[dennybritz]

I like this question. Differentiation is a pretty vague term and could mean almost anything: A better user experience, a different approach to sales/marketing, or a different business model. You're right, if you're in a large market there probably is enough space for multiple players and you can grow quickly even without differentiation. But you must still be prepared to answer "Why should we pick you instead of XX?" from a customer. I don't know what industry you are in, but competing solely based on price usually isn't a good idea. You don't want to attract the "cheap" customers who can't afford better/expensive products (they're often the most troublesome), and you don't want to start a price war with other companies. What if a new startup comes along and offers the same for 25% less?

I think what many investors are getting at is less about initial differentiation and more about long-term defensibility. How can you make sure that whoever comes along (competitor or new entrant) can't just copy what you are doing for cheaper and steal away your customers? Do you have proprietary data? Network effects? Customer lock-in? Does your service increase in value the longer you around through data/network/customers?

Also, don't forget that most investors (particularly VCs) are looking for breakout successes. They want to find the next Twitter, Dropbox, Airbnb, etc. They barely make money from companies that are doing well but are just cruising along. You can probably build a profitable business just copying what your competitors are doing in a large market, but that's not what VCs are looking for.