No, that IS NOT a competitive advantage

October 18, 2010 | Jason Cohen

Guest post by Jason Cohen.

This is part 1 of the series: 5 Lessons from 150 startup pitches.

Listening to first-time entrepreneurs talk about their competitive advantages is as predictably invalid as the local weatherman’s 10-day forecast.

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Between this blog and reviewing applications to Capital Factory I see hundreds of pitches a year. Every pitch has a section on competitive advantages, and quite literally 95% of the time the claimed competitive advantages are pathetic, unoriginal, and not really advantages at all.

The first clue that your competitive advantages aren’t actual advantages is that everyone else on Earth claims those advantages too!

P.S. Soon I’ll talk about what are real competitive advantages.

The following are not competitive advantages:

We have feature X.
This is an advantage only until others copy it, so it’s not long-term protection against competition. Indeed, the next company can observe what works well and what doesn’t, and than improve on your innovation. End users don’t care who thought it up, they just care how it works today.

We have the most features.
It’s common for older products to compete on the fact that they have more features than the competition. Trouble is, customers don’t want more features, they want the right features. As the competition also adds features, they reach a critical mass where they have all the features 80% of your customers want, and then just having “more” is no longer an interesting selling point.

We’re patenting our features.
“No one can compete with my blog because it’s copyrighted.” Silly, right?

That’s what you sound like when you claim that getting a software patent will protect you from competition. Except in certain industries (e.g. food, drug, medical), I’m unaware of companies who stave off quality competitors through patent holdings. Software patents are especially useless for small, bootstrapped startups. It’s even true in hardware: Every mp3 player uses zillions of patents, but that didn’t stop Apple from winning.

We’re better at SEO and social media.
80% of Americans believe they are better-than-average drivers. Can’t be true, right? Well 80% of the folks I meet tell me they’re way better than average at SEO, Twitter, and “building communities” whateverthehell that means.

Social media and SEO is ever-changing quicksand. You’re on top of Google today, gone tomorrow. Other companies being good — or better — is completely outside your control, so claiming that you have a sustainable advantage is poppycock.

We’re passionate.
Everyone has passion. What, you think everyone else quits their job, starts mowing through savings, works long hours, and yet has no passion? Passion is necessary but far from sufficient.

This is like saying, “My children are going to be more successful because I love them more than you love yours.” This makes investors roll their eyes and show you the door.

We have three PhDs / MBAs.
The landscape of successful startups is littered with people lacking post-graduate education. If you’ve lived in the software world for a few years you know the stuff they teach you in school is irrelevant, so who cares what degree you have? In all the interviews you’ve read about founders’ success, how many credit their MBA program? How many even have MBAs? It’s not bad to have a degree, but neither is it a significant advantage.

We work hard.
You hear about the 37signals guys working 30 hours per week and Tim Ferris just four hours (bullshit!), so you figure if you work a “healthy” 70 hours per week, you’ll win! But working harder is not, in fact, smarter. And even you could work 70 on-task hours per week, that’s still blown away by 10 developers at a funded company or even 10 passionate open source developers working part-time.

We’re cheaper.
It’s not bad to be cheaper. Indeed, at ITWatchDogs, the company I did before Smart Bear, being inexpensive was critical to our strategy. The key is that you cannot compete only on price, because then all a competitor has to do is lower their price. Established companies can destroy you with the “loss leader” strategy (e.g. when Microsoft put 1,000 developers on IE and gave it away for free, destroying the market for web browsers), newly funded companies can spend ludicrous amounts of money to get market share (even if it means taking you down with them), and anyone can implement a “freemium” model.

In the case of ITWatchDogs, the reasons we were cheaper were that (a) we sold direct instead through a channel, so our product wasn’t marked up 6x before it got to the customer, and (b) we used the newest, cheapest parts whereas our established competitors had stopped innovating and were using expensive 5-year-old parts.

So where does that leave us?

Haven’t I just claimed that the fruits of intense effort and innovation and one-upmanship isn’t enough?

Yes.

Innovative design and intellectual property are no longer long-term competitive advantages.

You live in the era of the flat world where millions of people have access to technology, education, and a powerful sales, marketing, and communication platform (the Internet).

You live in the era where the most powerful programming frameworks and tools are free, local broadband and high-availability servers are cheap, and world-class people are willing to work 60 hours/week in exchange for Ramen noodles and the chance to be a part of a cool new startup.

There’s too much energy, availability, intelligence and opportunity in the world to hide behind outdated notions of intellectual property.

Almost anything can be copied. In fact, I’d claim that anything of any value will be copied. It should be part of your business plan that other people will copy you.

Fortunately there’s plenty of ways to have true advantages that competition cannot readily overcome. Unfortunately, they’re difficult and rare. Of course they are! What, you thought creating and running a successful, untouchable startup was easy and commonplace?

Soon I’ll go into depth on some true unfair competitive advantages — ones that cannot be overcome even by a giant company, a funded company, a bootstrapped company, or an open-source movement.

Are these assertions unfair? Do you have more false-advantages to add? Leave a comment and join the conversation.

This post was originally posted on July 12, 2010 on Jason’s blog, A Smart Bear.

Jason Cohen founded Smart Bear Software, maker of Code Collaborator, a tool for peer code review and recent winner of the Jolt Award. He took Smart Bear from start to multiple millions in revenue and 50 percent profit margin without debt or VC, then sold it for cash. He is also a founding member of ITWatchdogs, another bootstrapped startup which became profitable and was sold. He’s also a mentor at Capital Factory (like TechStars or Y-Combinator in Austin). And he’s the author of Best Kept Secrets of Peer Code Review, the most popular book (35,000 copies) on modern, lightweight methods for doing peer code review effectively without everyone hating life. He blogs at “a smart bear.” Email him: jason (at) asmartbear (dot) com.

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{ 1 comment }

Matt October 18, 2010 at 8:19 pm

I do agree with most of this post. I think you are dead on about things like “we have more options, we work harder, we’re cheaper” (I could argue more options + price = value = advantage)

There is always someone faster, cheaper, stronger out there – trying to beat them in that game is foolish.

However, there is one thing about passion that has really stood out for me lately. I’m in the client services field running a design/media company. We’re a year old and starting out bootstrapped. Beating the streets in our “local” market. Literally knocking on doors of friends, family, small business owners, etc.

I’ve witnessed A LOT of local business owners that lack passion. Owners that lack the enthusiasm to want to promote themselves and their product. It’s actually downright scary. Scary that they’ve been in business so long and cannot answer a question like:

“Why is your pizza better?”

“What makes you a better carpenter than the next guy?”

Blank stares. Shrugged shoulders. Sometimes arrogance.

Maybe because in our “web world” passion has become ubiquitous amongst the elite in our field. It’s something I’ve grown to look for in the business to business relationships I have. From our merchant services clerk to our media relations.

Enter in, “Does the transition from entrepreneur to businessman/woman kill passion?” (hmm, maybe I’ll blog about that)

In my opinion – passion DOES give you competitive advantage.

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