The past few articles covered the first third of the pitch where you show there’s a great business opportunity. Now we turn to the middle third of the pitch that I call the evidence – this is where you prove not just that your startup will be the one in a hundred to succeed, but that there’s no possible way you can fail.
Your evidence consists of four elements:
- Moat / intellectual property
The order isn’t important, but your traction is a good segue into the financial projections which begin the final section of the pitch, and the moat is usually tied to the business model that ends the first section. So I’ll focus on the moat today, but use whatever order these fit most naturally into the flow of your pitch.
Why You Need a Moat
Your Grandma Sara had a secret recipe for out-of-this-world pancakes. When you make them for your family and friends, they always beg you for more, and encourage you to turn those pancakes into a business. Working long and hard with contract food packers, you’ve created a unique heat-and-serve pancake that can be sold at supermarkets, reproducing the same fantastic taste of pancakes fresh off Grandma’s griddle. Now, after years of scrimping, scraping, and small-scale trials, your pancakes have gone nationwide in supermarket chains and they’re selling like, well…hotcakes. Revenues are exploding, investors are calling to congratulate you, General Mills is sniffing around about a possible acquisition and your biggest problem is how to expand production. You’re not only on the road to success, but you’re cruising in the fast land and can glimpse the finish line up ahead.
Then one day, sales drop. Probably just a blip. The next week they drop further. Your daughter calls in a panic from the supermarket and texts you a photo: on the shelf right next to Grandma Sara’s pancakes is Grandma Sadie’s pancakes. The packaging looks similar, the pancakes look similar, but they’re half the price of yours. The following month, one of the huge food conglomerates comes out with Grandma Stella’s pancakes, and within days, you see their advertising everywhere. Only a few weeks later, your biggest account replaces your pancakes with a house brand named Grandma Sally’s pancakes. Sales plummet.
What just happened? You found a market, built a successful product, and had great traction. But you had no moat to protect it from competition. Once you prove there’s a market for your product, there will be no shortage of competitors who will try to eat your pancake lunch. How can you, as a tiny team with limited funding hope to compete with the giants in your industry who now see the value in your idea. If you’re going to stay in business past your initial success, and if you’re going to convince a big company to acquire your business instead of building their own product in-house, you need a moat, and you’d better have a good one.
Build it High and Wide
There are five types of moat:
- Specialized Expertise
- First Mover Advantage
- Stickiness / High Switching Costs
Patents: For most startups, especially in hardware and life sciences, patents provide the most important type of protection from competition, and the moat slide of the pitch is often simply referred to as the Intellectual Property or IP slide.
it’s important to understand that a patent is granted for an invention, not a product. You can’t patent Grandma Sara’s pancakes (we’ll get to trademarks below), but if you invented a new process to make your heat-and-serve pancakes, or a new packaging method, you may be able to patent that. Will that keep out competitors? It depends on how important that process is to making a similar product, and whether an inferior product that doesn’t use your patented packaging or production method could still compete with you.
Personally, I’m not a big fan of patents, especially for software products, but I’ll save that for another article. Suffice it to say that from an investor’s point of view, patents are the most obvious way a five-person team can prevent a giant with a billion dollar R&D budget alone from building a competing product. Even if patents have their limitations, many investors rely on them, so most startups need patents, or at least a patent strategy. That said, patents alone won’t get you very far. Investors invest in businesses, not patents. So while patents may provide some protection against competition, patents are just one element of your strategy to ensure the success of your product.
Investors tend to be savvy about patents and expect you to be, too. If your moat relies on patents, be prepared to discuss what your patents cover, how that will lock out competitors, and the progress of your applications through the Patent Office.
Branding: There’s likely nothing in Grandma Sara’s pancakes you can patent, and even if you did patent the production method, a competitor will probably be able to find a way to make pancakes that doesn’t use your production method, even if it results in an inferior product. Consumer goods are about branding. People will buy your product because they trust Grandma Sara. A large food conglomerate will acquire your company not because they want your recipe or your production process but because they want Grandma Sara’s name and logo.
