How to Defend Your Startup
What is defensibility?
I am spending a lot of time at the moment helping various companies raise finance and one of the phrases that keep appearing is ‘defensibility’.
“How do you plan on making your company defensible?”
If a company is successful, it’s products, services and possibly entire business model will be copied. And unless it can differentiate itself in some way from these competitors — i.e. defend itself — it will be forced to compete by dropping its prices.
And here is the thing that a lot of startups fail to understand; competing on price is rarely a good thing. If you and your competition are both trying to gain an edge by dropping your prices, then a so-called ‘race to the bottom’ occurs. This is not a good thing.
This point leads us to a neat definition of defensibility in this context; it refers to a companies’ ability to maintain a competitive advantage in order to protect both it’s profit margins and market share.
When is defensibility important?
The simple answer: always.
The more detailed answer for current purposes: it is not only established businesses that need to ensure they are defensible; startups need to ensure this also.
More specifically, early-stage startups need to project forward and think through how they will grow a defensible business. What, in other words, can be done today to maximise the likelihood of growing a defensible business?
This question is important both in terms of internal strategy and, as the opening words above indicate, in terms of convincing investors that your startup is worth investing in.
How to make your startup defensible
It is this precise spot where I want to dig into … how can startups prove to investors that they will remain defensible as they grow?
- Firstly, know that you cannot make yourself bulletproof: as Guy Kawasaki points out (a) you cannot make your business 100% defensible and (b) investors know this and will be as interested in how your answer. So, do your research, think creatively and commercially and project confidence.
- Time: if you are able to get a head start on your competition, however slight, this can introduce defensibility. Similarly, being able to move faster than your competitors can give you a significant advantage.
- Team: your startup can appear more defensible by assembling a team that possess the right mindset and work ethic, as well as highly relevant skills and qualifications. However, what is far more impressive and impactful is assembling a team who have experience starting and scaling similar businesses
- Economies of scale: as you grow you gain more operating leverage, allowing you in turn to lower your costs. Where this is done strategically and at the right scale, this can make your business more defensible.
- Brand: building a strong brand can make your business incredibly defensible. If a consumer chooses you over a competitor because of the emotional and psychological connection they have with your brand, then you have an advantage. This is actually an ongoing process whereby each positive interaction between your product and your customers can further improve your defensibility.
Let me give you an example that I came across when researching this topic. It relates to Apple, as so many examples in the entrepreneurship space do. Apple customers often love the brand so much that when it is time to buy a new phone (for example), they comparison shop between Apple products, rather than between Apple and, say, Samsung. - Network effects: your product or service has ‘network effects’ if each additional user of your product adds value to the existing users. The most obvious examples are social media networks or messaging apps. In these instances, the more people that join that you find interesting or that you want to connect with, the more compelling it is for you to join. And once one company gets ahead, users/customers will not find as much value in using (or even trying) smaller competitors.
- Embedding: embedding works when you integrate your software into a customers technology or wider operations. The result is that it becomes difficult for that customer to remove you from their operations and replace you with a competitor.
This example is far more common where businesses operate on a B2B basis (Oracle is a good example here). However, a similar thing does happen in the B2C space, where consumers feel that moving from one company to another will be difficult, expensive or impossible. A perfect example (here we go again!) would be moving an Apple phone to Samsung. Although it is relatively easy to transfer your data from one company to the other, there is a perception that this will be difficult or that there is a risk personal (often sentimental) data will be lost.
Note: in certain instances, defensibility is actually achieved by making it as difficult or expensive to switch as possible. These ‘switching costs’ deter the consumer from moving to a competitor by effectively penalising them. Pretty shitty really, huh. - Data: we live in a world where ‘data is the new oil’, data is more valuable than gold’ and ‘data is king’. This is not hyperbole and, for present purposes, the ability to acquire, store, organise and utilise data is a critical part of building a defensible business.
In this context, data could mean previously disparate and unconnected information or it could mean data that has no or very limited availability elsewhere. Google have an unimaginable amount of data at their disposal, as do the other ‘data giants’, Amazon, Facebook, Microsoft and Apple. This data gives these businesses a nearly untouchable understanding of the information, their customers and how to market in the most effective way. - What is also telling is how many startups make it an early priority to acquire as much data as possible. This is often done but trying to present a trustworthy brand (of course we will look after your personal information … we are only a little startup!) or offering something for free (a guide, recipe book, seminar, free trial etc.) in exchange for a customers’ personal information.
This list is not exhaustive and there are many other ways to make your startup defensible. Moreover, you need to recognise that each startup is unique and, as such, you should take the time to reflect on your business and your business model. What, in other words, is it about your startup that is (or will be) defensible?
Even though each startup will have its own way of prioritising the ways in which it is defensible, I would argue that the most important (at least in terms of the list above) are brand, network effects, embedding and data. Time, team and economies of scale are important, but the last four in the list will typically be a better way to defend your business.
And impress and win over investors.
