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Is Your Business Defensible?

Is Your Business Defensible?
What's new: K-Startup Grand Challenge 2020 for Australian/New Zealand Startups! More information here.

So you chanced upon a serious customer pain point and built a solution that costs less to deliver than customers are willing to pay for it.

Great!

You effectively promoted it, and you’ve now got a high-margin business that’s growing fast.

Congratulations!

Most would-be entrepreneurs never make it this far.

But…

Beware the barbarians at the gate.

Copycats are sure to follow, and unless your product is defensible — you’ve built some kind of moat or fortress that makes it difficult for said barbarians to penetrate the city walls, your market share could evaporate as quickly as it appeared.

Is your business model defensible?

This is a key question posed by most venture capitalists, so much so that in Bill Gurley’s iconic article on 10x revenue business, three of the ten traits listed had to do with defensibility.

Below you’ll find 18 ways products and/or businesses can become more defensible, along with a rating of how effective each is.

I’ve differentiated between product defensibility and business defensibility — the latter in reference to how well the business, as a whole, defends itself against market changes.

So without further ado…

Product Defensibility

1. Network Effects — 5/5

Perhaps the holy grail of defensibility, especially for B2C products.

Network effects essentially exist where the greater the number of participants, the greater the value of the network.

The concept boils down to a simple formula proposed by the founder of Ethernet, Robert Metcalfe. He proposed that the value of a network is the square of the number of nodes, or V=n².

For a primer on the different types of network effects that you can aim to embed into your product, check out this article.

2. Switching Costs — 5/5

If the cost to a customer of moving away from your product, in terms of time, money, and pain, is greater than the supposed benefit, or just a pain that said customer is unwilling to face right now, then they will likely focus their efforts elsewhere and continue to use your product.

Case in point. I’ve been using GetVero as my email marketing tool for a while now, despite its inferior CMS and feature set. But moving to another platform, creating new templates, updating all of our lead magnets and email opt-ins, our API integrations, and so forth…the pain is just not big enough and my team has other more important priorities.

So we stay with an inferior platform (but throw a cheeky elbow in a blog post from time to time).

The switching cost phenomenon is especially true the larger an organization gets, especially if there is a training aspect involved in using an alternative product and a period of lost productivity that goes with it.

3. Embedding — 5/5

Similar to switching costs, but a more deliberate tactic where you have a sales force and training function that helps to integrate your product into a customer’s operations — typically a large enterprise. Ripping your software out would have all sorts of negative flow-on consequences, and so, it rarely happens.

For example, products like SAP and Oracle are so embedded into the backend of most Fortune 500 companies that it’s unlikely they’ll be going anywhere anytime soon, boasting a combined US$300 billion market cap as at the time of writing.

4. Regulatory capture — 5/5

This is essentially what happens when regulators and policymakers serve the commercial interests of a profession, industry, or set of organizations.

A recent example of this was the rollout of vaccine mandates, which led to billions of people effectively paying, directly or indirectly, for Government-approved vaccines from one of several big pharma companies.

Pfizer, Moderna, Johnson & Johnson, and others, were huge beneficiaries of the pandemic.

5. Brand —5/5

Google it. UBER it. Airbnb it. These brands have become verbs, and synonymous with search, ride-sharing, and lodging. The strength of these brands puts them front of mind whenever you need to do one of these things.

In the case of other brands such as Nike or Apple, they essentially appeal to people’s need for identity and acceptance, and to feel good about themselves (I don’t agree that we should seek out material possessions for the very transient feeling of self-worth that comes with it, but thems the breaks for most, sadly).

Why buy that $50 pair of Brooks when for $300 I can have the exact same shoes that Devon Booker wears?

6. Economies of scale — 4/5

As an organization scales, the unit cost of operating effectively diminishes in most cases.
For example, large businesses can negotiate much lower unit costs on supplies that they purchase in the millions, and thus they can pass on a lower-end product cost to consumers.

