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October 25, 2006

How to Change the World: Defensibility

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Blog reader Curtis Thompson asked me a very good question a few days ago: What should an entrepreneur say when she’s asked what makes her company defensible? This question is more and more common as more and more entrepreneurs start “Web 2.0 companies,” and investors torture themselves by wondering why they didn’t fund YouTube.

“Defensible Web 2.0 company” is an oxymoron in the sense of a quick, irrefutable response to the question. First, do yourself a favor and examine the source of the question. If it’s a pencil-necked rookie investor or associate with an MBA, it means that you’re dealing with someone who wants to make himself look smart. If it’s an experienced investor, then understand that he’s not expecting a bullet-proof answer but wants to see if you’re street wise, clueful, and cool under pressure (or a reader of my blog).

Thus, this seemingly simple question is one of the hardest for an entrepreneur to answer. A good response requires a combination of clairvoyance, street wisdom, humility, honesty, and cockiness. More than anything else, it’s a trick question to see what you’re made of. First, let’s discuss the three worst possible answers so that you don’t show that you’re made of stupidity:

  1. “Patents make our business defensible.” Go ahead and file them because you may someday achieve huge success and therefore have the time and resources to go to court. However, the most valuable outcomes of a patent are often impressing your parents and filling up space in your MySpace profile. (The exception to this rule is biotech, chip design, and medical devices where a patent really means something.)

    As a startup, it’s highly unlikely that patents will make your company defensible because you won’t have the time or money to do battle with a Microsoft-esque competitor. Sure, every few years you hear that Microsoft has to pay a company tens of millions of dollars, but “suing Microsoft” isn’t a viable (or attractive) business strategy.

  2. “We’re the only guys who can do this.” This is a signal to investors that you’re clueless and don’t even know how to use Google. There are very few teams that have a monopoly on knowledge or implementation skills. This is like Terrell Owens claiming that he is the only wide receiver that can help a football team win the Super Bowl, so skip the grand delusions.

  3. “[Big-name potential competitor] won’t compete with us; they’ll simply have to buy us out.” Speaking of grand delusions, this is even worse than TO’s. Espousing the theory that what makes your company defensible is that potential competitors will buy you out will put you in the main display of the Bozo Hall of Fame.

Now that you know what not to say, here’s a top-ten list of what to say. However, as my mother used to tell me, “Don’t be a khazer“ (Yiddish for “pig”) by using them all because your answer won’t ring true if you do.

  1. “We know that there are no ‘magic bullets’ that provide defensibility.” This is a great way to start your answer. It shows that you’ve been around the block and understand how the world works. An experienced investor will breath a sigh of relief; an inexperienced one will want to call his professor.

  2. “We have filed for patents, but we know that we cannot depend on patents as a major component of defensibility.” This is the perfect treatment of patents: You filed for them just in case you can someday use them as a legal tool, however you realize that until those halcyon days, you will have to fight with different weapons on the battleground called the market, not the legal system.

  3. “We have an x month head start (mention “x month head start” only if x exceeds nine), and what we’re doing is hard. We know we have, at best, a temporary lead. It’s so hard that few established companies would defocus themselves by trying to do what we’re doing.” This shows that you’re both ahead of the market but clueful enough that leads don’t last. Plus, investors want to believe they’re ahead of the pack.

  4. “We’ve built similar businesses before.” This makes the case that you have an advantage on your side: you’ve done this before, so that even if others are doing it, you can do it better and faster.

  5. “We’ve amassed a ton of relevant domain expertise because our founders sold to these customers before.” Now you’re talking. You’ve got an inside track with established contacts and established reputations. This is getting interesting.
  6. “We used to work at [insert big-name company], so we know it won’t be a competitor. In fact, we quit the company to start this because our management refused to address this lucrative market.” This is a twofer: believable inside info about a worrisome potential competitor and another way to claim domain expertise.

  7. “We don’t know if we’re the only people who can or are doing this, but we’ve already signed up key customers like [insert the biggest names that you truthfully can] to use our product. You’d think they’d know of better solutions if they existed.” The point of this is use external, third-party confirmation of what you’re doing.

