Startup Paradox of Barriers to Entry
Successful businesses want to prevent competition as monopolies give companies more pricing power. Competitors for an incumbent include startups, incumbents already in its field, and competitors from new fields. Ventures capitalists enjoy when new product categories are created because they than don’t have to overcome existing barriers to entry. Unless a startup is creating a new product domain, startups must first overcome existing barriers to entry and at the same time build new ones to prevent potential competitors. Two main classes of advantages exist to prevent competition: the businesses’s scale/ expertise give it an advantage to provide a better product and even if a competitor builds a better product, this additional value does not justify the switching costs.
First, businesses with their scale and expertise can have unique advantages to prevent competition. First, a business can have the required expertise, ip talent, or higher R&D budget to build the products that other competitors can not easily maintain. This barrier is useful for extremely difficult technologies such as in chip industry. Second, companies can start to develop a brand where customers become loyal and always believe that the company has a better product. Third, companies with their scale can generate a distribution advantage. Fourth, they can have network effects and marketplace effects. Fifth, they can have aggregated data on their users that can allow them to build better products especially with machine learning businesses. Sixth, these business can have a distribution advantage on their competitors. Finally, economies of scale can extremely useful especially in fields with high fixed costs such as manufacturing.
Business can also build products with high switching costs. People can form habits using a product and have a difficulty quitting. They can also have spent time learning how to use a product such as users with Excel. People can have data, connections, and preferences stored in one network, which would be hard to export to another network. Furthermore, products users have underlying infrastructure and dependencies built on an existing product, which would have to be changed if they switch products.
