Wise Notes 1

This week's question is from Dennis in London, Ontario. Dennis asks: The other day, I was watching an older episode of Dragons' Den and heard Robert ask 'What prevents me from doing this myself, without you?' What does stop a Dragon from doing what Robert suggests?

Thanks Dennis. That is a great and informative question that many pitchers ask me. The short answer is nothing but the better answer is barriers to entry.

Nothing

An idea, if that is all you have, is not protectable. I can dream of finding a cure for cancer, but having the idea to do something and actually doing it are very different things. First off, you can't protect a pure idea. Even if you have the cure for cancer, to protect your ability to be the only one to monetize that idea, take the idea to market and make money off it, you have to file a patent. A patent is a form of intellectual property. At its core, a patent allows the creator of an innovation, the subject of the patent, to have exclusive right to use that innovation. If others wish to use a patented innovation, they would have to get permission from the patent holder. But again, this is after the patent is granted. To get the patent in the firm place you would need more than an idea, you would need a process that didn't exist before. You would have to prove that not only your innovation works, but that it is novel and you created it. An idea itself isn't enough. So if all you have is an idea, what stops Robert or anyone else, from stealing it?

Barriers to Entry

If you don't like the answer nothing, what else can you do to protect your ability to make money off your innovation? Barriers to entry are according to Wikipedia defined as "obstacles that make it difficult to enter a new market". But more generally, the term barriers to entry refer to a number of things that allow an entrepreneur to block others from stealing his opportunity (note: I said stealing his opportunity, not idea). Anything that prevents competitors from stealing your customers by offering a similar idea would be a barrier to entry. Let's look at some of the big ones:

• Intellectual Property: As discussed above intellectual property (IP) (patents, trademarks, copyright, etc) gives the rights holder the ability to be the only person to monetize the innovation. Of course, not all countries recognize IP rights and even if they did, the cost to enforce a patent is often 10x higher than the cost to file it.
• Loyalty: Apple Computers has some of the most loyal customers in the world, to the point they are sometimes willing to overpay for an item if it has the Apple logo. This brand loyalty can act as a barrier to entry.
• Resource Constraints: If your innovation requires magic element X, and you have exclusive access to element X, then this would prevent others from competing with you and thus be called a barrier to entry.
• Network Effect: Some businesses benefit from a barrier to entry caused by building a large user base first. For example, because Facebook's value to each user increases the more users join, the more users that join Facebook the harder it will be for others to win those users away.
• Sunk Costs: Staying with the Facebook example for a moment, most Facebook users have spent countless hours investing in their online profile. Hours and effort spent adding pictures, connecting to friends, updating status are thus sunk costs. If I wanted to switch from Facebook to MySpace, I would lose all the time and effort I sunk into Facebook. This is thus a barrier to entry.
• Economies of Scale: Large, experienced firms can generally produce goods at lower costs than small, inexperienced firms. This ability to create the same goods at a lower cost due to the size of operation is the barrier to entry called economies of scale. It is the reason why McDonald's can deliver burgers for less than you could BBQ them for.
• From the list above Dennis, you can see some of the ways one could stop Robert from stealing the opportunity. Simply put, barriers to entry make it harder for others to leverage your innovation into an opportunity.