Dirty Little Startup Secret: Barriers to entry

1. MY DIRTY LITTLE START-UP SECRET Barrier-to-entry strategy for start-ups http://www.flickr.com/photos/sirmightymac/

2. when dealing with competitors

3. provided that you don't break the law

4. cheating is good

5. one of the best ways to cheat

6. is to change the rules of the game

7. to stack the deck

8. so that competitors find it harder, or more expensive, to do the same thing as you

9. in b-school, we teach Cheating 101

10. but we call it Barriers to Entry * From Porter’s 5 Forces if you’re looking to impress at a dinner party

11. ideally, you want to have low barriers to entry in any market space that you want to enter

12. and then

13. once you are in

14. you immediately slap up high barriers, so that future competitors cannot follow you

15. historically, start-ups have placed an over-emphasis on intellectual property

16. IP gives you a government-protected monopoly to profit from a specific solution

17. it is no longer free-market competition

18. you've changed the rules of the game

19. excellent cheating!

20. but IP is just one of dozens of barriers that a start-up has at its disposal

21. and frankly, one of the weakest

22. let’s take a tour

23. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry LEGAL / GOV’T BARRIER INTELLECTUAL PROPERTY COMBAT RATING VULNERABILITIES BACKGROUND • Innovation around the patent • Reverse engineering • Shameless piracy • Prohibitive cost to enforce • Inability to protect across all jurisdictions • Public disclosure of IP required in registration Leverage the government sponsored monopoly privileges that come with registering patents, trade marks, or copyrights. Competitors are blocked from using your innovations without obtaining a license from you to do so. COMBAT STATS

24. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry LEGAL / GOV’T BARRIER TRADE REGULATION COMBAT RATING VULNERABILITIES BACKGROUND • Counter lobby • Forfeit of future growth markets If your competitors pay an additional 15% import tax in order to sell into your market, you're cooking on gas! Similarly, if you can help design safety regulations, subsidies, zoning, licensing procedures, subsidies or other laws such that your competitor products are disadvantaged, you are also laughing all the way to the bank. COMBAT STATS

25. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry LEGAL / GOV’T BARRIER RECIPROCITY COMBAT RATING VULNERABILITIES BACKGROUND • Be especially wary of jail time • Reciprocity has a quick half-life. You need to earn quickly and spend quickly. In many political contexts, firms use lobbying, favours, outright bribes, or other creative means to create reciprocity debt with powerful market players. These reciprocity debt pools can be called upon when needed to address competitors in creative ways. COMBAT STATS

26. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry SUPPLY CHAIN BARRIER CONTROL RAW MATERIALS COMBAT RATING VULNERABILITIES BACKGROUND • Competitor innovates an equivalent product from different raw material • Suppliers break their contract with you • Government intervention (anti-competition law) If you can control the raw materials required for production, you control the competitive landscape. For example, if the product absolutely requires Mangosteen extract to work, and you have 10-year exclusive contracts with 86% of the world's Mangosteen farmers, then your competitors won't be able to manufacture the product, as they simply won't be able to purchase raw material COMBAT STATS

27. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry SUPPLY CHAIN BARRIER CONTROL TALENT COMBAT RATING VULNERABILITIES BACKGROUND • Spin out start-ups • Someone always can pay more or give better perks • High-flyers often don't get a long • There are always new PhD's that put your PhD's to shame This is like control of raw materials, but specific to knowledge industries like high-tech, banking or pharma. In this case, you hire all the PhD's in the market so that competitors don't have access to the specific brain power. Then you comp them well and use bonus payments, equity, patenting support, etc to keep them locked-in COMBAT STATS

28. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry MANUFACTURING BARRIER COST OF PRODUCTION COMBAT RATING VULNERABILITIES BACKGROUND • Once you drop your price, you may not be able to raise it again – you may win the war, but what you win is a no margin market. • Niche or Blue Ocean Strategies • Production / Manufacturing Innovation When you are big, and spending big wads of cash, your costs go down. For example, you get discounts for bulk ordering. With a reduced cost model, you can drop your price below what smaller competitors can sustain. You can also leverage specialized know-how (which requires high cost/long time to duplicate) or favourable geographical location to reduce cost. COMBAT STATS

29. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry MANUFACTURING BARRIER CONTROL MANUFACTURING COMBAT RATING VULNERABILITIES BACKGROUND • Primarily works only for specialized (non commoditized) manufacturing processes • Easy to have facilities break ranks unless they are well locked-in by contract or otherwise The idea here is to control all the factories that make your widget or you control the technology required to manufacture it. COMBAT STATS

30. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry MANUFACTURING BARRIER SUNK COSTS COMBAT RATING VULNERABILITIES BACKGROUND • Competitors may not always be rational If the manufacturing process requires expensive start-up costs and because of the nature of production, those assets can not be redeployed to some other production process, then entrants will be wary to invest because they may end up losing big. COMBAT STATS

31. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry DISTRIBUTION BARRIER CONTROL RETAIL REAL ESTATE COMBAT RATING VULNERABILITIES BACKGROUND • E-Commerce • Multi-level Marketing • Channel margin war Why are there so many versions of Colgate on the shelf at your supermarket? It is not because they actually have that many distinct client segments. It is so that they can pack the limited shelf-space. If their competitors have no shelves upon which to display their products, nobody will be able to buy them. If you own shelf space your competitor is blocked. COMBAT STATS

32. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry CUSTOMER BARRIER CLIENT LOCK-IN: BRAND LOYALTY COMBAT RATING VULNERABILITIES BACKGROUND • Brain rewashing • It’s hard to brainwash in the first place Brainwashing is great. With brand loyalty lock-in, you convince your customers that their very sense of self (self image or personal brand) depends on your product. Without your product, or with another product, they are just sneetches without belly stars. COMBAT STATS

33. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry CUSTOMER BARRIER CLIENT LOCK-IN: TYING COMBAT RATING VULNERABILITIES BACKGROUND • Anti-competition laws • Need a pretty powerful product Y Tying happens when you force a customer to buy Product X if they buy Product Y. If Product Y is good enough, it locks in Product Y. COMBAT STATS

34. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry CUSTOMER BARRIER CLIENT LOCK-IN: SWITCHING COSTS COMBAT RATING VULNERABILITIES BACKGROUND • Adaptors • Signing “buy-out” bonuses • Make it financial difficult for a customer who has already purchased your product to switch to another one: • Phone number portability • Standards incompatibility & proprietary formats/APIs • Warranty on the whole, not the parts • Points & rewards programs • All or nothing service agreements • Licensing terms COMBAT STATS

35. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry CUSTOMER BARRIER NETWORK EFFECTS COMBAT RATING VULNERABILITIES BACKGROUND • Susceptibility to trend setters and new networks (Facebook vs MySpace) A network effect occurs when customers gain more value as more customers buy. Once a network reaches critical mass, it is hard for a customer to leave the network unless all the other customers move too. COMBAT STATS

36. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry GENERAL BARRIER PSYCHE WARFARE: VAPOURWARE COMBAT RATING VULNERABILITIES BACKGROUND • Clients may eventually see what you are doing • Lead users may still buy if they are too excited to wait You are a small start-up that has come up with a cool new software product for enterprises. Microsoft sees it and thinks that it is a good idea, but it will take them 2 years to build, or they don't want to build it & just want to squish you like a bug so that the tech is killed in the womb. They announce that the feature will be supported in the next version of Windows. Lies, damn lies, statistics….and marketing. Will clients buy from you, or wait for MS? COMBAT STATS

37. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry GENERAL BARRIER PSYCHE WARFARE: RETRIBUTION COMBAT RATING VULNERABILITIES BACKGROUND • You have to always win • New punks with no memory will come eventually Nobody wants to enter a bloody, embarrassing battle (price or marketing war). If you respond to the first few competitors quickly, harshly, and with deadly force, you'll develop a reputation for retribution. Competitors will have learned not to mess with you and will self-divert to another market without you actually doing anything COMBAT STATS

38. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry GENERAL BARRIER INNOVATIVE SPEED COMBAT RATING VULNERABILITIES BACKGROUND • Actually, you don't have the only smart team • The weight of operations will slow you down in practice • Talent poaching • Key-man risk • Burn out Just innovate faster than your competitors. You know, whip those engineers until they bleed!!! COMBAT STATS

39. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry GENERAL BARRIER WAR CHEST COMBAT RATING VULNERABILITIES BACKGROUND • Fight fire with fire – clash of the titans Just out spend! Having a big war chest is its own barrier. You can just spend more on everything – Marketing, R&D, Manufacturing Infrastructure COMBAT STATS

40. THE TRADING CARD GAME FOR START-UPS BarrierS 2 EnTry GENERAL BARRIER CARTELS & EXCLUSIVE DEALING COMBAT RATING VULNERABILITIES BACKGROUND • Anti-competition law Join together independent business organizations to regulate production, pricing, and marketing of goods by the members. This can occur either vertically or horizontally. COMBAT STATS

41. ok, that’s my list so far

42. if you've got a sneaky trick to play on a competitor, please email it to me so that I can add it

43. thanks for reading this far!

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