The myth of the protectable advantage

July 15, 2010 | David Goldenberg

(Editor’s note: David Goldenberg is co-founder of PigSpigot.com, a user-generated greeting card site. He submitted this column to VentureBeat.)

“What’s your protectable advantage?”

It’s often the first question a potential investor asks a startup, but it’s a bad one. Besides being unrealistic and confusing for most companies, attempting to create a protectable advantage stifles creativity, hurts communication and generally diminishes an entrepreneur’s prospects for success.

Here’s what investors mean when they ask for your protectable edge in the market: They want to know if you have any patents or secret algorithms that your competitors can’t touch. It makes sense for them to ask: They want to minimize as much risk as possible, and having an effective monopoly on technology is a great start.

But it’s also stupidly unrealistic. Entrepreneurs can hem and haw about their IP, but the reality for the vast majority of online companies out there is that an elite team of coders can reverse engineer and rebuild their sites in a couple of weeks without too much trouble.

So what does that mean for an entrepreneur with a good – but not patentable – idea? For many of us, the first inclination is to hide it in a refinery deep underground until the entire company has been pieced together and polished. Every interaction with a potential partner comes thick with NDAs and secrecy. And if there’s any worry that someone we’re talking to might spill the beans, we cancel the meeting or hold back information.

The goal, of course, is to stop other people from stealing our million-dollar ideas. But here’s the rub: For most of us, there’s no such thing as a valuable idea until it has been executed. And executing it means exposing it to the world.

It’s not like you’re going to keep your business a secret forever, after all. Almost all Internet businesses rely on exposure to be successful, and with lots of customers come lots of competitors.

Secrecy is not a protectable advantage. A head start is not a protectable advantage. There are a few reasons to think about things on your own at first – there’s a too-many-cooks maxim that sums it up well – but protecting your idea from the harsh light of day isn’t one of them.

So you probably don’t have a protectable advantage – and you can’t manufacture one using a cloak of secrecy. But all is not lost when it comes to your IP. Here are two heartening pieces of information to consider.

There are very few people who want to be in the business of copying you – Even if you’ve got a great idea, it takes tons of time and talent to turn it into something worthwhile. There aren’t many people out there who are both evil enough to swipe your idea and driven enough to turn into something better than you could.

Sure there are some. If you’ve come up with a cool idea that a larger company knows could be beneficial to them, then it may decide that it’s easier to copy the idea than to partner with or buy your company. But you’re going to be on their radar no matter what, so you might as well open the lines of communication with them early on. (Hell, it might even make them feel bad about ripping you off down the road.)

There’s likely plenty of space in your field for competition – It’s not like our company, PigSpigot.com, is the only site in the world where someone can find a greeting card online, personalize it, and have it sent by mail to friends and family. The greeting card business is a $10 billion industry, and lots of players are trying to get in on the next logical step in its evolution. Sure, we’re proud of our specific tech development, but we know we don’t need to be the only company doing what we’re doing in order to be successful.

So what should you tell potential investors who want to know what your company’s protectable edge is? Ask them what Facebook’s protectable edge is. Or Twitter’s. Or any of the myriad other startups that are successful not because they’re the only ones doing something but because they do it better than everyone else does.

Actually, that’s kind of a jerk-y thing to say to people who are thinking about giving you money. Instead, tell them that your protectable advantage is a group of smart, motivated founders willing to work for not much more than equity. Plus, if they invest in you, you’ll have something most startups never have: Cash. And that’s definitely a protectable advantage.

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People: Jerry Buhlmann

http://www.blog.worknow.co.nz Renee Lee

Q. Whats your protectable advantage?A. We are. Our team, our talent & our values.

“…Even if you’ve got a great idea, it takes tons of time and talent to turn it into something worthwhile…”

I can say with confidence that our team is our greatest strength, we are talented, motivated and experienced but more than that we are aligned. We found our common ground and the shared purpose towards which we, as a team and individuals, aspire. Find another set of co founders (3) that can match us on passion and talent and if you can, invest in them.
http://thomas.koch.ro/ Thomas Koch

Thank you for this post. I'm currently in the discussion (as a developer) to do some of our software development as Open Source from the beginning. But the founders are very reluctant to that idea because they fear that somebody else could take advantage and cut from their profit.What do you think about that?
Marc Bush