  8. “We came to you because we believe that the backing of a firm like yours will dissuade other firms from investing in competitive companies. We also know that you have a world-class Rolodex as well as access to the best talent.” The key to this response is to say it with a straight face because it is a suck up, but investors loved to be sucked up to. This is a lot easier to say at a Sequoia Capital; Draper, Fisher, Jurvetson; or Kleiner, Perkins than at, say, Chaim, Yankel, and Pippel, LLP.

  9. “We expect that there will be competition because we’re not working on a get-rich-quick gimmick. This is a real business that we think is going to be big.” This is music to an investor’s ears: a big market that has competition beats the hell out of dominating a market that doesn’t exist.
  10. “It’s a race, and we’re going to work like hell to reach escape velocity. That’s the bottom line.” Whether you realize it yet or not, this is as good as it gets. What makes a company defensible is that it has scaled to the point where it’s achieved critical mass and has become synonymous with a market (online video: YouTube), sector (rental DVDs: NetFlix), or task (search: Google). And this achievement renders all the other bull shiitake you can fabricate essentially impotent if not downright laughable

When all the dust settles, the goal is to paint this picture:

  • You’re street wise, so you know that you can’t depend on patents.

  • You understand that very few companies are truly defensible for reasons other than because they either achieved critical mass or had a nine-month head start.

  • You have domain expertise, connections, and what you’re doing is hard.

  • You’re not the only team that can do this, but you’re in a better position than most.

  • You believe that you can build a business better than anyone (a little cockiness is necessary for an entrepreneur to survive).

One last power point: These explanations will only work on an investor that already fundamentally believes in what you’re doing. If the investor doesn’t believe, then there’s probably nothing that you can say that will convince him of your defensibility. Nor, frankly, is defensibility the sole reason why he’s not interested. Then you should just move on to the next investor with the full understanding that achieving success is the sweetest revenge.


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Listed below are links to weblogs that reference How to Change the World: Defensibility:

» How to Change the World: Defensibility from Marketing & Strategy Innovation Blog
by: Guy Kawasaki Blog reader Curtis Thompson asked me a very good question a few days ago: What should an entrepreneur say when shes asked what makes her company defensible? This question is more and more common as more and... [Read More]

» How to Change the World: Defensibility from
Blog reader Curtis Thompson asked me a very good question a few days ago: What should an entrepreneur say when she’s asked what makes her company defensible? [Read More]

» Project and Business defensibility from gkoya
Using Guy Kawasakis primer, self analysing my current major project yields: We know that there are no magic bullets that provide defensibility. We know that there is not a single shield that we can raise that can ma... [Read More]

» How to prove defensibility? from Innovation Zen
Suppose you just started your own company and you are looking for some funding or venture capital. One of the first questions you will be asked is “What does make your company defensible”? ... [Read More]

» The evolution of intellectual property from Next Level Innovation Blog
Firms endeavor to find the ideal balance between traditional proprietary invention and the new more open collaborative business models. IBM assembled a worldwide community of 50 experts in the fields of law, academia, economics, government, technology ... [Read More]

» Guy Kawasaki on defensibility from Jigsaw Technologies
Guy Kawasaki has written a great post worth reading on the idea of Defensibility. Something that every startup is going to be asked, so you might as well as have the cheatsheet. Full post here ... [Read More]

» How to Change the World from www.yunar.com
What should an entrepreneur say when she’s asked what makes her company defensible? This question is more and more common as more and more entrepreneurs start “Web 2.0 companies,” and investors torture themselves by wondering why they didn’t fund YouTu... [Read More]

» When Starting a Company: Don't Worry About Google from Redfin
Guy Kawasaki today published a stupendous blog entry about defending a new company from competitors, arguing that all you really have in a startup is a jump on understanding the problem and building the solution. It's a very good argument.... [Read More]

» Counterpoint: Patents and Defensibility from Marketing & Strategy Innovation Blog
By: Guy Kawasaki Three of my buddies who are patent attorneys disagreed with my diatribe against patents as a key component of a startups defensibility. Being the open-minded Guy that I am, I offered to publish their counterpoint so that... [Read More]

Comments

why change the world? why not keep the way it is now? yes the world is good enough for how it is now, and it will be good enough for you me everyone, there is not use the change it

Good read, Thanks!

