At some point, most start-up companies need to seek capital from external investors, but do they have a competitive advantage?, writes Salvador Baille, partner at Aggrator. Shifter.
If you’re lucky, it’s about the money you need to finance growth that’s already underway. Most of the time, however, it’s about the capital you need to survive and get out of the cruel valley of death.
In such a scenario, it is essential for entrepreneurs to understand that investors always have a different choice. Capital is always a scarce resource, and the competition for funds is fierce. This is especially true during the initial funding rounds, when the company is most vulnerable and the business model still needs to prove its sustainability.
At the same time, we have heard and read often in recent times that Norwegian angel investors have become more experienced and cautious when it comes to allocating new funds to Norwegian startups. In today’s market, therefore, entrepreneurial companies must provide investors with even greater opportunities to obtain a handsome return. In reality, this means investing in a business model that can ensure growth, a positive cash flow, and strong protection against competitors.
Professional investors know that these three elements can only be guaranteed by building a credible and robust competitive advantage into the business model. Some call it «secret sauce», others «unfair advantage», but they are actually referring to the same concept.
In practice, newly established initiatives can build solid competitive advantages based on one or more of the three following categories.
Superior proprietary technology
A company or a startup that has developed and owns superior proprietary technology can enjoy market dominance for a long time. This is especially true if the technology is patent-protected or can be kept as a business secret. Investors tend to be very interested in this type of competitive advantage, partly because it allows them to build a story that can be sold to other investors or the general public.
There is nothing more toxic for a technology company than uncertainty surrounding the ownership of the technology on which the company is theoretically based. This happens especially often when the technology comes from an academic environment. In such cases, all the stakeholders involved must be aware of this challenge and solve it together.
Privileged access to resources
When certain resources are scarce or crucial to an industry, the actor who controls them will have a tremendous and lasting advantage. Examples of this could be a concession in areas rich in valuable raw materials (such as licenses for oil extraction), an established and loyal customer base, critical data difficult to obtain elsewhere, physical locations (such as parking lots for electric scooters), or a dominant distribution apparatus. Access to valuable and rare talent is definitely also a competitive advantage, but it must be truly exceptional and verifiable.
Switching costs (switching costs)
Switching costs refer to the costs, both financial and non-financial, that a customer incurs when switching from one supplier, product or service to another.
Some forms of switching costs may be relatively weak and based on user habits, such as switching operating systems on a PC. Others, however, are almost impossible to overcome because switching suppliers requires a new round of specialized training for the customer or an expensive new integration with the customer’s systems. Heavy and custom-made customer relationship management (CRM) systems are a prime example of this. Building switching costs for a customer is one of the most effective barriers to being acquired by larger and more resource-rich competitors, and it can ensure continuous revenue for a long time.
A type of switching cost that very few start-up companies are aware of and which is extremely difficult to break is the one that arises due to human relationships. Employees who are accustomed to buying from companies and individuals they trust will very likely take up the fight against switching to a new provider.
Building personal and trusted relationships with the counterpart is therefore extremely important and must be nurtured from the very beginning. Companies started by entrepreneurs with experience from the industry they want to operate in therefore have a greater chance of success. A board with connections to relevant individuals with access to resources and budget money from potential customers is extremely valuable.
Starting a start-up business or a new business area is always challenging. Building relevant and concrete competitive advantages gives entrepreneurs or initiators in established companies a clear strategic direction and strengthens the willingness of investors and decision-makers to continue supporting the team even when the road gets tough.
What competitive advantage does your company build on?
Image: Shifter. Article was first published in Shifter.