret. Most of them are scary cats. Yup. They don't really like to take risks. They only like to get paid like they took risks. And heaven help us we love them for it.

They like to mitigate risks. There are hundreds of venture funders who don't want to be the first play in a market. They want to see that there will be a market. They have no need to be the bleeding edge-- they are happy with the cutting edge (or even the semi sharp serrated edge). Two competitors in the space means choice. Two people in the space means that the marketing and advertising is supporting the building and cultivating of the market space.

And now your job is to win! securing and satisfying customers And strategically you do respond to this change in the market dynamics:

1. Adjust the plan. Just as you are. Reflect a competitive market space that has been proven and validated. Reflect an organization structure ready not to "explore" new territory -- but ready to go to battle for market share.
2. Find a match. There is a venture capital for who this market environment matches their profile. Review the past companies they invested in and when. You will find a pattern. There is someone who knows your space, and likes to be #2 in. That's your capitalization campaign target.
3. Tell prospective investors how you adjusted your plan: Be open. Honest. Upfront. Disclosing. Use it an an opportunity to build trust and confidence. Use it an an opportunity for them to feel needed for their great wisdom and expertise -- not just their money. (They like that.)
4. Shift Resources from the rear to the front: The market dynamics of a single player first to market is that you have lots of R&D producing a better and better product. The market dynamic of a "battle field" with multiple competitors is that your front line marketing and sales needs to be better and stronger.

If if push comes to shove and they still say: So how are you different than the bozo across the street? Say: "We are committed to providing a higher quality customer experience" . . . ooooh, aaaah.

A known competitor is better than an unknown competitor. A new competitor could pop up the day after you get funding, the day after you launch your product, the day after {insert significant event here}. You seem very focused on how you are the same. You need to get focused on how you are different. And if you are not different, you need to go home.

If you're worried about patent rights, go ahead and file a provisional patent application now. Then the period of protection you get, if you file the regular patent within a year, starts from the date of that provisional patent application.

Don't worry about that, competitors just mean you are moving right direction, it means you are doing something that people will use. Just look at the companies being invested by different startup funds and combinators, 90% of them is just old ideas under new sauce, for example I don't remember who was first box.net or dropbox, but still investors gave money for the project that is simple clone or analog of what is on the market, just take a look, still companies of online conference solutions are given money when gotomeeting and many others are for 10 years and more on the market.

What I can say on the end just focus on the market, development and marketing, different people can do same things but somebody wins, others loose.

Hope you will win.