Tools#other
16 March 2021
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Four ways startups protect their ideas. Competitive protection is more than just keeping secrets and filing for patents

If you build a great product or service, but one that can potentially be copied, how do you protect it? That question came in through my channels last week with no context and no background information. Thankfully, with 20+ years experience building companies on sweat and intellectual property, I don’t need either.

The short answer is: A truly great product or service idea is one that can never be copied, because its success or failure all depends on how well the company executes the idea.

The longer and less-bullshit answer is far more complex and nuanced. But it’s still about playing chess while everyone else is playing checkers.

The swamp and the moat

I like to use story elements when it comes to giving actionable insight on these kinds of complex concepts. Stories are great because investors, board members, and customers can understand them quickly, and entrepreneurs can quickly apply the concepts to their own unique product or service.

One of the key story elements we’re using for our next fundraising cycle paints a vivid picture of the value of our intellectual property and our plans for keeping our secrets away from the inevitable competition. I dubbed the story the swamp and the moat.

Quick background: At Precision Fermentation, we’ve developed a hardware and software solution to monitor and automate brewing. When you brew beer, what’s inside that tank is a swamp. It’s dark, it’s murky, and there’s all kinds of science happening with bacteria and chemical reactions. It’s incredibly difficult to monitor, let alone automate. I could drone on, but I think I painted the proper picture.

We’ve developed a solution that not only lets you see inside the swamp, but gives you a very clear map through that swamp to a very high-quality product on the other side.

Optimised. Efficient. Repeatable.

The problem you’re trying to solve with your product or service is also a swamp, just maybe in a less physically metaphorical sense. If the problem wasn’t murky, soupy, and difficult to cut a path through, someone else would have already solved it the right away.

Now, the words “the right way” are very important in the context of your startup. There may be a bunch of people trying to solve the same problem, but there is usually only one winner in every battle. If your solution can be that winner, you need to build your castle and your moat.

Obviously, the castle is your company and its product or service. The moat is the protection you build around your solution to be that singular winner. The moat is critical for scale and growth, the kind that’s unencumbered by knock-offs and also-rans.

Most of the time, that moat is built with experience. The harder your path was to get through the swamp, and the more mistakes you made that you had to overcome, the more surprises that happened to you — and will happen to all your competition — the wider your moat.

But there are a lot of ways to build a moat. Here are the four that I’ve used most often.

Method 1: Build rapid market share

Competitive protection isn’t always about defence, sometimes it’s about an overwhelming offence. If your company can grow quickly enough and quietly enough to emerge into the public eye with an insurmountable lead in market share, you have first-mover advantage.

When’s the last time you went to the Internet for information about a given subject and “Duck-Duck-Go’d” that subject? I use Duck-Duck-Go. I still tell people to “just Google” what it is they’re looking for.

That said, this is actually my least favourite method of the four because while it’s seemingly the easiest, it’s actually the hardest to pull off. It’s the most expensive, and your company immediately loses any traction in terms of quality gains to knock off attempts that will come out of all of the woodwork to chase a known successful model.

For an example, let’s look at Uber and Lyft. Seven or eight years ago, there were hundreds of ride share companies — locally, regionally, even nationally. There are still some around today, and there’s also meal delivery, food delivery, etc.

There is almost no competitive difference between Uber and Lyft, and in turn, little competitive difference between Uber and all those micro-companies, other than brand name. While that kind of competitive protection has the potential to win the battle, you might never win the war. You just keep spending money to gain more market share at a loss.

Method 2: Innovation, technical or otherwise

If you know me, you know this is my favourite method. You can stay ahead of the competition by consistently innovating your solution with methods that make your solution better, cheaper, more efficient, simpler, and broader.

But this method isn’t just about building something technically awesome, it’s about translating something technically awesome into a product without giving away the secrets. That’s the trick that most companies can’t pull off. They may be great technologists, but customers don’t buy technology, they buy the results of that technology.

This is where R&D meets the market. It’s where a skunkworks team hands off to a product development team. Formalising that transition is usually one of the last places that startups invest their time and money.

But the results can be glorious. The endgame of this path becomes the story of Apple and the iPhone, they dazzle you with features, and then throw in “one more thing” at the end to widen the moat.

Method 3: Patents and other legal means.

Patents are a necessary evil. And I would emphasise the words necessary and evil.

No, patents do not protect you, that’s a misconception. Patents and other legal claims of intellectual property ownership only give you the right to fight a battle that is always costly and very rarely has a clear winner. There’s a whole seedy sub-industry of patent owners and buyers who do nothing but sue for infringement.

If you want to spend your entrepreneurial career fighting battles, chase patents.

Now let’s talk about necessary. You need patent protection on an innovative invention, for sure, so if that battle comes to you, you have a fighting chance. But don’t equate building a patent library to increasing the size of your moat. Patents are, I don’t know, maybe just cannons around your castle that are really expensive to fire.

Method 4: Perpetual incremental improvement in execution

This is another favourite of mine, especially once your company reaches the growth stage.

This is how Amazon operates. They build their moat by being consistently better, cheaper, and more forward-thinking in everything they do — every offering, every process, every fulfilment, every new product or service.

It’s a mantra that’s ingrained in their culture and they do it better than almost anyone else. This is the most exhausting method — physically, mentally, and financially. It’s also the riskiest, because delighting the customer is a much more difficult and complex proposition than just satisfying the customer.

But it’s also the method where you’re not going to get ugly surprises. It’s the one where you can ignore most of your competition because you’re already outdoing them. Or acquiring them.

And finally: Once you’re protected, some words of warning about NDAs

A Non-Disclosure Agreement (NDA) is not a fool’s document, but it’s often used foolishly.

The number of times a company has thrown an NDA at me before telling me about their product is matched only by the number of times a company has shown me sensitive intellectual property without having me sign an NDA.

Be cognisant of when an NDA should be dusted off and when it shouldn’t. For example, investors are going to hesitate to sign an NDA, because they look at so many ideas in a given week that there’s always the chance that someone could accuse them or one of their portfolio companies of stealing something similar.

But more importantly, an NDA won’t protect you from having your secrets compromised. It’s basically a warning to the other party that you’re now showing them sensitive information.

That information should always be protected by the other means I’ve discussed here.

This article was originally published on Medium by Joe Procopio

Joe Procopio is a multi-exit, multi-failure entrepreneur. In 2015, he sold Automated Insights to Vista Equity Partners. In 2013, he sold ExitEvent to Capitol Broadcasting. Before that, he built Intrepid Media, the first social network for writers. You can read more and sign up for his newsletter at www.joeprocopio.com