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The Den Report: They’re Going To Fry You Like A Chicken!

This was Kevin's pithy comment about pitcher Henry Tenby's business CashSender.com, which was quickly dismissed by the Dragons in Season Six's first episode.

Kevin pointed out something that many entrepreneurs forget in the heady excitement of developing their product. This is to understand the nature of the market you're hoping to enter, and the competitors who currently rule it.

Would-be entrepreneurs are an optimistic bunch generally, so it's not surprising that they can be so in love with their product, they forget they may be facing fierce and entrenched competition that can crush them before they even get started.

This challenge becomes almost insurmountable when the entrenched competitor is a giant with access to far more firepower (read: cash) than the entrepreneur could ever hope to muster.

When planning a business, any would-be entrepreneur must scan the competitive landscape, and after identifying potential competitors (there are always competitors, no matter how unique your product or service), develop a strong and realistic plan for penetrating that market.

It's an extreme rarity that an entrepreneur dreams up something so unique it changes buying behavior and displaces existing companies in the market. So the entrepreneur's job is not to conquer the whole market, but to find a niche in that market and own it.

In Henry's case, his product, cashsender.com, is an online payment system that he felt would take Internet commerce by storm because it was slightly cheaper than the current king of online payment systems, PayPal, which is owned by eBay and did US$ 71 billion in transactions in 2009.

Henry figured he'd discovered PayPal's "Achilles Heel" and so could steal market share: PayPal adds a few cents fee on top of the percentage charge for each payment a company receives, thus cutting into that company's margin. Henry would charge the same percentage, but eliminate the extra fee: This is the differentiator he believes will allow him to create a business in the online payment world.

It didn't take the Dragons long to roast that idea as complete fantasy and hubris:

Arlene: You have no credibility.

Jim: You're too small!

Bruce: You're talking about knocking off airplanes.

PayPal's "Achilles Heel" probably doesn't matter one bit to most PayPal users. Also, it's a minor annoyance that is easily fixed. If threatened, PayPal could simply eliminate the extra fee and wipe out a competitor whose only value proposition is that it is slightly cheaper.

The lesson? If you're going to start a business in a competitive field, don't even think about taking on the giant that currently dominates it. Find a niche instead.

Tony Wanless is Certified Management Consultant (CMC) who concentrates on the SME segment. He is a frequent business plan writer, pitch guide, and business plan judge for competitions. His businesses include Knowpreneur Consultants, a provider of Content Marketing strategy and services to SME's, Reinventionist, an innovation consultancy to professionals who form their own independent businesses. He is currently launching tonywanless.com, which provides communication guidance and real-time digital editing services for leaders in the technology, finance and academic sectors.

Tony is also a columnist and blogger for BC Business Magazine and the Financial Post. A former financial journalist and editor, Mr. Wanless has a long history as a communicator, writer and advisor with Venture Capital and angel investors in Canada. He is a frequent business plan writer and pitch guide for technology start-ups and often acts as a mentor and judge in business plan competitions. Follow Tony on Twitter at @reinventionist