A large organization might get much better interest rates from a bank, and therefore be able to plow more money into growth.

Large organizations can justify spending millions of dollars on nationwide marketing campaigns, because of the potential for returns, but a small company with relatively small output would struggle to recoup the marketing costs.

7. Barriers to entry — 4/5

Starting an e-commerce business nowadays has pretty low barriers to entry. Platforms like Shopify, SquareSpace and BigCommerce make it easy and cheap to set up a fully-functional online store.

But if you want to build a SpaceX competitor? Or a biotech company? Or an AI company? The costs of doing so are going to be higher, which makes it more difficult for new entrants to enter the space, and acts as a deterrent to most from even trying.

8. Capital — 4/5

This is a pretty straightforward one. The more money you have the faster you can build, hire, grow, tap into economies of scale, get over barriers to entry, access cheaper interest rates, market your product, and so on.

But capital, in a world where hundreds of billions of dollars of venture capital is plowed into businesses annually, is not the scarcest of commodities.

Critically, where you choose to allocate your capital is key. History is littered with the corpses of once mighty organizations with once massive war chests that simply didn’t invest their money and their resource’s time effectively.

9. Relationships — 4/5

“It’s not what you know; it’s who you know”.

We hear this often throughout life, and while the truth might be somewhere in the middle, there is no doubting the fact that getting to know and build rapport with the right people can open many a door that would otherwise remain closed.

Within a business context, its relationships with partners, decision-makers, suppliers, product champions at large organizations, journalists and the media, VCs and investors, other entrepreneurs, your customers, your community, and so on.

Solid relationships can’t be replicated overnight and can take years to build.

10. Distribution channel — 4/5

Locking in exclusivity over a key distribution channel can make or break a company. Let’s say you’re a hotel operator and you’ve managed to secure an exclusive partnership with the largest airline in your country, so that every time someone books a flight they’ve upsold a room at one of your hotels, that is going to put you at an advantage over your competitors.

The same holds true with software products that find a large incumbent, such as a Microsoft or Apple, to distribute their product to a captive audience.

But…beware of dependencies that if removed can decimate a business.

11. Loyalty — 3/5

Loyalty programs have existed in some way, shape or form for decades now. The humble ‘get your 10th coffee free’ is a simple program that can keep people coming back to the same cafe.

But loyalty built around customers that truly resonate with your organization’s mission and purpose is better than a customer who just wants to save a few dollars. The latter will walk once a cheaper offer comes along elsewhere — they are essentially mercenaries, whereas the former will stand by your organization for the long haul, despite internal challenges.

And it doesn’t just need to be the company mission that people resonate with, but the cult of personality atop it. For example, whenever Tesla’s performance is criticized, countless Elon Musk supporters and loyal Teslarati come to the company’s defense on Twitter.

12. User ownership — 3/5

The emerging world of blockchain and web3 has given entrepreneurs a new defensibility tool — tokens.

A web3 project’s native token (kind of like owning a stock but with more utility) effectively gives holders ownership in said project, financial exposure to its growth, and in some cases the ability to vote on and influence decision-making.

And as Variant Fund’s Li Jin notes below, when we own a piece of a company, and feel like we’re a part of it and share in its successes, we’re more likely to stick around (the same could be argued, to a much lesser degree, of stock ownership). However, this isn’t always the case, and what matters above everything else is that the company continues to create value for us.

For example, the leading NFT marketplace today is OpenSea which doesn’t have a token yet. Its competitor, LooksRare, has a native token and offers users token rewards for transacting on the platform. However, in the 30 days to 15 September 2022, OpenSea’s trading volume was $416M while LooksRare’s was just $17M — about 25 times less.

Using Token Incentives to Beat the Chicken and Egg Problem

How Web3 platforms can use tokens to build positive network effects and get to critical mass without raising capital.

glaveski.medium.com

13. Lock-in contracts — 3/5

Building upon 11, this extends to contracts with key suppliers as well as customers. Locking people and companies into using your product for months and preferably years on end creates reliable recurring revenue streams, and keeps your business somewhat defensible.

