The NVA Blog

For the sake of efficiency, lets assume we both understand in principal “web 2.0″, the cliche’ of “its much cheaper to start a company today”, and that we are very much in another tech bubble where people have exchanged chunks of their brains for the lure of buried treasure (which I’m sure is hiding under the OpenSocial rock everyone is scrambling to climb). Great…

Defensibility in online software is dead. Long live defensibility!

As both an advisor and entrepreneur, I’m living both sides of the fence where some days I’m doing the pitching, and some days being pitched to. One of the most common questions/concerns that come up when sizing up an early stage web company is the defensibility question. It often sounds like one of these…

• What is your secret sauce?
• What do you do better or differently than everyone else?
• What if, or why hasn’t Google decided to do this?
• Is this patented? Have you done a patent search?
• Is this a marketing play or a technology play?

Ok, so these are all valid questions. A bit simple perhaps, but expect to be asked them and please have answers that are intelligent. There is no right or wrong, but demonstrate you’ve thought it through.

If you are building an optical switch, a new storage device, a chipset, etc. it is much more likely you’ll need to create a unique and defensible technology platform because you are entering a market where there are commodity players, knock-offs, and lots of established competition. Having something that is unique on the customer-facing side is as important as on the technology side. However, in the world of online software and web-based services, great tech is helpful, but there are probably six different ways to solve the problem using available tools. Thus, your defensibility in the market comes down to the formula you concoct. This is having the right offering at the right time with the right message aimed at the right users. Another VC blogger used the analogy of an airplane taking flight, ie. a start-up has to have have the right overall design, enough thrust, lift, little drag, and enough runway to get off the ground. Either way you ge the picture.

In the context of online applications or web based services, defensibility=execution.

Is this true? How so?

• Technology and creatively solving hard problems is important, but many roads lead to Rome.
• The best tech or most innovative service doesn’t always win, it’s about usability, marketing, simplicity, etc. This industry is littered with examples on both sides.
• Execution isn’t just about revenue or customers, its about doing all of the important stuff right. Strategic partners, capital, scaling the infrastructure, branding, customer service, etc.
• Every generation studies the last one. We look at our competitors, find the weakness, leverage new tech, and use it to our advantage.

Google itself is an interesting example if you think about their early days. Sure, they had come up with a better/faster/cheaper search algorithm vis a vis Yahoo or Lycos, but their success wasn’t due to just the algorhym. It was the implementation of it, the marketing (or complete lack thereof), the simplicity of the service, and ultimately the decision to buy what became Google AdSense and integrate it. I used to have servers in the same datacenter as Google, and thought what we were doing with Linux and caching was pretty progressive until I saw Standford grad students backing up their Subarus and unloading motherboards sitting on pizza boxes. That’s not patented hardware, that’s innovation (and truly thinking outside the box). [ed. couldn't resist...]
We live in a world where start-ups are encouraged to be transparent. Where global teams can collaborate in real-time using free and dirt-cheap tools. You can post coding work to international job boards and set your price. LAMP and RoR and Grid servers means you can stand up a web app in a day for less than a dollar a day. Getting off the ground is cheap and the barriers are very low. Staying off the ground, and actually taking flight requires more perfection of the formula than ever. Look at the hundreds of “web 2.0″ companies that have started in the last few years, many riffing on a theme that gains traction. Creating real value, and turning into a true sustainable company will be achieved by solid execution of all aspects of the business. Doesn’t matter how good the secret sauce is if you can’t get anyone to taste it.

Phil Black at True Ventures said awhile ago “Defensibility has to be respected” when I asked him about this topic. Go ahead and read that slowly. Not only is this a very astute comment, it says volumes in very few words. Thinking about this further, the big take-away is that EVEN in the web 2.0 context, you have to look at how defensible the company’s position can become based on what they are doing. Defensibility can be achieved in a number of ways, but if you cannot create it over time, then you have to question the real value-potential of the business and the risk-quotient.

Look at YouTube. Flash-based video isn’t rocket science. I’m sure it was a challenge to get right when they started the project, but its now a commodity (well, not at YouTube scale…but work with me here). YouTube established defensibility once they had market position and brand. As they grew and faced both technical and operational challenges they had to solve a ton of hard problems and created value in the platform and the company’s infrastructure. I might be wrong, but I’d guess that Sorensen holds more video patents that YouTube, and you probably have never heard of them if you aren’t in the biz. If the thing ground to a halt for 6 months once people started using it, or if they hadn’t provided easy sharing and embedding features, they’d be hanging out with Friendster in the pseduo-deadpool instead of flying around on G5s.

I asked David Cohen about this topic also. His take…

• Having unique, next-gen, tech is a “nice-to-have”, but it’s more about the team and the market.
• The company doesn’t have to have patents filed and legal defensibility to be interesting or capable of executing.
• He’d rather invest in a team that has proven they can build what people want than a team that can build rocket-science patent-able tech.
• Definition of defensibility: Execute better than the other guy. If the game is over, make sure you’re #1.

What’s the bottom line? If you are building a web application focus on your overall execution of the business and the user experience, and have a plan to create defensibility over time. If an investor says they aren’t interested because you don’t have defensible IP from day one, they probably aren’t the right investors.

Side Note: Brad Feld is anti-patent and blogs about it all the time. The guys at Ask The VC talk about patent reform also. Its an interesting area to look at in the context of defensibility and core-business value.