Startups: Dealing With Larger Companies

It does not appear there is anything stopping a bigger company with deep pockets from seeing what I am doing and going after my customers. Is this something to emphasize when I appeal for venture fund?

Dear Entrepreneur:

Your question points toward an issue that every entrepreneur must address – how will you compete in the marketplace. You can ask the question in other ways: How will you create barriers to entry or competition? What is your “unfair” advantage? Or, why will customers do business with you instead of someone else?

Here are some common strategies. You need to develop a strategy based on the specifics of your business and the market you intend to serve.

Intellectual Property Protection.

A lot of investors believe a patent or other intellectual property (IP) protection is the only true barrier to competition. And to a certain extent, they are right; a good patent will make it difficult for other companies to compete directly with you. They will have to offer a different product or service, and if yours is better, they will be at a severe disadvantage in the market.

But IP protection is not an absolute guarantee that you will “own” the market. A determined competitor can study the intricacies of your design (which you must publicly disclose as part of the patent process) and come up with another way of doing the same thing. This route may be costly and time-consuming for them, but if the opportunity is big enough, they might choose to do it.

But what if your business is like most others and does not have IP that can be legally protected? What other kinds of barriers can you create?

First-to-Market Position.

During the dot-com bubble, many businesses claimed “first-to-market” as their barrier to entry. The idea was they would be the first company to enter the market and by doing so they would tie up the distribution channels, negotiate exclusive deals with key business partners, become the “de facto” standard for the product, and so on. The trouble was, dozens of startups expected to be first in the same markets, and the ones that actually succeeded, usually found it to be a lonely place because the market did not yet exist.

So today, a claim of “first-to-market” is almost guaranteed to produce an ironic chuckle and a few snide remarks from investors. But their skepticism aside, first-to-market can be a very effective way for you to build barriers to entry. Assuming a market exists, you can find yourself in a good position to attract the strongest channel partners, negotiate favorable distribution agreements, capture the attention of thought-leaders and influencers, and establish your product or service as the market standard. Later-arriving competitors will be at a disadvantage because to unseat you, they will have to prove their product is clearly superior.

So being first-to-market has important advantages. You just need to be ready to endure a few sneers and then explain to investors in realistic terms how you intend to capitalize on the position.

But here again, very few businesses can claim to be first to market. So now what?

Business Execution.

Most new ventures must rely on barriers created by how well they do business. They must offer better service, lower prices, or other benefits that make customers want to buy from them and not someone else. They have to build a strong organization, efficient business processes, and out-market and out-sell their competitors.

It is easy to woo away unhappy customers, but it’s very difficult to win over happy ones. Customer inertia or resistance to change is a powerful force. So you can create a strong barrier to competition by building and retaining a large base of happy customers.

Unfortunately, many investors have a hard time accepting “business execution” as a meaningful barrier to competition, particularly venture capital investors. VCs want strong, well – defined, defensible barriers because they establish and protect the venture’s position in the market, and, maybe more importantly, they setup the exit strategy for the investors. If the new venture’s product is successful, strong barriers will allow the company to grow quickly, unfettered by competition. One of the competitors, not wanting to abandon a growing market, is then likely to step forward with an offer to acquire the company. This is the most common exit for venture-backed companies.

So getting back to the second part of your question (what do you say to investors if your business lacks strong barriers), you should talk about your strategy for business execution. Also, you should recognize that your company is not a likely candidate for institutional venture capital. You will have better luck seeking angel investors who understand your business and appreciate the power of execution barriers.

Good luck!