Stop with the “Sustainable Competitive Advantage” Question
Some new investors – or those who aren’t experienced in launching and growing a technology or software business – will ask a Startup Founder, “What is your Sustainable Competitive Advantage?” <Thanks for the reminder of the question from a current #TSSeattle Team.>
That question makes you look smart<not>. It reminds me of a college philosophy class question: “Can God Create a Rock too Big for Him (Her) to lift?” Here’s why.
Somewhere between the Launch of your product and Scaling up your company you need to build competitive advantage. But how and when do you build a competitive advantage is the real question.
Let’s break down the question:
Steve Blank said, “a startup is an organization formed to search for a repeatable and scalable business.” First Principles
By definition, you don’t yet have a repeatable or scalable business. It’s difficult to sustain (defend) something that you don’t have. Having Competitive Advantage “puts a company in a favorable or superior business position.” As a startup, you don’t have a superior position in anything. You’re cash constrained, staff contained and engineering constrained, at the very least; not to mention the challenge of launching a startup that is not in a vibrant ecosystem where there is access to capital.
Tren Griffin works for Microsoft and was previously a partner with the Private Equity Firm Eagle River. He writes at his blog 25IQ.com on a wide range of investment-related topics. He recently made the observation: A business without a moat is either never profitable (FAB.com) or gradually overtaken by competitors (GoPro).
Better Investor Questions for a Startup
Mr./Ms. Investor, the question you may want to ask that startup founder is: “With this investment, how do you think you can build a moat around the business?”
For physical products or manufacturing, you may be able to file a patent and get up to 20 years (from the time of filing). That might create a moat, but maybe not, if a competitor can reverse engineer your product without violating the patent.
If you’re developing virtual or software products, you’re less likely to get a patent – though it’s not impossible. The time and expense for completing a patent require that you have the idea before the market is mature. Good for you! Or in that time, the market could just as likely lap you as you wait for the approval process.
As an early stage Startup Founder, how should you answer this question? You need to have a hypothesis for how you are going to build your moat – like most hypotheses, it will be wrong, but you need a place to start. What do you have to start building the moat?
- Knowledge of the market and customer – doing customer development well means you need to know what the customer wants. Hopefully, you and your team know the industry as well
- Speed to market – you better be nimble, speed is in your favor – taking four years to launch a product is bad
A competitor can always raise more money, hire more developers, etc. Big companies have a large customer base – but don’t generally innovate. Read Clayton Christensen’s latest book, “Competing Against Luck,” the update of Innovators Dilemma.
Finally, when an investor asks the question – remind them that you can’t build a moat before you build a castle. : )