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False. Startups may start out in an indefensible state, however, investors will expect you to build some kind of defences somewhere along the way. If it is impossible for your start-up to build such defences, you will become commoditised rather quickly, and therefore may not be a good investment, however good a project it might be in the first instance. Building barriers to entry is a fundamental activity of the start-up that wants to succeed in the long term. Examples of barriers to entry includes: network effects, customer lock-in, stock, relationships with partners… those are not necessary, and indeed often impossible, at the beginning of the life of the startup. However, if they cannot be engineered at some point later, the business is indefensible and therefore potentially a bad investment. Successful businesses like Google, Facebook, or Apple, or Microsoft, may still be disrupted. However, because of the barriers to entry in their markets, these disruptions will happen over a period of years or decades, rather than over a month. That is one of the factors that makes them great investments. When investors ask about barriers to entry, they are not asking what barriers to entry you have right now. Rather, they are asking what barriers to entry you will be able to build over the next few years, should you happen to be successful. And you better have an answer for that if you want their money. |