I went through a similar thing a couple months ago. I had actually started building something had about 3 weeks of personal time into it. Then I discovered someone with money from big name angels, the founders were people with a lot of connections, and the site already had good traction. I was heartbroken. Not only because I'd spent time coding but because I thought I had a great idea and apparently I did. On one hand, your idea is now validated. One the other hand you have major catching up to do and need to find something they are doing wrong and solve it along with the original problem. If you are really committed and can do better than your new competitor you should start building and build fast.
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I went through a similar thing a couple months ago. I had actually started building something had about 3 weeks of personal time into it. Then I discovered someone with money from big name angels, the founders were people with a lot of connections, and the site already had good traction. I was heartbroken. Not only because I'd spent time coding but because I thought I had a great idea and apparently I did. On one hand, your idea is now validated. One the other hand you have major catching up to do and need to find something they are doing wrong and solve it along with the original problem. If you are really committed and can do better than your new competitor you should start building and build fast.