One of the most important questions you will be asked by potential investors is how your solutions beat the competition, not just today, but over the three- to five-year life of their investment. There is no perfect answer to this question, but there are many wrong answers which will immediately jeopardize your credibility.
The concept is called “sustainable competitive advantage.” A good answer might be “We have several patents on the base technology, which is so robust that we expect to roll out new products every year for the next ten years, always staying a step ahead of our competitors.” That implies competitive now, a strong barrier to entry, and the potential to stay in the lead.
We all recognize that there are no guarantees. So the best responses always require a combination of street smarts, confidence, humility, and honesty. Investors are often just checking to see how you tackle hard questions. Here is a collection of common red flags to avoid:
- “We don’t have any competitors.” As everyone should know by now, this is the worst possible answer, since it implies that there is no market for your product, or you haven’t bothered to look for competition. Remember that cars compete with trains, so alternative solutions, or doing nothing, are real competition.
- “We have the first mover advantage.” First-to-market is meaningful for a large company, like IBM or GE, which has the resources to sustain their move, but is not relevant for a startup, when surrounded by “big gorillas.” If they see you getting traction, the giants will awake quickly and step on you. This advantage is not sustainable.
- “Our product is truly disruptive technology.” This is a variation on the first mover argument, implying a paradigm shift that gives you a tremendous lead. Investors will suspect you have a technology looking for a solution. Disruptive technologies typically take years to catch on, which is longer than they can afford to wait.
- “Only our team can make this work.” This statement comes across as arrogance, no matter how much experience and technical degrees your team has. No one in this world has a monopoly on knowledge and implementation skills. Investors will conclude that this is probably an impossible and unrealistic team to work with.
- “We plan to offer it for free, and live off advertising revenue.” Undercutting competitors in price is always a good strategy, but free implies no real value. Free is a good short-term Internet strategy, if you have $50 million to spend on viral marketing to get your page-views up to the million per month needed for significant advertising revenue.
- “Our patent will protect us.” Patents are worthwhile, so this answer is far better than the first five. Yet every investor knows that a mere startup will not be able to afford a patent battle in court, and most patents can be circumvented if the opportunity is large enough.
In the end, after stating your best arguments, it’s probably smart to concede that there are no silver bullets, but emphasize that you have the experience and knowledge to put up a never-ending fight. This tells investors that you are realistic, despite your conviction and confidence in your product. Investors like realists, but not wimps.
A sustainable competitive advantage is not a destination, but a journey. Whether you are looking for an investor or not, every good entrepreneur better plan for this journey before he finds his backside exposed.