Steven Burda, MBA
www.linkedin.com/in/burda

e-mail me to connect:
steven.burda.mba @gmail.com

Thanx Guy - great post (again). I'm trying to raise capital to a start-up with some great patents :-) And it is easy to convince yourself that everything is just super when your technology is patent "protected". Outstanding resource for wannabe entrepreneurs

What about the "Everybody come and see how good-looking I am" line? Would that work?

It seems like referrals are a major boost also- getting someone important to say something nice about you and/or your model.

Here's an answer: This business is our specific answer to a general business problem (insert that here). I will provide the specific reasons why, but first, I just want to say -- No one has our idea, no will be able to implement our idea, it is unique because of the people involved.

That may sound like BS, but it's true. No one has "my" idea or "my" solution. It is unique to me. There may be substitutes, there may be alternative - but it's not the one I'm building.

That's should be the biggest message presented - and that ends up being confidence in our own personal ability to execute "my" idea. Then you get into the proof points.

So many great advices, right now when I need them...
Thanks a lot for helping me to challenge myself ;-)

Awesome post Guy!

I'm an Entrepreneur in Residence (EIR) with a VC firm in Canada (eh!). While there for the last six months, I've had to opportunity to sit in on a number of pitches and follow up with the partners. I can directly attest to the negative reaction the VCs had to overconfident founders who think no one else could do what they could. That pretty well killed it right there!

Another good one was a group who was going to save an entire troubled industry with their idea. The VC would much rather invest in emerging markets than declining ones ... kinda obvious.

I recently wrote a post entitled "crush crush crush" on my blog that shares some of my thoughts regarding people that say "Apple could do that ... why won't they just crush you!"). It's not as eloquent as Guy's post but I think it's worth checking out.

http://isfanstartup.blogspot.com/2006/10/crush-crush-crush.html

Guy,

Thanks for a great response. Unfortunately I had to respond to this question before reading your post, but the good news for me and my team is that I actually gave similar responses to as many of your points as are relevant to our current situation. I am glad to see that we are thinking about this issue the right way.

One follow up question. If you can't make the same statement as you make in #5 (which seems to be the scenario you would be most interested in), but you have built similar businesses before, how much traction does a company in the social networking space have to have before it is interesting to investors?

OK. Patents, Shmatents.
BUT (tuchess oif der tish, as you might say), would you tell a bootstrapping software startup that it can forego the time, attention and money necesary to file for a patent and focus on building a better business.
And will VCs invest in a patentless, but otherwise promising, software startup?
Thanks

LOVE this post! Items 2 + 3 on the "Do Not" list made me laugh out loud. I still hear people saying things like this, and I always wish that they would listen to themselves talk...

You're the best.

Curtis's question seemingly doesn't specify Web 2.0, but your reference to it has led many commenters, in my eyes, to equate this post particularly with Web 2.0. Can you clarify if that was your intention and that, by implication, you believe Web 2.0 companies are inherently different from other entrepreneurial ventures?

***************

John,

The short answer is that I believe this for almost every company except something with hard, hard science like a new drug. Personally, I hate the moniker "Web 2.0."

Guy

Thanks Guy. I'm applying this info to our pitch to potential investors/business people for an innovative new church we're starting in NC. Our 'open source church service' will use 'stories instead of sermons.' We'll go into the community and world, find REALity based stories, produce them so that the story preaches, not me. Kind of an 'open source church service' model. May sound boring to vc's & techettes, but believe me it's extreme to most church types. For that reason we have to figure out how to pitch the vision to connect with CVC's (Christian Venture Capitalists). Thanks Guy for giving us great info that will help us do that.

