Competitive Advantages (riffing off of ASmartBear post)

by Giff on July 21, 2010

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I’m a big fan of Jason Cohen’s blog A Smart Bear, but I gave him a hard time after his last post “Real Unfair Advantages” (read that first). I did not think it was concrete enough for the young entrepreneur. Let’s face it, you either have “authority” or you do not. The entrepreneur with the $100M exit under his belt, or the publicly-known domain expert, does not really need help.

Jason is right that most things cited as competitive advantages are flimsy structures easily knocked down. Things like passion, design quality, obsession, etc cannot be promised. They must be proven. If you aren’t a business “celebrity”, do not be discouraged. You can succeed with hustle, smarts, a strong customer focus, and staying power.

Let’s imagine two scenarios for the pre-proof, pre-initial-traction entrepreneur asked about competitive advantage: 1. you are applying to an incubator a la Y Combinator or Capital Factory; or 2. you are applying to seed/angel/micro-VC investors.

In scenario 1, if you get asked about competitive advantage, don’t fake it. If you have a good one, use it. Otherwise, be honest that it is an execution play and sell yourself as best you can. There’s no shame in being an execution play. Look at Zynga and Groupon — they have built competitive advantages on multiple fronts as they have gone along (brand strength, capital raising, domain knowledge, sales/distribution, etc).

In scenario 2… wait… why are you in scenario 2? Instead, shore up your savings account before starting a company, then spend your time on the business, not chasing investors. Don’t spend your time obsessing about theory and powerpoint slides that are immediately dismissed. It will take time to get “product-market fit” and initial traction. Use that time to build authority, not just your product.

Still, on the topic of competitive advantages:

  • I like competitive advantages built into the product. Marketplaces and social networks have network effects. Data-driven businesses can always stay one step ahead of new entrants.
  • Technology can be a real competitive advantage if you are tackling a gnarly problem, but you must reality-check whether the complex technical solution is really necessary, or if the 70% solution would suffice (if so, go with the speed of the easier solution).
  • There are sales and marketing competitive advantages: in the enterprise space, signing up marquee beta customers makes a big difference; exclusive distribution deals are another example, albeit very difficult for a super-early stage startup to pull off.
  • Business model innovation *can* be a competitive advantage against incumbents, although it needs to be a radical enough change that would tie their channels or supply chain in knots to try to duplicate.

If you do not have a monumental competitive advantage, that does not mean you should pick a different business. They certainly help reduce risk, but I have come to the conclusion that the best competitive advantage is really good execution. Speed. Focus. Quality. Hunger. These cannot be sold to a cynical investor, but they do need to be promises to yourself.

(Photo of Bodiam Castle by antonychammond, via Flickr, Creative Commons)

  • http://twitter.com/asmartbear Jason Cohen

    Thanks, it’s a smart and accurate rebuttal that a lot of the things on the list are things to work towards instead of have at the beginning.nnStill, there are companies which have one of these things at the beginning, and although it certainly doesn’t guarantee success, it certainly looks better when you’re raising money.nnOf course having bootstrapped two of my three companies I also agree raising money isn’t necessary!nanThanks.

  • http://giffconstable.com giffc

    I totally agree that the more you have, the better it looks. Sometimes it can be a red herring, however. Further, many of the most successful companies out there right now had easily dismiss-able “competitive advantages” built in at the start — they had to build them through execution.nnAs for funding, I’ll come right out and say that my current startup isn’t possible to bootstrap all the way, but we’re not going to raise until we’re ready. I think many people think they can raise money earlier than they actually can — I wrote more about this in http://giffconstable.com/2010/05/the-cold-reality-of-first-time-funding/nnThe reality as far as I can tell looking around, is that if you want to be an entrepreneur, you should first save up enough money to go 9 to 12 months without salary. I know some folks are going heavily into debt but I really think that’s a bad idea… a topic for another post.

  • http://twitter.com/asmartbear Jason Cohen

    Thanks, it's a smart and accurate rebuttal that a lot of the things on the list are things to work towards instead of have at the beginning.

    Still, there are companies which have one of these things at the beginning, and although it certainly doesn't guarantee success, it certainly looks better when you're raising money.

    Of course having bootstrapped two of my three companies I also agree raising money isn't necessary!
    a
    Thanks.

  • http://giffconstable.com giffc

    I totally agree that the more you have, the better it looks. Sometimes it can be a red herring, however. Further, many of the most successful companies out there right now had easily dismiss-able “competitive advantages” built in at the start — they had to build them through execution.

    As for funding, I'll come right out and say that my current startup isn't possible to bootstrap all the way, but we're not going to raise until we're ready. I think many people think they can raise money earlier than they actually can — I wrote more about this in http://giffconstable.com/2010/05/the-cold-reality-of-first-time-funding/

    The reality as far as I can tell looking around, is that if you want to be an entrepreneur, you should first save up enough money to go 9 to 12 months without salary. I know some folks are going heavily into debt but I really think that's a bad idea… a topic for another post.