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When you’re building your startup, protecting your business and idea is just as important as building the product itself. As you start creating your business, you should be thinking about building barriers to entry into your product, your business model, your selection of target customer segment, and/or any other aspects of your business in order to protect yourself.
So, what is a barrier to entry? A barrier to entry is a method of protecting your startup so that competitors (both larger businesses with more resources as well as other startups) can’t come after you easily. A true barrier to entry should literally cause the competition to say that they can’t move from where they are, to where you are.
Once the industry leaders find out that you’re onto something interesting, they’re going to come after you! If you’re building a new product and just focusing on the technology of it, it’s likely that those leaders in your sector will be able to come after you easily - after all, the bigger established players in your market likely have more resources, including technologists, than you do! Similarly, if you only have a product that’s faster, better, or cheaper, those companies with more resources will have a measurable way to win, and will be able to compete with you at scale (for example, they can often operate at a loss just to get you out of business - how do you compete with free?).
While intellectual property rights are a great place to start, most startups don’t have the resources to defend that in court against larger companies. Lawyers are expensive, and it takes lots of money to defend your intellectual property - entrepreneurs often find that patents alone are not enough to protect their startups.
Instead, find some combination of technology, know-how (like IP), business model and customer segment that makes you special, operating in a part of the market and with a business that no one else can approach easily. Don’t fall into the trap of approaching everything with a technology bias, but instead think about key areas of how to define or redefine the competition in a way that puts you in a position to win.
Here’s another Startup Secret: create a moat! Find the white space in your market, and then defend that with your moat, or barrier to entry. Check out some of the resources at the end of the lesson for more on building moats around your business.
One of our favorite barriers to entry is your business model. This is one of the areas in which startups really have the advantage. While it’s easy for startups to pivot and iterate on their product and their business model, larger companies with more resources are slow-moving and find it difficult to chase a new business model. The larger they are, the more likely they are to be titanically slow at responding.
Another aspect in which you can gain differentiation and build a barrier to entry is in your distribution model and market positioning. If you’re able to get into a space that bigger companies can’t enter effectively, you’ll be able to find white space in the market.
We suggest that you actually draw a 2x2 picture. Map every industry player and competitor out on axes that make sense to you, like customer segment, revenue model, price, etc. You’re trying to end up in the upper right-hand corner here! Let’s look at the anti-virus software company, Symantec. In the 1990s, all software was almost exclusively distributed in physical CD format, which may seem foreign to us now! But, every time you wanted to update your anti-virus software, or any other software, you had to drive to the store, buy the physical CD, and install it manually on your computer. Additionally, anti-virus software was a very busy space, and most companies were selling just that: software, and occasional updates to help customers protect their computers against viruses.
Symantec came along and changed the game: they realized that customers didn’t want software, they wanted protection. And that protection really means that they were interested in frequent updates to the virus signatures so their protections were current as new attacks appeared. So the team revamped their whole business model to focus on providing customers with what they really wanted: frequent virus signature updates.
Symantec decided to go with a subscription model that sold updates to the software instead of focusing on the software itself. No longer did individuals have to go to a store and buy a box with a software CD in it, except for the first download. Instead, Symantec focused on staying updated on virus signatures. As a result, Symantec produced a more sustainable business model, with revenue coming in more frequently because customers were happy to pay for frequent, automatic updates.
This new method of distribution allowed Symantec to quickly become a market leader, as the convenience of their product significantly decreased the pain of adopting their product. As other software providers were already distributing their product physically through CDs, it was very difficult for them to pivot and change their business model and distribution. In this way, Symantec used their distribution system for a barrier to entry.
Get creative in thinking about your barriers to entry! One of the barriers that few people consider is a network. If you’re a product with a community, your network and users are one of the major barriers to others following you into your space. This is called the network effect, where adding a new customer increases the value of the product for all of your customers.
For example, think about social media outlets like Facebook or Twitter. For every user that signs up, the platform becomes more valuable for all existing users. Social media wouldn’t be much use if there weren’t people to connect with!
And, even if another company could build a better social media platform, it’s unlikely that they’ll be able to penetrate the massive networks of users that the major social media platforms already have. You could also think about open-source projects like Drupal, or community-building products like Discord or Disqus; their product isn’t just the technology, but their network of users as well.
In recent years, one of the huge barriers to entry is data. As users and consumers, we often don’t think about this aspect of a product, but the rise of the internet has made it possible to use and sell user data as part of a business model.
For example, Google started as a search engine, mapping all of the internet’s information and making it accessible. But the most valuable thing they own is data. Instead of selling their products like Google Docs or Gmail, they map users across the internet and use that to build their company, improve their products, and make money.
Things like data are a huge barrier to entry. If you can find yourself in a corner with valuable information that other companies can’t get access to, you’re likely to be in a great position!
This list is, by no means, an exhaustive list of barriers to entry. As we encouraged earlier, be creative! Defenses for your business are critical in the earlier stages of your company, as they’ll allow you the space to grow before the industry leaders attempt to come after you. As you gain traction, your barriers to entry should grow with your business, building up that moat around your CORE value.
Investors will be sure to ask you: why is your idea impenetrable? What’s going to stop somebody from coming along and replicating this idea? Why will your idea be sustainable? Your answer to all of these questions should include your barriers to entry! Be sure to be clear and concise about how you’re going to prevent others from following in your footsteps or entering your space.
For more on building barriers to entry, check out our original workshop here. If you have any questions, be sure to look into the resources and comments below, or head over to our forums to chat with other entrepreneurs!