If you own a typical physical store, almost all of your customers live or work within a few miles of your location . Even for big ticket item like cars, 80% of purchases are made at dealerships that are within 30 miles of the buyer's home .
Because of physical restrictions on how far most people are willing to travel, building a successful offline business doesn't mean being the best in the world at something, it means being the best option within five or ten miles — or sometimes being the only option within five or ten miles.
Unless your company has a strong physical component (e.g. Uber or Homejoy), building a business online is completely different. Instead of competing against similar businesses in the same city or same county, you're competing against similar businesses everywhere. That's right, everywhere. This is why VCs ask founders questions like: "why is your team the right team to build this product?" and "how will you maintain your lead against other competitors?" Implicit in these questions is the assumption that most online business categories will have one big winner, and that there's no physical moat against competitors.
This is the scary side of competing online: there are no physical barriers to limit your competition. You have to be the best at something, otherwise you'll eventually fall.
There's an encouraging side to competing online, too: being the best in the world at something will yield massive rewards. While a local candy store or barbershop or car dealer are very unlikely to scale up globally no matter how fantastic they are, a great online product can gain market share quickly and (relatively) cheaply. Furthermore, mechanisms like Twitter and Facebook and social sharing and online reviews all serve to aid great companies and punish mediocre ones. Even if you operate in an vertical with some cultural barriers — for example, India and China each have their own versions of companies like Amazon — you have a shot at capturing a large share of the global market.
The important thing to remember is that the internet is a meritocracy. You won't win by being the only choice in town, you'll win by being the best choice. Not necessarily the best in every way, but the best in some way, to some group of customers. If you can't find a group of people who would prefer your service to everyone else's, then it might be time to step back and reassess your value proposition.
Thanks to my partner Chad for feedback on this post.