Chris Horn: Patents are good, but a secret sauce is better

After the investors have patiently listened to you explaining your product and underlying technology, you just know they will ask: what is to stop a well-funded competitor reinventing your product and capturing the market from you? How will you prevent this, particularly once you have some customer wins and have thus proved that a market exists for your product?

Many investors expect entrepreneurs to have patents already in place to protect their position in the market. Patents are one form of a “barrier to entry” against aggressive challengers.

Policymakers for public research revere patents because, having invested public money in research, the outcome can be measured by the number of new ones that result. Fresh patents indicate noteworthy research results which may be commercially valuable and which should be protected before they are licensed to established companies or start-ups.

Nevertheless, for investors, an entrepreneur may offer more subtle barriers to entry than explicit patents. A team may have specific knowledge or a combination of interdisciplinary skills and market insight that competitors may find challenging to assemble. A product may appear easy to imitate, but the precise details of how it is put together may be more opaque. Such a “secret sauce” of key intellectual ingredients is often a better barrier to entry than patents on their own.

Commercial potential

Savvy investors and entrepreneurs thus usually view commercial potential in a different way from public policymakers in innovation and research: patents are good, but a secret sauce is even better.

Presenting subtle or explicit barriers to entry should be intrinsic to the investment pitch of any entrepreneur. Of course, there must also be a market opportunity, and a way of bringing the new product to the market. But then there is the old adage: there may a gap in the market, but is there a market in the gap?

Exploiting the market in the gap requires deep consideration. Apart from the barriers to entry which must be erected against competitors, are there also barriers to adoption which must be lowered for potential customers? A well-run promotional campaign draws attention to a new product. Deciding the best price for the product, and designing the balance between direct selling and sales through partners and resellers, further lower the barriers to customers.

Even so, the most significant potential barrier is the degree to which the product is not a natural fit for customers. Having to train customers on how best to use the product erects a barrier; far better if the product is a very comfortable replacement or extension of something that customers already know how to use. The design and appearance of a product, and its packaging, make an impact in those crucial first five minutes when a customer starts to use a product.

Paradox

A well-thought-through investor pitch or business plan therefore addresses a paradox: on the one hand, there should be high barriers to entry to prevent aggressive, well-funded competitors simply reproducing the innovation and stealing the market away; on the other, there should be catalysts that accelerate customer interest and adoption of the innovation, with the fewest possible barriers placed in their way.

Some new products and business strategies have excellent technology and team expertise, perhaps augmented by a portfolio of patents, which form robust barriers to entry. Unfortunately, they may also have poorly conceived customer design, unnatural use and a weakly planned commercial strategy. Nice technology, shame about the marketing.

In this situation, the only credible solutions are to fix the marketing or sell out the technology. Investors, meanwhile, will wait on the sidelines, passively watching.

In contrast, some new products get the benefit of excellent marketing strategies, are natural for customers to use and have catalysts for market adoption. However, they may also sometimes be based on utterly indefensible technology, which competitors can thus quickly reinvent.

In this situation, the only credible solution is to expand rapidly into the market and do a “land grab”. This business model is attractive to some categories of investor, but is a war of capital attrition. Those who raise the most money, and thus can spend the most, have the best chance of capturing and dominating the market.

In the Irish context, none of these approaches are particularly attractive. Weak technology and weak marketing are clearly a disastrous combination. Strong technology but weak marketing is an unlikely basis for a credible company. Weak technology but strong marketing may be a successful strategy in places such as Silicon Valley, through raising a very large capital investment, but is generally not feasible in Ireland.

The exciting opportunities for Irish investment are entrepreneurs who not only have great and defensible technology, but also have thought through catalysts to market adoption. Not only must it be difficult for a competitor to reinvent a product, but also, at the same time, it must be entirely comfortable for a customer to adopt it. Not only must the team have a secret sauce to trip up competitors but also a tasty temptation to attract customers. A product that is obvious for customers, and yet opaque to competitors, is real innovation.