One of the first questions that investors will ask you about your company is “what is stopping others from copying your ideas or technology and beating you at your own game?” I’ve found that the “barriers to entry” question is one of the most difficult to answer when raising institutional money. If you answer too boldly the investor might feel that you are naive about the nature of competition. Conversely, if you answer that you simply have a head start, you may not be making a strong enough claim. Neither answer will build a sufficient level of confidence. Following are a few thoughts that may help:

There is no such thing as a unique idea. If your idea is truly unique it’s probably too far-fetched for the average investor to latch on to. The only unique idea I’ve ever heard about was a company formed to launch a rocket to the moon and land a lunar rover that would stream live video of the surface of the moon back to earth with banner ads scrolling across the bottom of the screen. I’ll have to admit, I never heard of a competitor to this company. Unfortunately, although they rose $30M during the dot com days, they never made it off the ground (pun intended).

So don’t rely on your idea being something that nobody else has ever thought of. If it’s a good idea, in a good market, you can count on the fact that someone else is out there trying to get the same idea funded. Telling a potential investor that your idea is unique will probably lose you credibility points.

Patents – the good and the bad. Don’t have false confidence in the strength of patents. Yes, they are good to have and can certainly make raising money easier. However, making comments like “Microsoft will have to come crawling to us if they want to use our stuff” isn’t going to help you with an investor. Investors are rarely if ever interested in funding legal battles – especially with Microsoft. Do the work, get the patents, know your position, but don’t sit back and rely on those patents to protect your competitive position.

Execution - lock up exclusive deals and partnerships. If there are a small number of partners or distribution channels in your space, spend your time forming relationships; whether it is OEMing your product to a larger provider or locking up a particular distribution channel. Locking up exclusive relationships early is a very powerful barrier to other competitors getting into the game – and one that you can actually do something about. Barriers to entry don’t just happen, they are created. Execution on these key partnerships also shows a potential investor that you know the importance of these items and have the ability to execute against a pre determined plan.

Like many questions, the “barrier to entry” question is intended to probe how you think as much as it is to get “the right answer”. Any decent institutional investor can do the diligence to check out competitors, patents, etc. and get the formal answer. The key to answering well is to show that you understand your strengths as a company and the relative dynamics in the market. Practice answering this question accurately and honestly as people want to invest in other people who are sincere and candid. Finally, and most importantly, do everything you can in the early stages of a company to create exclusive relationships and you’ll have a much easier time when it comes to the dreaded “barriers to entry” question.

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