Secret Sauce and Tasty Temptation

I wrote this piece when contemplating the interplay between barriers to entry (against competition) and barriers to adoption (by customers and the market).  It was published today in the Irish Times.   I had spoken on the same topic way back in 2012 and more recently at a breakfast event for Invesco on ‘managing risk’..

After the investors have patiently listened to you explaining your product and underlying technology, you just know they will ask: what is to stop a well funded competitor reinventing your product and capturing the market from you, particularly once you have some customer wins and so have proven that a market actually exists for your product?

Many investors expect entrepreneurs to already have patents to protect their position in the market. Patents are one form of a ‘barrier to entry’ against aggressive challengers. Policy makers for public research revere patents: having invested public money into research, the outcome can be measured by the resulting volume of new patents. Fresh patents point to noteworthy research results which may be commercially valuable, and which should be protected before they are licensed to established companies or to start-ups.

Nevertheless to investors, an entrepreneur may present more subtle barriers to entry than explicit patents. A team may have specific knowledge, or a combination of interdisciplinary skills and market insight which competitors may find challenging to assemble. A product may appear obvious, but the precise details of exactly how it is put together may be more opaque. Such ’secret sauce’ – some key intellectual ingredients – often form a larger barrier to entry than just patents on their own.

Savvy investors and entrepreneurs thus usually view commercial potential in a different way to public policy makers in innovation and research: patents are good, but a secret sauce is even better.

Presenting subtle or explicit barriers to entry should be intrinsic to the investment pitch of any entrepreneur. Of course, there must also be a market opportunity, and a way of bringing the new product to the market. But then there is the old adage: there may a gap in the market, but is there a market in the gap?

Exploiting the market in the gap requires a deep consideration. Apart from the barriers to entry which must be erected against competitors, are there also barriers to adoption which must be lowered for potential customers? A well run promotional campaign draws attention to your new product. Deciding the best price for the product, and designing the balance between direct selling and sales through partners and resellers further lower the barriers to customers. Even so, the most significant potential barrier is the degree to which the product is not a natural fit for customers. Having to train customers on how best to use the product erects a barrier: far better if the product is a very comfortable replacement or extension for something which customers already know how to use. The design and appearance of the product, and its packaging, impact those crucial first five minutes when a customer starts to use a product.

A well thought through investor pitch or business plan therefore addresses a paradox: on the one hand, there should be high barriers to entry to prevent aggressive, well funded competitors simply reproducing the innovation and then stealing the market away; on the other, there should catalysts which accelerate customer interest and adoption of the innovation, with the least possible barriers in their way.

Some new products and business strategies have excellent technology and team expertise, perhaps augmented by a portfolio of patents, which form robust barriers to entry. Unfortunately they may also have poorly conceived customer design, unnatural use, and weakly thought through commercial strategy. Nice technology, but shame about the marketing. In this situation, the only credible resolutions are to fix the marketing or sell out the technology. Investors will meanwhile wait on the sidelines and passively watch.

In contrast, some new products and business strategies have excellent marketing strategies, are natural for customers to use and have catalysts for market adoption. However unfortunately they may also be based on utterly indefensible technology, which competitors can thus very quickly reinvent. In this situation, the only credible strategy is to rapidly expand into the market: a ‘land grab’. This business thesis is attractive to some categories of investors, but is a war of capital attrition. Those who raise the most money, and thus can spend the most, have the best chance of capturing and dominating the market.

In the Irish context, none of these approaches are particularly attractive. Weak technology and weak marketing are clearly a disastrous combination. Strong technology but weak marketing is an unlikely thesis for a credible company. Weak technology but strong marketing may be a successful strategy in places like Silicon Valley by raising a very large capital investment, but is generally infeasible if based in Ireland.

The exciting opportunities for Irish investment are entrepreneurs who not only have great and defensible technology, but also have thought through catalysts to market adoption. Not only must it be difficult for a competitor to reinvent a product, but also at the same time entirely comfortable for a customer to adopt it. Not only must the team have a secret sauce to trip up competitors but also a tasty temptation to attract the customers. A product which is obvious for customers, and yet opaque to competitors, is real innovation.


About chrisjhorn
This entry was posted in Enterpreneurship, Intellectual Property, Uncategorized. Bookmark the permalink.

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