Devin's Definition: Barrier to Entry

Know More: Definitions, Private Equity, Raising Money, Venture Capital 2.0, Private Equity

Barrier to Entry: The phrase "barrier to entry" is a reference to the legal or other structural barriers that companies erect to prevent competitors from playing on a level playing field.

For venture stage businesses, intellectual property is considered the best barrier to entry. Intellectual property includes patents, trademarks, copyrights and trade secrets. While a patent is, all else equal, the most valuable of these barriers, many others can be of even more value.

Venture capitalists typically consider a "sustainable competitive advantage" to be essentially the same things as a barrier to entry. I prefer the focus on the sustainable competitive advantage as, to me, it implies a broader range of barriers against competition. A management team frequently wants to "be" the competitive advantage. There are rare cases when this is true, as in when someone uniquely qualified to do a particular thing is part of the management team.

Capital can be a barrier to entry. Perhaps the best evidence of this is that there have been no successful start-up auto manufacturers in the United States since DeLorean.

Location can be a competitive advantage for some businesses--though this is more important for gas stations and hotels than for high-tech start-ups.

One of the best ways I've ever heard this concept defined is as an "unfair competitive advantage." Clearly, a venture capitalist is more inclined to invest in a deal where there is a clear definition of a barrier to competition.

Interestingly, the private equity guys I know, never talk about barriers to entry. They typically focus on proven companies (read that profitable) with a good growth trends. As a result, I think the competitive advantage is presumed to be there--or they wouldn't be profitable.

What keys to understanding barriers to entry do you think I've missed?

Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

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