Execution, Scaling and Defensibility

One of the most common misunderstandings in the world of entrepreneurship is to believe that a good idea is critical to the success and shall be guarded like the holy grail. While in some rare cases a good idea did grow by itself simply because it's good, most of the time that's not the case. The key to the success in entrepreneurship is always execution, not the idea itself.

Traditionally, there are two ways to protect an original idea: trade secrets and patents.

Coca-Cola is famous for keeping its formula a closely-held secret, known in its entirety to but a few employees in its vast empire. Its CEO posted for photos in front of a gigantic vault to propagate that sense of secrecy and reinforce the brand image, when in blind tastes most consumers could not tell a coke from its bluish rival Pepsi.

On the other hand, any consumer that is addicted enough to the smartphones is familar with the patent wars between Samsung and Apple, which sometimes rested on borderline ridiculous claims. Nevertheless, a patent pool — note, not a patent or two, but a pool — remains one of the more effective tools to defend the business.

So between utmost obscurity (trade secrets) and plain openness (patents), a business basically have two extreme tools to protect its advantage. The question is then: which side of the spectrum does a startup typically fall in if it were to think about defenses?

A short answer: neither.

 

Patents

I have trouble with startups pitching to me about the patents they have be granted or have in the process of approval for their product offering. In fact, anyone in the hi-tech industry with enough understanding of how patent litigation works would cringe when a startup brags about its patents.

Heck, I myself own a US patent and I can't recall the last time I even bother mentioning it!

The first problem is the timing. The time for a US patent to be granted is, at best, 1 to 2 years. Given the pace of the startup world, your competitors will pass you by like cyclists in Tour de France competition before you receive the patent. Worse, if you think about suing your opponents with a patent that's granted to you, it's a pure waste of time since

  1. it will be another 2 years before the lawsuit is completed and remember we're in the lightspeed startup world?, and
  2. the startups you sue are most likely as poor as you are, which means you won't get much even if you win the lawsuit after paying a huge sum to the lawyer.

In fact, I very much doubt whether there's any sane lawyer that would take a patent case against a small startup whose cash is burning out everyday.

And if it's the big player like Microsoft and Apple infringing your so-called patent? Forget it!! Even if they do stumble upon the technology you patented, they have a whole moutain of patents that could be leveraged to fire back at you. You're bound to be infringing at least one or two of those obscure patents and more often than not you'll lose more than you win.

In short, you cannot defend with ONE or TWO patents. You need a pool. This is why in most standard wars big players rush to pile up patent claims, such as what Samsung and Qualcomm did in 4G LTE standards.

Patent war is not for the tinies.

 

Trade Secrets

There's no way a startup can keep its idea, however great it is, secret beyond the next fund-raising event. When a startup pitches to 20 or 30 VCs for the first time, the idea is basically public. Sometimes it happens even earlier as some angel investors are known for their penchant to brag about their placements.

Or in the case of China, your idea is copied before you even think about expanding into China. As 500 Startups Partner in China Rui Ma detailed in her brilliant TechInAsia piece:

To anyone who thinks that there are Chinese people waiting to clone your product as soon as you enter China, you are dead wrong. The Chinese will clone your product long before you enter China, usually as soon as they hear about you – when you launch, when you get any traction, when you raise a round of funding. You will get cloned because the amount of information flowing into China vastly exceeds the amount of information flowing out. The Chinese are like a sponge — waiting to absorb the best business ideas worldwide, but most especially Silicon Valley. New (relatively speaking) dedicated tech news sites such as 36Kr, Huxiu, ifanr, iheima, as well as old-hand CSDN all regularly report on original content but also translate a good deal of articles from overseas.

In fact, I can distinctly remember a handful of instances where I saw the Chinese translation first (thank you Wechat public accounts!) before I encountered the original English article. The turnaround is that blazing fast. So if you are a business with any sort of notoriety (particularly in the press) in the developed world, know that you are being watched here in China, and most likely dissected and reassembled to fit local tastes. Most of your clones will be instantly recognizable and most will die, but a few, such as this Uber lookalike, will thrive.
— Rui Ma, 500 Startups Partner in China

And calling out peope as thieves doesn't help. 90% of the time the idea would end up as a lemon, leaving no traces on the market as the waves of startups wash it away. History will only record the ideas that last stand on the market.

And as I said many times here on this humble blog: you always have to explain to your users what your ideas are in order to sell them the idea. Is there any entrepreneur wannabe out there that doesn't understand the business model of Uber or Airbnb? Of course not. Then if you understand their ideas, why don't you copy them NOW and be successful?

This leads us to our conclusion on execution being the key.

 

Execution, Scaling and Defensibility

Uber's idea is ridiculously simple now that it's famous. Any startup can write a similar app and start recruiting drivers like they do. In fact, there are at least one or two Uber copycats in every metropolitan area around the world, in addition to Uber itself!! So why is Uber the one that's getting $1.2B series D at a valuation of $17B from famed investors like Google Ventures, Kleiner Perkins and even BlackRock, instead of your copycat?

Because they're the one that successfully maxed out the scaling speed given the cash available in addition to be the idea originator. In other words, it's execution that got Uber to where it is today, not the idea.

By achieving the incredible scaling they were able to persuade the investors of every ensuing round that their money would be put into an even steeper scaling curve — this would then seem like the exponential growth that all VCs are looking for in order to meet their 30% cost of capital.

But having scaled up fast enough does not guarantee defensibility, which is exactly the doubt many people cast on Uber.

The business of Uber as it is now — a taxi service that's better and sometimes cheaper — is far from defensible and certainly does not justify its latest valuation. As Prof. Aswath Damodaran of NTU Stern Business School analyses thoroughly in this article, the $17B valuation most certainly seems outrageous given its main business model today. There has to be something else in the cooking — and to me certainly not the much quoted "Uber for everything" idea — that would entice smart people at Google Ventures and Kleiner Perkins to put in such a huge sum of hot cash.

What we don't know about Uber's plan there, if there is indeed any, would be the real big idea that shall defend this gigantic startup if it materializes in the near future. But to get to the point where you could dream about disrupting beyond your own current offering, the last thing you should worry about is your idea being copied.

Execution, that shall be your real focus.

 

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