Barriers to Entry: Why Entrepreneurs Win and Competitors Lose

From Mike Drzal, partner with LeClairRyan, a sponsor of VT KnowledgeWorks. A version of this post first appeared on Handshake 2.0.

One of the standard components investors expect to see among the fundamental tools in the fundraising toolbox – an executive summary, business plan and slide deck – is "barriers to entry." Some entrepreneurs are confused by this item and think that it refers to the barriers they face in advancing their company or moving a product into the marketplace. 

What are your competitors' barriers to entry?Actually, what investors are looking for is some barrier to entry that makes it more likely than not that the entrepreneur’s company beats the competition either by getting out into the market first or being able to keep the competition from entering afterward.  When you think about it, this makes sense because investors don’t want to put money into a company that gets left at the starting line by a competitor that is bigger and better financed. 

What constitutes a barrier to entry?  It can be one of a number of things.  Patented or otherwise protectable intellectual property can thwart a competitor by denying them access to the best embodiment of an innovation.  Proprietary know-how or trade secrets can work just as well as patented or copyrighted intellectual property.  A significant lead in development is another potential barrier to entry. For example, if your IT company has an 18-month lead on the competition in writing code, it means your company can launch and begin to grab up market share before the competition can react.  Locking up key channels of distribution with exclusive contracts works as well – if the competition is denied the most efficient pathway to the market, that gives you the opportunity to become the market leader. 

These are just a few of the potential barriers to entry that will excite an investor. What matters is that you have a credible barrier to entry to beat the competition that you can articulate in a convincing way during your pitch. 

LeClairRyan specializes in high-tech corporate law.LeClairRyan is an entrepreneurial law firm with offices from Virginia to New York to California, providing business counsel and client representation in matters of corporate law and high-stakes litigation. The Blacksburg, Virginia-based office of LeClairRyan offers venture capital, angel investor funding, and intellectual property law services for startups, entrepreneurs, and technology-based companies.  It also offers Outside General Counsel services covering the full gamut of clients' corporate, employment and business litigation needs. For more information, please contact Jim Cowan or Mike Drzal at 540-961-2600.

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