Great post, Dave.I agree that most potential copycats probably lack the skills and motivation (and also the risk tolerance) to replicate a start-up idea. It also seems as though these protections are highest at the early stages of a company.One question is how does the concept of protectable advantage change over time for a early stage business? As a service or product grows and the concept and business is proven, these barriers to entry (motivation, skills, risk profile) decline. It seems like things such as brand and user base become protectable advantages – especially for businesses with network effects. Any thoughts on the concept of a protectable advantage past early stages? Certainly this an issue that a start-up would hope to have to worry about over time.PS, your post reminded me of the lyrics of a great Ruthie Foster song, Heal Yourself:”You wanna save your survival. You wanna know 'bout your true arrival.You wanna make real music, not just part time, but really use it.But you don't want nobody else to hear it. You think somebody's gonna steal it.You better think 'bout healin' yourself, child.”Here are the rest of the lyrics and a video: http://bit.ly/brVzd9.
sigmaalgebra

Essentially all of your article is one huge mistake.Likely the problem is you just don't see any 'protectable advantages' or any possibility of any.Likely what you see in 'technology' is just software that does work that is easily understood intuitively and in principle could be done manually and that this work and foundation will be clear widely once the Web site is on the Internet.Nonsense. Uninformed nonsense.Here how to get a powerful, valuable 'protectable advantage': List A has data that is or can be made available. List B has candidate manipulations of that data. List C has needs of a lot of people where some information would be valuable. Pick one from each of list A, B, and C in a coordinated way.Write the corresponding software for the manipulations in B.Run the software only on servers and, thus, don't let anyone outside the company see it.First, big, huge point: What the software does can be astoundingly obscure. Sure, maybe the US National Academy of Sciences could put together a team who could largely guess what the software was doing and duplicate it, but it's easy enough that no one else in business would and could.Second, what the software does has to be powerful in the sense that what it puts out is about all that can be done with the data to get the desired, valuable information for the need from list C.So, how to write software that is especially powerful? One way would be to find an algorithm that shows that P = NP. But there are other ways, however, NOT from practical computing, not from heuristics or much of anything in computer science.Where? In selected topics, new or classic, in applied mathematics. Such topics can be essentially impenetrable to nearly everyone in business and yield manipulations that are astoundingly powerful, where the results can be astoundingly valuable, and where the corresponding software is astoundingly obscure.So, net, invent some powerful new mathematics, write the corresponding software that produces valuable output, keep the software secure on servers, and don't explain the math.That's a 'protectable advantage' and can last for years.Of course there are few examples in Web 2.0. So, one problem is that few people understand the opportunity. The flip side of the lack of understanding is an especially good opportunity.Or, nearly necessarily, if many people understood it easily, then it wouldn't be very valuable anymore. So, have to expect that nearly no one in business will understand it, for a long time.Thankfully for US national security, the US DoD for over 70 years has understood the power and value of applied math very, very well. Else we would all be speaking German, Russian, or Chinese. And the US DoD, and NSF and NIH, really can evaluate such work long before one can just 'see' the power. Business can nearly never do such evaluations. So, in business there's an especially good opportunity.Take nearly anything very new and powerful, roll the clock back 200 years, and find lots of people who would have claimed that any such thing was impossible and that because they didn't see how to do it.Of course, not everything one might dream is possible, even if possible in principle maybe still not doable in practice. Still there is a LOT that is quite doable that nearly no one in business is in a position to understand.
http://twitter.com/dgoldenberg vbcontributor

Thanks for your comments:@Renee Lee: Definitely agree. It's a little cheesy to say it, but the quality of the founding team is definitely more important than the IP.@Thomas Koch: It depends what you're developing for, but I definitely think Open Source is a great way to go. Free tech support if nothing else.@Marc Bush: A Ruthie Foster reference. I love it! I didnt get into it too much, but as you leave the startup stage it's definitely true this changes. I'm not sure brand and market are exactly what investors mean by “protectable advantages” but I think they're definitely more important than whatever secret sauce is behind them.@sigmaalgebra: I agree that if you invent some “powerful new mathematics” that is applicable to business, you should do your darndest to protect it. I'm just saying that the vast majority of us neither have the ability to nor care to turn applied math into software. We just want to use the power of the internet to create opportunities, and to do that we don't need to erect impenetrable walls around every aspect of our business model under the auspices of protecting our IP.