Building a brand, though, is usually expensive and time consuming, particularly for consumer packaged goods. It doesn’t matter if Grandma Sara’s pancakes taste better, or are healthier, are made from better quality ingredients, or better for the environment if shoppers don’t know it, so you need to build the brand. This includes everything from logo design to color palette to packaging shape and materials, and often requires expensive promotion, whether that’s an advertisement during the Super Bowl or partnering with Instagram influencers. You have to build your brand before a competitor beats you to it, and unless you have a secret weapon like a celebrity on your team or are targeting an easy-to-reach niche group, plan on raising a lot of money and raising it quickly. A pitch for a consumer product, even one with great initial traction, won’t get anywhere with investors unless you’ve worked out the strategy, cost, timing, and capital required to build a successful brand because in the end, the brand is far more important, and far more valuable, than your product.
Trademarks are intellectual property and issued by the Patent & Trademark Office, but they protect your brand, not your product. They’re prevent a competitor from branding their product Grandma Sara or even Grandma Sarah (and you might have a problem with Grandma Sara’s pancakes infringing on the trademark for Grandma’s cookies). Trademarks are simple and inexpensive to register and you get some protection without even registering the trademark, so make sure you have the trademarks you need (don’t forget international markets), but unless there’s something special about your trademarks, they’re rarely worth mentioning in a pitch.
Specialized Expertise: Let’s say your team includes all the leading researchers in a rare disease and you’ve discovered a treatment. Even if the large pharma companies suddenly decided to target the disease, they wouldn’t have the expertise they need. Your moat is secure. While that’s an extreme example, it’s not an uncommon situation in life sciences, which is one reason investors like the space despite the high risk and long times for a return.
Hopefully, you’ve assembled a team of experts to solve a particular problem that even the giants with their tens of thousands of employees will have difficulty replicating. My network emulator startup was able to build a higher performing product at a lower cost because we were experts in optimizing packet processing. The giants built custom hardware (10x more expensive) and other startups tried to compete with software (1000x lower accuracy). Our unique expertise in a very narrow niche gave us a significant edge for this particular product that was difficult for others to replicate.
If specialized expertise is your primary moat, make sure to explain why competitors can’t hire their own experts or acquire the specialized knowledge some other way. In other words, make sure your expertise in not only unmatched, but unmatchable.
First Mover Advantage: Being the first company with a new product gives you the opportunity to associate that functionality with your product. You can define the product category and be recognized as the leader in the field, even with a team of only a few people. The first mover is able to begin generating revenues, obtain funding, hire the best team, expand the product features and wrap up exclusive distribution channels before other startups ever gain a foothold.
First mover advantage is especially valuable when there are strong network effects—i.e. where a customer using your product means that their friends, or their suppliers and customers have to use your product as well, making your product ubiquitous throughout your industry.
However, first mover is only an advantage if you move quickly to stay at least two steps ahead of the competition. Saying you’re the first mover in your pitch isn’t enough—you need to show how you’ll turn that initial lead into an enduring advantage. Sometimes it’s better to be a fast follower, especially for a giant, jumping in only after it’s clear what customers want. And particularly for a software startup, as an investor I’m worried that one of the giants will suddenly decide to add competing functionality as a free feature in their product that all your customers use, locking you out of the market.
Stickiness: The ideal product is like a fly trap – once a customer’s in, they can’t leave. Even if a new competitor has more features or lower price, it’s difficult or expensive for them to switch. This is especially important for services or SaaS which depend on a continuing revenue stream.
More than a decade of financial transactions stored in my Quicken file makes it impossible for me to switch. Similarly, my company is stuck with Quickbooks until my CPAs and tax accountants can share other files. Their stickiness keeps out competitors and they’re able to raise their prices nearly every year, and there’s little I can do but grumble. Exactly what potential acquirers, and therefore investors want to hear.
Put Alligators in the Moats and Cannons on the Turrets
Which of these moats is best? The answer is simple—a combination of all of them! Building multiple defenses is like putting alligators in the moat and cannons on the turrets, Any one type of moat will probably not be enough to hold back competition, so combine as many types as you can. In your pitch, be sure to tell us not just about your patents, but your branding strategy, your unmatchable expertise, your first mover advantage, and the stickiness of your product that makes it impossible for any competitor to swim across your moat.
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