An excellent article. I wish I had read 10 minutes before my latest appearance before a bunch of VCs.

I believe the only effective answer is 'Speed'. Everything else can be copied or circumvented. I believe only a strong market position can be defended successfully and then only some of the time.

A good list, but I think it's missing the strongest defenses: network effects with switching costs.

All of the major marketplaces (eBay, Half), social networks (MySpace, Facebook, LinkedIn), communications platforms (Office, PayPal, Skype, ICQ, Wikipedia, Flickr, Delicious) are very defensible because of network effects and switching costs.

Brand is also very important for commodity services. Google innovated in search and has survived many attempts to dislodge it because of brand (though Google AdWords has a network effect). Amazon's brand allowed it to extend from books to dozens of categories (though its recommendation engine based on the purchases of others is a network effect).

Guy, perhaps this should be a top 13 list? :)

let me clarify - my post below. specifically talking about the patent question. time to get some more sleep!

Guy:
One of your best posts ever. having been through many years of pitching and starting (technology) companies it is the one of the questions that drives you up the wall in a meeting - in many ways i like to use it to judge the ability/experience of the vc i am talking to. if they really think it is important (sometimes this borders on fetishistic) i know i am being bozoed and its time to cut bait.

Since companies are not defensible, maybe it's time to stop building companies and start building networks.

Networks get stronger as resources are added. Companies get weaker as resources flow into and create a competitive environment.

As long as we focus on building companies that inevitably end up as players in hyper-competitive industries, we are squandering resources and especially the ultimate resource, our time.

Instead, let's design networks to solve problems. Networks can be designed with companies as nodes where new entrants are incentivized by the structure to take their place as a new node rather than competing with existing nodes.

Personally, I don't want to see any more business plans, I want to see problem solving plans that leave doors open for others to join in and contribute to the solution rather than fighting over scraps.

A nitpick to be sure, but surely this should be "they're" and not "their"... ;)

"Plus, investors want to believe their ahead of the pack."

John

***********

John,

Thanks for this catch. You're absolutely write. :-)

Guy

Great post, as usual. Thank you so much Guy for giving us faith and hope in entrepreneurship.

I am not looking for money, but as I build my new venture, I think about defencibility several times a day.

As usual, it all comes down to common business sense. Ultimately, my defensibility depends on how fast can I improve my capabilities and how good I am in managing those resources?

Guy, I would like you to be on our board, but don’t get super excited :). I will let you know, when we are ready.

There are only two reasons investors will ask why "someone else can't come up with the same idea and beat the shiitake out of you"

1) They don't care about your idea. It's like they've decided it's too simplistic or just not their cup of tea. They'll be able to justify dropping it better (to themselves) when you say it isn't defensible; there's no way you can defend anything that needs VC to succeed.

2) They like your idea, but want to probe if you have thought about competition. Clueless answers like "no competition" or "We're simply the best team to get this done" will raise an internal alarm.

What you have to do is try and find out which of the above it is - the approaches to answer are quite different. One needs serious selling. The other needs to raise no alarms.

Maybe now I can sleep at night. (maybe) I feel cocky(stupid) trying to explain to older investors that the mere nature of the 'Web 2.0' movement contradicts traditional defensibility so I often get caught up in the traps of the question.

Hearing you say things like escape velocity, room for competition, etc., Guy, gives me confidence even though my business may not be in the basement of a stone fortress on a mountain, surrounded by moats filled with blood thirsty crocodiles, protected by a fire-breathing dragon.

Very good. It would help to explain that defence is "defence of a position". Many people do not clearly articulate what that position is, and why it is valuable, and how it is defendable. Of course, that position is also evolving. One of the best phrases I've heard that captures this challenge is "path dependancy", i.e. if you haven't come "this way", and had our experience/knowledge/other, then you would not have the experience/resources/other to take advantage of this opportunity...

What is domain expertise?

Your mother was Jewish? I'm kvelling.... who knew we had a Kawasaki of our own?
:)

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