Competitive Advantages & Defensibility; How to Achieve and Maintain a Startup’s Market Position

The game is changing, it’s not just about how to achieve the desired market position, it’s about how to maintain it in the long run. It’s something you have to understand before starting to raise capital.

At the beginning of the internet, it was only necessary an (I) Idea to raise capital (selling tennis rackets), then a (II) Validated Team was needed to undertake the project (McKinsey guy or second-time entrepreneur), nowadays we are in the (III) Competitive Advantage era (UX & Technology) and … That’s all? Of course not, you will have to explain how you are going to maintain this market position through (IV) Defensibility.

I will not take into account public monopolies, patents, and trade secrets because are the most obvious and extremely difficult to obtain. These are the different kinds explained through examples of Lanzadera Startups:

Figure 1: Competitive Advantages. Source: Own elaboration.

1. Momentum is everything for a startup, mainly from the customer point of view. Holafly sells SIM cards for traveling and not paying roaming. They have been gaining experience since 2017 in the market and preparing to be one of the first players offering eSIM, which is the next market trend. They have gained enough market share and brand recognition.
2. Entry Barriers for Competitors. In the case of Afterbanks they have developed an API for bank aggregation with an incredible UX that isn’t easy to replicate or to improve by potential competitors, apart from some licenses and adaptation to the PSPD2 regulation needed to operate in this market. Proprietary Technology has to be at least ten times better than other alternatives. Another entry barrier they have created is the amount of Data collected by its 150.000 daily connections from more than 60 companies.
3. Costs Leadership. The co-founders of Gana Energia previously managed a call center company with big telcos as customers, with this experience they have optimized their customer support in Gana Energia, achieving more productivity per employee and better customer service. This impacts their Economies of Scale improving Unit Economics.
4. Capital. When a company has raised more capital than its competitors, it can afford increasing acquisition costs, hire better employees, improve its product, etc. In this case, Geoblink has raised more than €7M, this fact discourages VC to invest in its competitors.
5. Know-How. Mesbook founders Diego and Fernando were managing factories for more than 15 years before launching their startup. So, they started their startup with the significant market knowledge and network.
6. Traction. Due to the speed of the execution of 2gteher’s team, they are gaining more than 2.000 customers per month, this is a competitive advantage in the short and mid-term.
7. Data. Customer data will allow improving the product, UX, marketing campaign, offers personalized, in other words, It can create an unbeatable competitive edge. When learning of one customer causes better experience in others creates network effects and switching costs. Bionline is a B2B software which helps companies to forecast the behavior of its customer through AI, with the objective of improving marketing efforts.

When Competitive Advantages have been recognized, it’s time to explain what it is going to allow the startup to maintain it. There are some indicators for future Defensibility of the Startup, also known as Moats:

Figure 2: Defensibility. Source: Own elaboration.

1. Recurring revenues are one of the best measures of a startup’s health. It shows how your product is adding value to its customers. Every investor will check this when analyzing your company and it will depend on the business model. For example, customer retention by cohorts, upselling, LTV:CAC, negative churn, etc. Typically, the business model with the best customer retention is SaaS B2B like Nirvine KPI.
2. Network effects. Network effects are the incremental benefit gained by an existing user for each new user that joins the network. As more users play Codigames games, they receive more value, so the same users are responsible for bringing more users through word of mouth. These recommendations usually come from members-get-members actions.
3. Switching costs. Ordatic is channel manager for connecting all the delivery platforms with the POS of restaurants. Once a restaurant manager has trained its employees to use the software, it will not change to another one just for better prices or incremental changes in UX. As a consequence, it will derive higher customer retention.
4. Brand awareness. Creating a strong and powerful brand is the best way to grow a monopoly. UO has created a big community of followers, this helps UO to receive feedback to design new products, to reduce customers’ acquisition costs thanks to customer loyalty, etc.

Finally, we can see in the following graph how the competitive advantages increase the valuation of a startup in a linear way and the defensibility characteristics in an exponential way.

Figure 3: Correlation between competitive advantages/defensibility and startup valuation. Source: “Defensibility creates the most value for founders” by James Carrier.

As Peter Thiel tells in his book “Zero to One” to build a sustainable Monopoly it´s needed to start in a Niche Market, then gradually expand into related markets with a clear long-term Vision.

Some insights have been acquired in articles like “Defensibility creates the most value for founders” from James Carrier, “What Makes a Business Defensible?” from Cian O’Connor between others and adapted from my experience working with startups at Lanzadera.

Lanzadera is a startup accelerator and incubator based in Valencia supporting more than 100 entrepreneurs per year. Lanzadera has different programs to cover the spectrum from MVP to Scale ups.

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• OkyWatch Business Case: From Copycat to Seeking Traction
• Unit Economics: Is Growth the Ultimate Goal of a Startup?

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