And when you find competitors, you need to realize that probably no one else you know has heard of them. The people here have rather bleeding edge knowledge of start-ups. There may be 10 start-ups for your idea. Some of them are probably running on vapors at this point.
If nothing else, finding other people working on the same idea is a validation of the idea, since they think it is worth working on too. If you think you can do a better job at it than they can why not try it yourself?
In fact, if you find competitors in your market and they are using a free model to gain traction, don't be shy about taking them on with a paid model.
If customers find you first and you can close the deal, those other free competitors won't pose a threat. The caveat here is that you must keep your customers happy. However, if true customer satisfaction is just not quite attainable and you're in survival mode (due to being under resourced or what have you), simply keep the the level of pain that you create for them below the threshold of pain required to switch from your service to your competitors.
