Natural Fortifications
A Model for Competitive Advantage in the Start-Up Era
Natural Fortifications
“Amazon is brilliant, efficient, and rich. They have teams of the best people and are literally building an army of flying robots. They stuff the mangled remains of their competition into smiling cardboard boxes and move on to the next market.” — James McKelvey, Founder of Square
How do you compete with an army of flying robots? You find Natural Fortifications.
This article introduces the concept of Natural Fortifications — free, strong, and lasting deterrents from the competition. These are business strategies that require little to no investment that produce outsized advantages in the market.
Competing with Zero
The cost of competition is a particularly relevant issue to start-ups. As a start-up, your end goal should be to attain monopolistic advantages a la Peter Theil. Product and brand leadership, network effects, behavioral data, intellectual property, and economies of scale can all be employed towards a monopoly.
The problem is, you don’t have any of these advantages, and they all require inordinate time, money, and manpower. You might gerrymander markets to trick investors into thinking you’re one-of-a-kind. But you’re not.
I have a movie idea.
A time-traveling robot…
Joins an elite group of thieves…
To find his true love…
One of a kind, or just another movie?
Realistically, start-ups are far from a monopoly. And without a monopoly, you’re at risk of being killed by replication, or, even worse, entering the ~perfect competition~ of economics 101. Survivorship bias hides the scattered remains of these start-ups.
So how do you get from zero to one* without excessive risk from the herculean competition of incumbents?
When I asked this question in regards to my own start-up, the best answer I heard was, ‘Hope your product isn’t on the competition’s radar. Count on the time it will take for them to build and launch the product.’
Surely, we can do better.
Natural Fortifications — A Guide
I’ve found five Natural Fortifications. Three of these are well-known concepts: Positioning, Small Ponds, and Blue Oceans. Two are newly introduced in the article: Tundra and Rivers. Each one is a strategic advantage that any company, including a cash-poor start-up, can use to compete.
Positioning
Brand positioning is about finding and occupying a relevant part of a person’s mind with your brand. It’s similar to a personality. If you choose a unique position, other brands can’t occupy that position without undermining their own.
For example, when you think of the beauty of the outdoors, you might think of an outdoorsy friend, like Steve, or your favorite outdoorsy B-Corp, like Patagonia. An existing brand will hurt their image if it copies you. If Steve started work for an oil company, that might hurt his image as an outdoorsy environmentalist. The same would go for Patagonia if they tried to sell business suites.
While positioning is strong against existing brands, anyone can start a new brand mimicking your personality. Many companies have multiple brands to try and overcome this limitation.
Birddog is one company that succeeded in positioning in an industry filled with prominent players and aggressive copy-cats. They sell pants with watermelon-smashing, vampire-slaying, viral content. Oh, and you don’t have to wear underwear with their pants.
Everything they say and do is consistent with their image — you won’t find standard khaki’s here. This type of aggressive positioning can make a highly profitable business even in an incredibly crowded market. Patagonia would look like a dad trying to be hip-with-the-kids if they tried to compete with that position.
Your goal with this strategy is to get into customers’ minds and establish your business before the copycats come along. We will eventually see if Birddog can achieve this long-term goal.
Small Ponds
Small ponds are the tiniest customer segment possible. Your goal is to make them the happiest people on earth. It’s a symbiotic relationship where you make customers happy, and customers tell you how to make them even happier.
The small pond strategy is a Natural Fortification by nature of its ability to fly under the radar. Instead of choosing a causeway to compete over, choose a small pond that won’t attract attention. Small ponds aren’t naturally fortified in the traditional sense, but they are naturally too-small-to-care-about. Still, apathy is a good defense.
Eventually, however, you have to expand from your small pond. “Cross the Chasm,” you might say.
No longer protected by the “nicheness” of your market, you are now, hopefully, an adolescent company capable of competing in other ways.
Luckily, your happy customers from your small pond will be one of your greatest assets. Evangelists are worth their weight in gold, and you should have a few by now.
Many companies have taken this route. You might not remember, but Facebook (now Meta) started in a small pond. Facebook is now an industry-defining monolith with network effects spanning half the world’s population. But it used to be an upstart relying on a Natural Fortification. It had an uphill battle competing in this winner-take-all market, with the overwhelming power of MySpace’s network.
Facebook did many things right, but its success is often credited to a great synergy with their original niche: Harvard undergrads. They started small and garnered a group of evangelists who spread the product to nearby colleges, then to nearby populations, and so on.
Small ponds are strong fortifications against all forms of competition: both incumbents and other start-ups. A small pond strategy can be effectively paired with any of the other fortifications.
Blue Oceans
IN 2020 McKelvey introduced the idea of audacious entrepreneurship in his book Innovation Stack. The idea is to choose an idea so far from expectation that competitors are more likely to think you are crazy than they are to copy you. Like an explorer sailing to a far-off continent, an audacious entrepreneur will go where no one has gone before. You might call this a Blue Ocean Strategy.
McKelvey’s image of entrepreneurship is almost bucolic: This far into the unknown, there are no experts and no advantages, just grit, trial and error. You’re likely to be left to your own devices as no one even believes what you are doing is possible.
Blue oceans are exceptionally effective strategies because they transition into Innovation Stacks: a collection of knowledge, best practices, operations, and culture that make a company impossible to copy. By tackling an audacious problem, your solutions will be so unique no one will be able to replicate every innovation that lead to your success.
There are many examples of audacious business ideas. Square brought modern finance to a population ignored for decades, Southwest launched into the luxurious market of airline travel with the intent of democratizing it, and Tesla silently raced past the automobile market by ignoring the energy-intensive combustion engine. Each of these companies was aggressively attacked, copied, and lobbied against by incumbents in the space. If McKelvey is correct, each of them succeeded because of these hardships, not despite them.
