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?
How about brand? Seems like Harley Davidson has pretty good barriers in their niche.
Posted by: Bconnery | July 6, 2006 9:44 PM | Permalink to Comment