That’s the most famous catch phrase of all time isn’t it? We’re going to build a wall!
Without getting political lets just say that in startups, building a wall is a very good thing. You know, that thing that makes your startup defensible.
Why stop at a wall? Build the wall, dig a moat, fill it with pirañas, and put vaporising lasers on the walls to shoot down any competitor that comes near.
Sounds good, doesn’t it? But how do you make a startup defensible? Here are a few ways to do it:
- Develop a strong, and trusted, brand.
- Create a network effect - this is where the platform gets better for all other users each time a new user starts using the product. Think about how hard it would be to take Airbnb on, head-to-head, now. You couldn’t because your smaller network just wouldn’t offer the same value to the users. You wouldn't have enough 'stock' to offer to users and owners of the 'stock' that you have wouldn't get many bookings.
- Have a data play - collect a unique dataset that gives you a head start of many years over your competitors. You could apply machine learning to the data to make your software better and smarter, or the data may provide options for monetisation.
How important is competitive advantage and defensibility in the early stages of a startup?
Many investors, prior to investing, ask early stage startups how they will make their startup defensible. It's a great question (I've seen many founders tripped up by this one), but is it the right question to be asking early stage startups?
In 2012 Brad Feld said:
I've always felt this was a silly question for an investor to ask an entrepreneur. The goal of the startup, at least in my mind, should not be to create something defensible out of the gate. Rather, focus on creating something unique, that is done better than anyone else has done it before, that delights your early customers, and that rapidly evolves based on the feedback you get from these early customers. By executing these attributes / activities over and over again, you will create something defensible.
Essentially, when starting out you should focus on:
- the user and giving them a great experience
- solving a big problem that many people have
- being 10x better than existing solutions
- getting paying customers
While you shouldn't expect to be defensible at an early stage, if you’ve done all of the above and are seeking investment then you will stand a much better chance if you can see a clear path to defensibility (or as a minimum have ideas as to what could make you defensible).
Christoph Janz from Point Nine Capital has a row in his Saas Funding Napkin 2017 edition which indicates the stages of defensibility a Saas startup should have through various investment stages. These are:
- Pre-seed stage: none
- Seed stage: Tech, product dev velocity
- Series A: First signs of an emerging 'mini brand'. Conviction that the company can become a platform or build a unique data asset.
- Series B: First signs of a successful brand, platform and/or data play
- Series C: Strong signs of a successful brand, platform and/or data play
Here is the full 2017 funding napkin (click to view larger image):
You will in almost all cases be indefensible in the early stages. After all, things like having a strong brand, creating a network effect or a having a great data play mean nothing in the early days when you won’t have a strong brand, you won’t have many users and you won’t be collecting enough data.
One of the things that you can do though when starting out is to give yourself a competitive advantage. This could be:
- Creating something that is new and unique
- Shipping rapidly
- Having a unique insight into the market your startup plays in
- Money - this helps you buy marketshare and scare off competitors who may not have the same funds. This money probably won’t be your own. You’ll need investor money for it to be significant enough to buy yourself an advantage
If you are just getting started don’t go out and buy the bricks and mortar for your wall straight away. Focus on the core product and your users, but start sketching the purpleprints for your wall.
If your startup becomes a rocket ship you’ll need to build that wall, and build it very quickly.