investment, lean-startup, angel-investorsWe are a newly established startup. Recently, I was asked (CEO) by an investor the following question:
Why your product/service is hard to clone by someone else?
I really don’t know what is the perfect answer for such question as I believe that any product/service can be cloned as it is only a matter of time/money.
Please share your thoughts.
Investors prefer businesses that are harder to compete with, because they have the potential to be more profitable.
Consider a toll bridge: once built, it is essentially impossible to compete with, because any time someone started to build a competing bridge, you could just lower your toll price, to make it unprofitable for the other bridge, and construction stops. Then it’s back to setting your own price.
On the other end of the spectrum is something like a lemonade stand, which is very easy to compete with on price. If you sell lemonade for a dollar, there is very little preventing me from setting a stand next door and selling it for 75 cents, which would cannibalize 100% of your business, unless you lower your price to match mine. Eventually, we are both selling lemonade at cost (zero profit), just to try and hold on.
So the investor wants to know what will make it hard for me to compete with your lemonade stand. Maybe you have the best lemonade due to a secret recipe (okay) or a patented process (better). Maybe you have an exclusive territory with the lemon distributor (good), or a celebrity spokesperson (okay), or a great brand (for a startup? meh). Maybe you have a proprietary training system that produces the friendliest and most-attractive lemonade-sellers. Maybe you have an expensive slushie machine that creates a high startup cost.
These obstacles for potential competitors are sometimes also called “barriers to entry”.
In general, investors prefer “hard” barriers to entry, such as patents or proprietary technology. Specialized industry knowledge and connections can also be valuable (e.g., a former general starting a defense contracting firm). Brand/marketing type differentiators are generally seen as weaker protections with startups, but every situation is different.
The answer I would deliver with regard to my own budiness is that it’s not enough to clone my service. My service is constantly improving according to well thought out and researched design principles. A copy-cat will never keep up nor understand the underlying reasons for my design decisions.
If your invention is simple enough, patent protection will go a long way. When I think of “simple” inventions, the first one that comes to mind is the sticky note or Post-It. There are so few “parts” to it that no one can make a knock-off without infringing the patent. Something like a cell phone is hard to patent because it is so complex; with enough tweaks, a competitor can introduce another cell phone that’s similar enough to the original but doesn’t infringe any patents.)
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