Take Southwest — a famously profitable airline in an unprofitable industry. United and others tried to replicate a budget airline, but they all failed. Why? Because while United copied some of the innovations of Southwest, they aren’t able to copy all of them.
Remember TED?
No, not that Ted.
This one.
By the time TED, United’s budget brand, launched, Southwest had developed incredible operational efficiencies, a compelling employee culture, and a dedicated customer base. TED copied some of the innovations, but even with the expertise of their parent company, they couldn’t replicate all of the innovations in Southwest’s stack.
Blue Oceans are risky because the problems you are solving are difficult. Southwest almost failed many times, often due to legal and pricing pressure from incumbents. Yet with success, you’re audacious plan will create a strong Natural Fortification.
Tundra
I’m naming this Natural Fortification after the Russian Tundra. Invading Russia has become a trope for bad military decisions. Russians figured out they could just let an invading force into their Tundra, and the vast, barren, and harsh land would do all the work for them.
The size of Russia undermines any attempted supply chain and logistic efforts by the invader. You can achieve the same defense in business by using a strategy called Asset Decoupling.
Asset Decoupling is a business model strategy that undermines an asset or revenue stream of your competitors. The most successful start-ups of our time have depended upon this Natural Fortification because of its ability to keep large incumbent companies out of the space.
Airbnb, Uber, Twitch, Instagram, and many others used Asset Decoupling (often by accident) to redefine industries. Ask yourself: Why didn’t the massive trillion-dollar hospitality industry try to compete with Airbnb? Because doing so would undermine their assets (hotels) and take away from their own revenue streams.
While you might say Airbnb was revolutionary, you don’t have to be revolutionary to use Asset Decoupling. Dollar Shave Club is a wildly successful shaving supply company. They weren’t audacious, they didn’t have any technology or secret sauce, and they entered a big pond as a small fish. How did they succeed against incumbents with the ability to out-price, out-market, and out-distribute?
Dollar Shave Club is touted as one of the first companies to take advantage of a direct-to-consumer subscription model. Using recurring monthly payments and shipments of supplies has several advantages: a consistent revenue stream, no payments to a middle man like a grocery store, and one less trip to the store for customers. However, more importantly, the subscription model tends to Asset Decouple incumbent business models.
Dollar Shave Club decoupled the incumbent’s primary revenue stream: razor blades. The standard business model of incumbents like Gillette was to sell a cheap razor handle and upcharge for the razor blades. This model is incredibly profitable — Gillets’s razors were a cash cow. When Dollar Shave Club inserted itself into the consumers’ shaving habits, Gillette couldn’t copy the subscription model without undermining their own highly profitable operations.
The larger the revenue stream, the more incumbents will want to protect that revenue, the larger the Tundra, and the more effective Asset Decoupling is. That is why most unicorn start-ups used Asset Decoupling strategies to succeed in large markets with capable incumbents.
Rivers
Moats are great, but you need to dig the trenches and find the water, which is no menial task. Why not use an existing river instead?
Rivers are the most straightforward fortifications on this list. They are patented technology you already have, a unique data source, an exclusive strategic partnership, or a secret sauce your grandma passed to you in her recipe book.
Rivers give you exclusive control over a small area of technology, data, or product. They are powerful, and If you have one, great! Don’t screw it up.
However, it is worth noting the limitations of rivers — they are immovable. If you have a patent, there’s no guarantee it will be a usable part of a successful product. Technology does not make a good product; a good product leverages technology.
You can, however, leverage a river directly for licensing and architectural strategies — as a city can profit from facilitating ships down a river.
A great example of the misuse of a river is TiVo, the original DVR used to record and fast word live TV. TiVo focused on leveraging their river (original technology) and built it out into an extensive moat. Despite their vast IP and revolutionary product, their effort to go direct to market failed.
The cost of educating a customer base about a whole new product was untenable for the start-up. After a decade of marketing, TiVo still only had a 6% market share. They didn’t have the power to out-market the cable and media giants, and they didn’t use any other Natural Fortification to level the playing field.
Eventually, TiVo realized its mistake and focused on licensing. Embracing the river finally gave them the profitability they were looking for.
Some start-ups use Natural Fortifications on purpose, others do it by accident, and yet many don’t use them at all — we don’t hear about the many because they don’t succeed long enough to be written about. Don’t be one of the many.
In fact, most successful companies use multiple fortifications. Amazon used small ponds, blue oceans, and asset decoupling. They started in a small pond as an online book-seller before expanding to larger markets, they wholly ignored brick and mortar retail, heading for the blue ocean of online sales which no one had done before, and in the process completely undermined the massive brick and mortar assets of the competition.
Positioning
Strength: Positioning can always be used — either on its own or in addition to other fortifications.
Weakness: You can be copied directly by a new brand.
Long Term Strategy: Hold onto and reinforce a strong association in customers’ minds.
Small Pond
Strength: Deep Customer Intimacy, evangelists, effective against incumbents and start-ups
Weakness: You’ll need another plan for crossing the chasm.
Long Term Strategy: Customer Intimacy as a core Value Discipline.
Blue Oceans
Strength: You’re crazy, and no one will copy you.
Weakness: You’re crazy, and the idea probably isn’t even possible
Long Term Strategy: Value Chain Innovation or Market Disruption.
Asset Decoupling
Strength: Power increases proportionally to the size of the market.
Weakness: Especially in large markets, you will need to race other start-ups taking advantage of the same fortification.
Long Term Strategy: Disruption — move fast, take on the competition and create a new paradigm.
Rivers
Strength: Monopolistic advantage from the start.
Weakness: Technology doesn’t solve the problem of product-market fit. Limited range of applications.
Long Term Strategy: Licensing or Architectural.
