Sunday, April 02, 2006

Barriers to Entry: Patents & non-Patent Barriers

One of the key criteria that venture capitalists look for in potential investments is the protectability of the technology. Paul Graham’s recent essay questions the value of patents, yet it seems like most entrepreneurs still focus primarily on patents as barriers to entry. VCs know that patents usually aren’t enough to protect a startup’s technology. First, the patents are granted relatively easy but they aren’t necessarily defendable. I have heard that the US Patent Office spends approximately 3 hours deciding whether or not to grant a patent. However, if the patent is ever going to be enforced attorneys on both sides will clearly spend much more time investigating what the claims really mean and who really has the prior art. Often the victor in patent litigation is the party with the greatest resources that can “out lawyer” the other side… which doesn’t bode well for startups. Furthermore, it can be especially hard to determine exactly when software patents have been violated. Certainly no venture investor wants their capital to be used in patent litigation. Thus, non-patent barriers to entry are very important to venture capitalists.

Here are some quick thoughts on non-patent barriers to entry that entrepreneurs should consider how they can maximize.

Cost of Imitation:
Labor Man-months
Knowledge Databases

Loyal Customer Base / Sticky Features

Long Customer Contracts
Government Licenses or Permits
Distribution Channels (VARs & OEM)

4/10/06 UPDATE: Check out Brad Feld's intersting post titled "Abolish Software Patents"
4/14/06 UPDATE: Fred Wilson also wrote an intersting post titled "Patently Absurd"


At November 05, 2007 1:30 PM, Blogger srini said...

You are pointing in a very good direction with this post ! I wanted to continue your brainstorm.

The ultimate competitive advantage is a synergy of competitive advantages. Southwest Airlines is the perfect example of this - they do many unique things. Competitors and new entrants can mimic one or two of their unique factors, but the entire synergy of advantage (from brand attitude to abandoning hub&spoke to all-direct-sales etc) has proven inimitable.

Outside of that, too many firms focus either a) on the very first customers they get, therefore not crossing the chasm or b) on gaining lots of initial sales, rather than a long-term sales strategy coupled with LOCK-IN (e.g. retention).

- Srini


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