It also makes your business much more valuable when it comes time to exit because buyers will always value recurring revenues orders of magnitudes times more than one-off revenue.

14. Be better or cheaper

As the name suggests, being better, or cheaper, offering a superior experience, these can keep people coming back to your product, and also feeds in to the quality of your brand, and what you’re known for. At the end of the day, businesses are about solving problems for people.

Do that better than your competitors, but not just a little better. For people to care, you’ve got to be 10X better.

Business Defensibility

15. Speed and Capital Efficiency — 5/5

The faster and cheaper we learn, the faster we win.

One of the key advantages that small startups have over their well-heeled corporate competitors is speed. Instead of taking weeks and months to make a decision, they might make them in a day.

Instead of incorrectly treating all decisions as what Jeff Bezos calls Type 1 decisions (audacious, expensive, irreversible decisions), which is what large organizations are prone to do, they treat them as Type 2 decisions (cheap, reversible, inconsequential) and get on with it.

They also engage in effective prioritization, can pointless meetings, use automation and outsourcing where possible, and remain laser-focused on getting sh!t done.

This can be a HUGE advantage when it comes to business defensibility, keeping cost and waste down, and therefore keeping margins up.

In the world of web3, startups are demonstrating outsized returns because they are very capital efficient, owing to both token economies as well as the open-source nature of the blockchain, both of which can help to radically accelerate both product development and marketing without needing to invest millions.

16. Culture — 5/5

Finally, the culture of an organization — a product of its people and processes — can set a company up for success long-term. Does the culture celebrate experimentation, radical transparency, extreme ownership, conviction, adaptability, speed, and innovation?

Then long term, it’s probably going to beat out a culture that enjoys the status quo, outsourcing accountability, consensus-seeking, and taking all the time in the world to get things ‘perfect’.

17. Content — 4/5

Nowadays, almost every brand needs a content strategy or it will fail to compete against brands that do. This extends to social media engagement, podcasts, articles, videos, reports…you name it.

Essentially, it’s about capturing attention and building trust. Do that well and people will likely use your product over everybody else’s. Attention gets monetized.

Content also acts as a serious inbound marketing tool, driving people to your website and mailing list.

The bigger your list of users, listeners, viewers…the bigger your platform, the better your business will be positioned to roll with the punches and serve its audience.

18. Adaptability — 4/5

This one has been done to death in the past decade, but as is the case on the battlefield and in our evolutionary history, when conditions change you need to adapt or you will perish. This essentially ties into speed.

Organizations that have short OODA loops (observe, orient, decide, act — a military acronym) will be more adaptable than those that have to get every decision signed off by a central commander before doing anything.

That is, the more decentralized organizations are, with many groups of 5–7 people operating independently, the better poised they will be to adapt faster than everyone else.

19. Community — 3/5

The strength of a brand’s community, essentially its ambassadors, can go a long way to defensibility. This is true of Apple, and it's true of many emerging web3 communities that tend to have a bottom-up people and token-driven marketing approach.

But you still need to deliver value, and maintain trust — this was evident when NFT-driven game Axie Infinity’s daily active users (DAU) dropped from a high of 2.1 million in Dec 21 down to 600K just seven months later — on the back of security vulnerabilities and its plummeting token price.

This happened despite its large, vocal, and engaged community.

What do you think? Have I got something wrong? Do you agree with these ratings? Can you think of others? Let me know in the comments!

Workflow Podcast

The WorkFlow podcast is hosted by Steve Glaveski with a mission to help you unlock your potential to do more great work in far less time, whether you're working as part of a team or flying solo, and to set you up for a richer life.

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Steve Glaveski

Steve Glaveski is the co-founder of Collective Campus, author of Time Rich, Employee to Entrepreneur and host of the Future Squared podcast. He’s a chronic autodidact, and he’s into everything from 80s metal and high-intensity workouts to attempting to surf and do standup comedy.

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