On commodities and defensibility

We all know that startup founders are famous for wearing 'every hat', but which hat is the most difficult and time consuming to wear?

I firmly believe it's fundraising.

So what is fundraising beyond the process of getting cash for equity? Well, it's sales. (As an aside, I think everyone is a salesperson because an individual is like a product with various features and bugs and compromises. An interview is a sales process. Fight me.)

Sales is really just an exchange of value. Cash has a fixed value we all recognise; your product has some either abstract of monetary value (abstract if in line with a vision/goal, like Jira, or monetary if it can be resold, like a supply). At some point we decide we're happy that some fixed value is worth abstract/monetary value and we buy the thing. The fundamental here is that we buy the thing under fairly well known conditions: we're not buying into a dream; we're buying a thing with defined rules and value and a market that clearly supports its price and provides some healthy competition.

On the other hand, fundraising is a particularly difficult kind of sales because it depends instead on unknowns - it depends on the future. It demands firm belief in the founders, growth, continued strong defensibility, competitor performance, and a dash of luck. It's a bet.

In this blog, I want to explore commodities, defensibility and how these shape fundraising.

Let's start with commodities. Nearly all investors will tell you they never invest in a business that's easily commoditised (I do remind them that there are some seriously big commodity businesses out there with a low barrier to entry, like food and drink; anyone can make a fizzy drink, but nobody is successful as Coca Cola). With obvious exceptions, commoditised businesses are bad because they're not defensible. I see a commodity to be the polar opposite of something defensible, and clearly defensible companies are more attractive investments. Fundraising is much easier when you're defensible!

The Château du Plessis-Bourré in the Loire Valley region of France

So what does it mean to be defensible? It's worth revisiting Coca Cola. If Coca Cola is so commoditised and therefore not defensible, why would anyone invest and why is the company so successful? That's because there are other ways to achieve defensibility, and Coca Cola is only weak on one part of defensibility: low barrier to entry. Low barrier to entry is a particularly poor measure of defensibility. It's a poor measure because the barrier to entry on any tech product is now practically zero: you can make an app for free with no code. Facebook is a delightfully grotesque but simple product: a feed, chat, and a basic group system. More than a handful of kids in my school had built that by 14 using some god-awful PHP. The barrier to entry is now at least 10x lower, yet none of those kids are worth a billion dollars.

No, defensibility is better thought of these days as an average of the founders, speed and network effects.

Founders are a huge part of defensibility because vision is extremely hard to commoditise. There are more founders than ever (this is good, obviously), but the reality of the world is that not everyone can reimagine what the world looks like and make it happen. Delivery on contrarian insights is extremely rare, never mind being able to come up with one. This isn't an opportunity to be elitist; it's just reality (although I think there are many more people who could be founders, and we should help these people start companies.)

Speed is a big part of defensibility too. Can your company move 10x quicker than any other company? Big plus. Whilst OtherCo is figuring out how to implement Jira, YourCo has 2 pilot customers and found the Bad Stuff (tm) that would be extremely painful later. I firmly believe speed is not a coincidence, but again a byproduct of founders and how much they believe in failure and agile principles. Founders-to-be who talk about failure and lovingly respect their amateur years are attractive and move quickly to avoid mistakes. Founders-to-be who talk the talk and love themselves belong in MBA school with the other shitmunchers.

Network effects outrank founders and speed because they lead to growth so big that a group of humans could never have achieved it by hand. My definition of network effects is loosely that each new user makes the product better for all the previous users, and that growth fuels future growth. Businesses with network effects don't scale linearly (that is, if they had 2x as many users, they would be 2x better off than before) - they scale exponentially (that is, if they had 2x as many users, they would be at least 4x better off, then 8x, then 16x, until almost everyone has a Facebook account). Coca Cola is an example of a company that nails network effects almost purely on the growth aspect: they have deep distribution channels and the more Coca Cola is available, the more likely a future venue will be to serve it. Sorry Pepsi, nobody thinks it's a feature that you're served in KFC.

So let's drop low barrier to entry as a factor of defensibility.

When it comes to fundraising, anyone can make an app. Hardly anyone can start a billion dollar company.