This article was published on June 22, 2014

The elements of defensible barriers to entry

The elements of defensible barriers to entry
George Deeb
Story by

George Deeb

George Deeb is the Managing Partner at Chicago-based Red Rocket Ventures, a growth consulting, advisory and executive staffing firm based in George Deeb is the Managing Partner at Chicago-based Red Rocket Ventures, a growth consulting, advisory and executive staffing firm based in Chicago. You can follow George on Twitter at @georgedeeb and @RedRocketVC.

George Deeb is the Managing Partner at Chicago-based Red Rocket Ventures, a startup consulting and financial advisory firm based in Chicago.

Anybody can start a business. But, very few businesses started have long term, defensible barriers to entry to protect against potential future competitors.

As you know, every good idea spawns many new competitors trying to get a “bite at the apple.”  Creating barriers to entry are one of the key things you need to focus on in terms of building a winning business model and increase the odds you get a big pay day down the road.

Here are a few examples of the elements your company should establish in order to defend from potential competitors.

Patents and Intellectual Property

Patents are a double edged sword for startups. They are great to have to protect your idea and get investors excited about your business. But, they are costly to set up (around $12K if a straight-forward filing and process, and much more if not).

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Patents are also very costly to enforce, which could require hundreds of thousands of dollars in legal bills to protect your idea, which most startups typically don’t have. But, assuming you build to scale with enough of a first mover advantage, hopefully your profits of the business will provide enough defense capital to enforce your patents and keep others out of your space.

Difficulty of replication

Difficulty of replication typically comes down to complexities of the product or the amount of capital or time required to duplicate the product. As an example, it is very difficult to knock off a new biotech or pharmaceutical line that has been in research and development for the last 10 years.

Similarly, it is very difficult to replicate Google’s dominance in search technology, given the years of learnings that have gone into refining their search algorithms and the billions of dollars in capital investment required to replicate its international network of high-speed servers and data centers.

Exclusive or long-term partnerships or contracts

Exclusive, long-term strategic partnerships or contracts can also be a game changer for a startup. For example, at iExplore, we were the exclusive adventure travel provider for National Geographic for five years, a highly targeted demographic audience for our business.

Or, imagine you are Waste Management with the exclusive waste removal contract for the City of Chicago. Or, maybe you are Lens Crafters, as the exclusive in-store optical departments within a Walmart location, or Chase Bank as the exclusive ATMs inside a Walgreen’s location.

Anytime you are talking exclusivity and long term in your contracts for customers or distribution, the better barriers to entry you are building.

High switching costs

Products with high-switching costs are also great barriers to entry. Once, a Fortune 500 company has implemented a new customer relationship management platform, it is highly unlikely they will swap out that platform in the near term, and have to reinvest in technology and employee training all over again.

Or, once LinkedIn has built the “default business networking site” and users are comfortable using it, it would be very difficult for a new site in the space to get traction, since users will not want to make the change. Same could be said about YouTube as the default place to store videos (if you’re in Google’s ecosystem) or iTunes the default place to store your music (if you’re in Apple’s). Consumers don’t want to reload all their a content a second time in a second place.

Hopefully, you get the point here: any startup requires long term defensible barriers to entry to increase your odds of long term revenue growth and to attract investors. Critically assess your own business, and look for opportunities to build your own barriers to entry against potential future competitors.

That said, in this day and age of lean startup methodologies and the low costs of launching minimum viable products, it is really hard to build barriers to entry with that mindset.  So, the sooner you can afford to better protect your turf, the more painful it will become for your competitors and the higher odds you will have for long term success.

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