Intellectual Property and Barriers To Entry

So what the heck is Intellectual Property? Many times, people think it is only patents and trademarks, but in the context of Software Products, it can mean many more things. The SaaS delivery model introduces some new elements in what is exactly Intellectual Property and how to make sure that it is useful for you!

Intellectual Property is a nice concept but it is useful for you as an entrepreneur only as far as it is a Barrier to Entry for any of your competitors to get in.

It can come in many forms:

a. Innovation or Invention that can be protected by a Patent. "Can Be" is more important than "should be". Are you using some techniques in your product that are trade secrets and hard to replicate the functions of, by any of your potential competitors? Apple iPod user interface has not been matched by any of the other competitor mp3 player UI in ease of use in spite of the numbers of years that have gone by since its introduction. That's intellectual property.

b. Do you have a significant Development Lead Time advantage? If it will take your competitor two years to catch up to where you are, that's intellectual property. Quite often people think that only patents and code secrets are Intellectual property but being early to something is a *huge* advantage. Even if some product does not contain earth shaking secrets, companies routinely underestimate the amount of learning, failures and insights companies gain by just doing it longer than others. This is not be taken lightly!

c. Do you have a significant People/Knowledge/Expertise advantage?  Microsoft SQL server group went out and rounded up almost all of the world's Relational Database gurus and they are all working in Seattle for Microsoft. Long term prognosis for almost all competitors are dire while Microsoft keeps making SQL server faster, better and capable of a lot more that only more expensive Database products used to have.

Barriers to Entry are very important for Product Companies as opposed to Service Companies, just given the amounts of money you need to sink in before you start seeing Sales Revenues.  What prevents a competitor from showing up with a competing product?

In services, it is more a People Business. Barriers to entry are minimal. Intellectual property are all in the third kind above (peoples' expertise). They can resign, go across the street and start a competing business in two days!

The point here is that product companies need to think about intellectual property seriously, how to develop it and make sure that you erect barriers to entry. It may not be just in the form of patents alone. Time and people advantages could be significant barriers to entry.

Something to think about and plan. It will definitely come up when you ask for equity funding!

 

Replies to this Topic

Nari: Good inputs as usual.

Which is the biggest barrier - ability to innovate or ability to execute collectively or ability to sustain for long? Please chose only one.

Lakshman:

To answer your question, it depends on what kind of Service or Product you provide or come up with.

In another note I had a matrix that identified that if you are a Product or Services Company you could be in one of four quadrants:

a. Old Products or Services for Old MarketsHere the ability to sustain for the longest time is the most important Barrier to Entry. IBM, HP, Oracle are all great examples of companies in this quadrant. Old competitors to IBM like APollo Computers, DEC, Sun, Compaq have all been folded into one of the above companies. They still stand while others are gone. The trick is to wait till technologies or products are mature enough and then buy the company and fold it in. IBM buying Cognos and Oracle buying Sun are all good examples. Many times it is to even shut down competitors and transition customers slowly but surely. Like PeopleSoft customers eventually will be usng Oracle versions one way or another!

b. New Products or Services for Old Markets - Here the ability to quickly scale up and execute quickly is the key even if the IP is not very innovative. SaaS delivery of old software is a good example.  In services, RFID enhancements to existing enterprise software is a good example of innovating new technology in an old market. This could also justbe services specialized in a certain area like Embedded Software.

c. Old Products and Services for New Markets  - Speed and Sustaining is the key here. IBM is very active in the Electronic Health Records and Healthcare AUtomation areas currently. Here leveraging your size and identifying the right time to move quickly is the key.

d. New Products or Services for New Markets -  Here the ability to constantly innovate and come up with new products is the key here. 3M is a good example of constantly coming up with new products out of the basic chemicals they produce is  what is keeping them dynamic. They come up with totally new uses for their chemicals in all kinds of areas. Apple is a great example - iPods and then iPhone. They may come up with something that is between a laptop and a iphone but is a full communication device and a computer - a handheld that does many functions.

The trick is to clearly identify which of these quadrants you play in, what your pressures should be and then go down that path diligently!

 

Excellent summary. Thanks Nari.

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