I’ve been seeing a lot of business plans lately about companies built on the new ap platforms, or based on social media services, or with off-the-shelf software components combined to make a new product or SaaS offering.
The exciting news is that these recently stabilized platforms are generating a flood of new applications and services, that allow businesses and consumers to apply new technologies to new ways of communicating, to building communities and to consuming the goods and services they need.
On the entrepreneurial side, though, there lies an often-overlooked threat to these new companies: because the intellectual property is not deep, or cannot be patented, or the components that build the product are licensed, there is little defensibility to protect the company itself.
Now, if the entrepreneurs are satisfied to build a “back-bedroom” business, or a cash cow, and can launch the company self-funded, this may not matter.
But if the entrepreneur wants to gain outside capital in the form of professional angel or venture capital, this lack of defensibility is a serious obstacle to that funding.
So, entrepreneurs, listen up. If you are after venture capital, you must make your case that your application or service can withstand replication by much bigger players than yourselves. Oh, these competitors will let you run for a while, will let you prove the market, and even let you make the first-generation mistakes. But once you refine your product, its target audience, and its market reach, once you prove there is a serious revenue opportunity and upside for your idea, the big guys can copycat your idea and throw lots of marketing dollars at it, and leave you, as you were when you started, defenseless.
If you can envision this scenario, so can the investors. So you will need a compelling argument about defensibility before you request funds. You must define why your company will prevail long enough (6-8 years is now the expected rule) to dominate a market sector and create a liquidity event for you and your investors?
I was reminded this week that you should double your development costs and time to market (with all associated costs), and cut in half your revenue projections. Then, you should re-consider if your idea has legs. This is especially true if there is no unique edge to your business that will keep the copycats away, or nothing to gain you a particularly strong market penetration.
Yes, I know all the arguments about first to market taking a dominant position. And I know the case to be made for your competitors “buying” your company vs. “building” their own competition to you.
But examine these closely, in light of how easily you built your application, and needed very little new invention or intellectual property. In these times, it may be easier for your competitor to build the new generation of your idea in-house, fitted well to your competitor’s current product line, than to enter negotiations (and integration) with you. And first to market only matters if you have the capital to sustain your market share and fight off your competition.
So if you are light on IP, or tight on marketing capital, think again. Here are some ways to approach this strategic thinking:
What can you build or add that adds a competitive or defensive edge to your product offering? It could be a new feature set, or deployment on multiple platforms, or early focus on an adjacent market which is not so competitive.
Research the venture capitalists you want to approach. Look for synergies with products in their existing portfolios that may be enhanced by your technology, and pitch the VCs that an investment in your company extends the reach of this other company. If that portfolio company is failing, you have a different pitch, that investment in your company can restore the portfolio company and shore up the VC’s ROI.
Look for strategic capital as well as venture capital. A significant strategic partner that needs your functionality can provide you the initial market penetration through its partners or channels, legal support, and development funds to make your product truly viable in the market. They can defend you against the copycats. Your early strategic partner may become the company that acquires you, and sometimes you can negotiate a formula for acquisition during the initial funding, and allow them the “first look” for acquisition (but not the last look), on your terms when you are ready.
Consider this as well: you might narrow your target market, refuse outside capital, and build that small, under-the-radar back-bedroom business and use it as a cash cow, and even as a launching pad (a private incubator) for your next new thing.
Just a thought.