AZ Central: Creating sustainable competitive advantage
When angel investors put money into a business, they’re generally laying their own cash on the line. So they’re careful about what businesses they back.
But how do angels think? What are the most important factors they look for when choosing a business to fund? A new study called the “2014 Angel Investment Outlook Report” offers insights that should make business owners and entrepreneurs take notice.
This report was commissioned by Worthworm, a Web-based valuation system used by angel investor groups and entrepreneurs. When a cross section of angel investors were asked what’s most important to them, they named such things as reasonable valuations, market size, industry sector, founders’ backgrounds and the company’s stage of development.
But one factor stood head-and-shoulders above the rest: sustainable competitive advantage. Nearly half of all angel investors named this as the single most important thing they consider when investing in a business.
But what is “sustainable competitive advantage,” really? Many people think it’s a new technology or maybe a process that’s hard to copy. Or perhaps some kind of cost structure advantage (i.e. we can do it cheaper!). Trouble is, if it work better or costs less, others will copy it. Guaranteed. So it’s not necessarily a sustainable advantage.
Think of sustainable competitive advantage as a moat that surrounds your business. How difficult is that moat for others to cross? Is it deep and wide? Is the drawbridge solid and retractable? Does the moat have alligators?
In biz-school speak, competitive advantage is something that happens when a business has an attribute or combination of attributes that help it outperform competitors. It’s the key to market, category or location leadership and ensures your survival. If it’s something that competitors can do or acquire quickly, it’s not a sustainable advantage.
Below are six things that can help a business create sustainable competitive advantage. But keep in mind that possessing an advantage doesn’t guarantee success. Far from it. You still need to take advantage of it and deliver superior performance:
Intellectual property: Intellectual property is something your business owns and that, in some cases at least, can legally prevent other businesses from copying it. This includes patents, trademarks and copyrights, of course, but also such things as long-term contracts and unique domain names.
Outside partnerships: Developing strong and exclusive partnerships with other companies or vendors can be a great way to differentiate your business and establish sustainable competitive advantage. For example, a partnership with a company that offers a product or service that goes hand-in-glove with what you offer can create something bigger and stronger than the sum of the parts. And striking deals with vendors might secure exclusive rights to certain merchandise or access to items in short supply.
Great location: For many businesses — including local businesses — location can be a critical factor in establishing competitive advantage. The store itself can often promote the business, requiring you to spend less on advertising. For retail businesses in particular, location strategy is part of competitive strategy. The right location can allow you to conquer one part of a city or region, then expand into others. And once you are established with the best location in a given area, it makes it more difficult for another business to move in.
Great people: Smart, talented and highly-trained or skilled people with great connections can always provide a competitive advantage. Talented teams are what many startups count on to generate an immediate lead that can then be sustained over time. After sustainable advantage, this is something angel investors most want to see.
Customer service/loyal customers: These, of course, go together. By excelling at customer service, you gain loyal customers that give you a competitive advantage. But this can’t be run-of-the-mill good. It’s got to be insanely good customer service done with a flare and in ways that others would be hard pressed to duplicate. This takes time and effort, but once established it can help put you in front, and keep you there.
Innovative/unique product line: Businesses with a single product are often in a weaker position. If you build a more expansive line, the product “portfolio” can help set you apart from others. But you need to keep innovating. You can also create your own private label products.
Curious about how much your venture could be worth? Or how to maximize your business? Or are you trying to do due diligence on potential investment deals? Or even looking for a world-class instruction tool? Then try a subscription to Worthworm, and let us help you.