Why do VCs invest in businesses with already existing models?

Amid the current economic climate and concerns about a global recession, many individuals have turned to entrepreneurship as a result of being furloughed or facing difficulties in finding employment.

I used to be puzzled by a significant question, primarily due to my lack of business experience: Why would any investor invest in a business that relies on an existing business model?

Consider the following examples:

• Investing in Bluesky Social when Twitter already exists.
• Investing in Bard (Alphabet Inc) when ChatGPT already exists.
• Numerous SaaS products and businesses.
• Various search engines before Google.

In my mind, I believed that many of these new products entered the market late, with the pre-existing companies/products already dominating the industry.

However, I discovered that I was mistaken.

Here's what I learned:

• New startups have an opportunity to thrive and expand within an existing market space dominated by established leaders.

  As a startup entering the scene later, the chances are high that your larger competitor has already conducted expensive research, made necessary pivots, educated the market, and invested in marketing efforts for the target audience.

  Less groundwork equals faster scalability, which translates to higher chances of success.

• Overcoming technical challenges becomes easier with a fresh product. Consider an entity still utilizing SOAP web services architecture. A nimble startup is likely to progress faster than a corporate behemoth because it doesn't have to contend with technical debt.

• Innovation is valuable but also risky. A proven and scalable model presents a safer investment. If the Total Addressable Market is sizable enough, growing rapidly, and the existing competitors haven't monopolized the entire market, there is indeed room for a new entrant.

• Targeting different markets can also be an effective strategy. For instance, two startups offering the same e-wallet solution but targeting the African and LATAM markets respectively.

Overall, while established companies may enjoy a significant portion of the market share, there is room for innovative startups to thrive by capitalizing on existing market dynamics, leveraging technology advancements, and targeting specific niches. The entrepreneurial spirit, coupled with strategic market positioning, allows new startups to compete effectively and bring fresh perspectives to the business landscape.