Wednesday, January 16, 2013
Insights and Opinions: Protection by Execution
Story by Ben Dyer
Entrepreneurs frequently question me about how you protect your prized IP or your business methods from theft by others. The less you disclose, the less help you will get from your mentors and peers as your company evolves. And, potentially, fewer opportunities will come your way if you hold your cards too close to your vest. I've repeatedly seen companies hide or delay their best product features for fear others would copy them, only to see themselves surpassed by competitive surprises. What's the point in waiting until you look like the follower and not the innovator? If you've created demand for your product and your customers have some switching costs, always give them the best you can to reward and retain that loyalty.
Then there's the topic of patents. Those are a daunting task, especially in lean startup software companies where the product at risk may well be long obsolete before any patent can be granted. Plus, even having a patent only gives you a hunting license to spend your capital chasing infringers. Patents, like any serious litigation, in my view are falling into the general category of the “sport of kings.” For most startups I see, patents are part of the equation only when the product is more tangible, more scientific, and derived from funded research at a university.
Everyone has a natural fear of giving away the great idea. Too many open the conversation with potential investors by asking for a signature on an NDA. That almost guarantees an immediate dismissal. VC's and serious angels who invest repetitively aren't interesting in managing NDA's from the flood of deals coming over the transom. It's in their best interest never to be seen as a conduit of secrets among their current or prospective portfolio companies. That said, however, I would advise not shopping your idea to an investor who has an obvious direct competitor already in the portfolio. You're wasting everyone's time in the process.
As your company grows from the startup stage, one of the best strategies is what I call “Protection by Execution.” MailChimp is a great example of that. Look at the total transparency of the annual report they Tweeted today; it doesn't show the financial data of this privately held and no-outside-investment company, but it lays out all the stats, even the number of pizzas consumed by the staff. This report is aimed at MailChimp's customers. It sends the message that the train is accelerating, and it makes you glad to be aboard. If you're a prospective customer, you'll want a ticket on that train. There's no braggadocio, just the facts. And, when your facts are that good, that's all you need. There's nothing there for competitors, except perhaps envy. MailChimp operates, supports, and innovates – and has cool hats. They let the data do the talking.
Public companies seem to have a different view of transparency. They have to disclose the financial facts simultaneously to all interested parties, but a lot of the operating data like MailChimp provides is far more carefully protected. Is there truth in today's reports that Apple has cut in half its component orders for the iPhone 5 for next quarter, or is some analyst gaming the stock price? Apple is certainly not going to provide any data of that nature. Whatever the case, they have a prized institution to protect by continuing to innovate and execute as well as they have done for the past several years. (Well, except maps, but no company has to get everything exactly right.) They're at the size where they can employ all the weapons of king-size competition, notably patents, but they've still got to deliver or risk the declines of even legendary companies like HP.
On the other extreme of the spectrum, I've also been observing the competition among SMB's that depend on local listings, reviews, ratings, organic SEO, and paid ads. There's an area where there is seemingly very little transparency or even consistency over time as to how Google determines its rankings, and there is plenty of snake oil being proffered by “experts” in that arena and by various sources of supposed ranking boosters like directory and review services. Frankly, I've seen a lot of cheating by the businesses themselves, e.g. a whole bunch of testimonials using the same phrasing and obviously written by the same hand. Businesses that don't have natural referral partners in the community or that provide services like weddings, for example, where repeat business is not too common are engaged in a form of trench warfare for clients. Even dirty tricks are not unusual, where you pay more attention to elbowing aside others' rankings rather than optimizing your own. (Perhaps I will gather up some observations along that line for another “how-to” post.) At any rate, how you build and protect a business in that environment can be more about executing your enemies than executing your own plan.
The bottom line: If you want to protect your great idea, just take care of business. You'll be unstoppable.
Ben Dyer is a technology veteran, investor, and blogger who publishes TechDrawl, which promotes technology business across the South, is an Entrepreneur-in-Residence at the Austin Technology Incubator, and is best known as the founder of Peachtree Software. He originally posted this on his blog, TechDrawl, and gave us permission to reprint it here.