“Traction is the new IP.” This emerging mantra results in many startup CEOs eschewing the traditional path of patent and other forms of IP protection. While I am aware of no rigorous studies conducted to date, anecdotal information indicates that startup entrepreneurs are increasingly saying no to patents, and likely to other forms of IP. Instead, these entrepreneurs first seek to validate their business models and then follow business plans focused on generating recurring revenue, often avoiding altogether the step of protecting their business idea or product with IP. From my own interactions with startup CEO’s, I can confirm that the pendulum has swung very far to the “IP is worthless” side of things. But, is this emerging conventional wisdom actually correct?
There is no doubt that over the years far too many startup company resources have been spent on patents and other forms of IP protection (many of which were paid to me in my former life as a patent attorney). Moreover, if we were to track the number of patents held by successful startups and those held by failed startups, a poor correlation would certainly exist between successful exits and the presence of IP protection. An adherent to Lean Startup Methodology would then likely conclude that scarce resources should be spent on tasks more often associated with startup success. This could be a huge mistake, however.
First, let me say that I love Lean Startup Methodology. This framework has transformed the way that I think about running the startup company at which I am currently CEO. In short, Lean tells us that we must first identify and validate our company’s business model; any efforts not directed toward these activities are not only wasted, but may actually assist in driving the startup to failure. Validation of a business model necessarily comes when customers buy the product of a startup company like mine on a recurring basis for more money than it costs me to make the product. If I am not successful in selling a product, I must quickly attempt to supply a new product that does entice the customer (i.e., “pivot”) or shut the business down. Data generated from actual conversations with customers must drive this process, the execution of which requires the startup team to move and react quickly, with the focus being only on tasks that have a high probability of creating value for the enterprise. Since IP has traditionally created little value in the startup world, it is no surprise the the move toward Lean is also resulting in a backlash against IP protection.
The almost singular focus of Lean on customer validation is a brilliant insight into startup company success because strong growth in customers provides me not only with revenue that keeps the lights on, but also might reduce the likelihood that other companies will knock off my validated business model. That is, why would another company try to enter a market against a startup that is killing it with customers? Customer traction can set up barriers to entry that keeps competitors away much in the same way as IP does. So, in the framework of Lean it makes much sense to conclude “traction is the new IP” because this is a “lean” way to for startup teams to think about the complicated subject of barriers to entry.
I agree that large and loyal customer base is the brass ring for startups, but more often than not, a validated business model means not only revenue, but also competition. In a world where “traction is the new IP,” the winning company will have to ensure that its customer and revenue acquisition efforts happen at speed and scale required to be first not only but to also stay first in the market. To do this, the startup company’s execution of its customer acquisition and retention efforts must occur at a speed and a rate of growth that likely is akin to a hockey stick. Sure this is possible, but it requires flawless execution and a whole lot of luck. For most startup companies, finding the right product market fit takes a long time and hockey stick growth is rare.
Focus solely on traction to the exclusion of other forms of barriers to entry means that a startup company is placing is huge bet on its ability to gain customers and revenue at a rate that effectively keeps competitors out. Time and again, we see that the second or even third entrant into a new market ends up being the company that wins in the end. The delays resulting from pivots or other adjustments can allow smart competitors to use the first startup’s business model and execution mistakes as a literal roadmap to short cut to success. In these circumstances, a startup CEO sees the “close by no cigar” pathbreaking efforts of the first startup team as a business opportunity. Alternatively, we see an established business with deep resources swoop in and take over the nascent but promising market of a startup. In each of these cases, the startup team that identified the opportunity and expended the time and resources to validate the opportunity ends up with nothing for their efforts because in the absence of the hoped for traction, no barriers to entry existed to keep competitors away.
It is certainly comforting for startup CEOs to have succinct slogans like “traction is the new IP” to reduce the complexity of decision-making. Nonetheless, I believe such simplicity can be very dangerous. Like many things in life, “the devil is in the details.” Rather than shut down a conversation regarding the applicability of IP and other, more traditional barriers to entry to a specific business model, the leaders of and advisers to startup companies following Lean Startup Methodology must work to understand what barrier–or more likely–combination of barriers will allow value capture from the new venture’s validated business model. In other words, what activities will allow the startup to not only be first in a validated and valuable business model, but also to be able to stay first for long enough to capture the value? So instead of saying “traction is the new IP,” Lean Startup CEOs should be saying “is traction the right form of IP for my company?”
Perhaps it is better for entrepreneurs to consider traction as just one of the tools available in the value capture toolbox. Indeed, customer traction may be more than sufficient to allow some startup companies to achieve a strong exit. For other companies, however, traction may happen too slowly or even not be enough to keep competitors at bay. In these cases, startup CEOs must at an early stage evaluate alternative competitive barriers that make more sense for capturing value in their specific business model. These other tools could include patent, trademarks, strategic partnerships, and a whole lot more. In later posts, I will be discussing the various tools available to assist startups to capture value from a validated business model.