Blog reader Curtis Thompson asked me a very good question a few days ago: What should an entrepreneur say when she’s asked what makes her company defensible? This question is more and more common as more and more entrepreneurs start “Web 2.0 companies,” and investors torture themselves by wondering why they didn’t fund YouTube.
“Defensible Web 2.0 company” is an oxymoron in the sense of a quick, irrefutable response to the question. First, do yourself a favor and examine the source of the question. If it’s a pencil-necked rookie investor or associate with an MBA, it means that you’re dealing with someone who wants to make himself look smart. If it’s an experienced investor, then understand that he’s not expecting a bullet-proof answer but wants to see if you’re street wise, clueful, and cool under pressure (or a reader of my blog).
Thus, this seemingly simple question is one of the hardest for an entrepreneur to answer. A good response requires a combination of clairvoyance, street wisdom, humility, honesty, and cockiness. More than anything else, it’s a trick question to see what you’re made of. First, let’s discuss the three worst possible answers so that you don’t show that you’re made of stupidity:
“Patents make our business defensible.” Go ahead and file them because you may someday achieve huge success and therefore have the time and resources to go to court. However, the most valuable outcomes of a patent are often impressing your parents and filling up space in your MySpace profile. (The exception to this rule is biotech, chip design, and medical devices where a patent really means something.)
As a startup, it’s highly unlikely that patents will make your company defensible because you won’t have the time or money to do battle with a Microsoft-esque competitor. Sure, every few years you hear that Microsoft has to pay a company tens of millions of dollars, but “suing Microsoft” isn’t a viable (or attractive) business strategy.
“We’re the only guys who can do this.” This is a signal to investors that you’re clueless and don’t even know how to use Google. There are very few teams that have a monopoly on knowledge or implementation skills. This is like Terrell Owens claiming that he is the only wide receiver that can help a football team win the Super Bowl, so skip the grand delusions.