Doriot Roundup: A startup's competitive advantage

Happy Friday Doriot Venture Community!

High five to the 5 the new members this week! ✋ 

Whether you're a seasoned investor or just starting out, our goal is to provide valuable insights in Venture that help you make informed decisions and achieve outsized returns. Today, we’re going to focus on evaluating a startup’s competitive advantage.

Table of Contents

• Venture Investing: Key Metrics

• A story about about Competitive Advantages

• DVC Deal

• DVC Portfolio Updates

Venture Investing: Key Metrics

By: Gerry Hays

For the past several weeks, we’ve discussed the three pillars of successful venture investing: 1) A Fertile mindset; 2) A Sound Strategy; and 3) Disciplined Execution.

During the execution phase of building your portfolio, you will be assessing the credibility of each investing opportunity to determine whether you’re investing in a deal (or not). Specifically, we concentrate on five broad areas:

1. Business Model

2. Team

3. Competitive Advantage

4. Market

5. Alignment

Last week, we discussed the how to evaluate a team. Today, we’re looking at the a startup’s competitive advantage.

A story about about Competitive Advantages

Meet Joe. He started a side hustle buying 'amazing' apples from a distant orchard and selling them at his local farmer's market during the fall harvest season, where he sells out every weekend. Joe buys 500 apples at $0.50 each and resells them for $2.00, making a $1.50 profit per apple ($750 per weekend). It's a great side income, and he's happy with his success.

However, farmer's markets can be cutthroat, and Joe quickly learned how competitive they could be. First, another entrepreneur noticed Joe’s success and set up his own booth, offering apples from the same orchard for $1.75, undercutting Joe. Worse yet, a third, more enterprising individual saw an opportunity to “disrupt” multiple farmers' markets. Backed by capital, he struck a deal with the orchard to buy apples in bulk at $0.25 each and began selling them for $1.25!

Joe's in a tough spot. If he keeps his price at $2.00, he risks unsold inventory and losing money. If he lowers it to $1.25, his gross profit shrinks to $375 per weekend, barely covering expenses. Even though he's built strong relationships with customers, when they can save $0.75 per apple, what do you think will happen?

Had Joe considered how to defend his market position from the start, he might not be in this situation. So, what could Joe have done early on to build a "moat" around his side hustle? Well, here are some options he might have considered exploring:

1. First Mover: Joe was the first mover and briefly enjoyed a monopoly, but it didn’t last. In reality, being a "first mover" doesn’t mean much because well-funded competition can catch up fast. So investors, whenever you hear “we’re a first-mover” from a founder, just remember that most advantages are temporary (like Joe’s);

2. Apply for a Patent: Patents offer a temporary monopoly for inventors to recoup costs and profit, but they’re hard to obtain, and well-funded competitors often find workarounds, leading to costly litigation. In Joe’s case, there’s nothing to patent, but it was worth considering.

3. Brand his apples and protect the brand via a trademark: This is a clear strategy every entrepreneur must give full attention to. For example, if Joe created a strong brand (i.e. "Crimson Zenith”) and secured a trademark, competitors could sell the same apples, but they couldn’t sell "Crimson Zenith" apples. Once customers connect with a brand, they’re less likely to switch to what they perceived to be an “inferior” product. By adding a small sticker to each apple for just a few cents, Joe could create a unique product that stands out from the competition. And, unlike patents, trademarks last indefinitely.

4. Other potential solutions: There are also a few market-based strategies Joe might consider such as:

   • Negotiating an exclusive contract with the apple orchard to only supply him but he better prepared to purchase a large quantity of apples; or

   • Change the narrative altogether by selling something different (i.e. caramel apples) but this means an investment in equipment and time.

A comprehensive overview of how investors and founders should approach competitive advantages can be found in Doriot’s Venture Preparation Program: QAI.

The key point is that no matter how amazing a startup's product is, without protection from well-funded competitors entering the space, it risks failing to achieve a significant exit and return capital. Investors want to see a defensible position with enough runway to ensure they can benefit from a harvest before the competitive advantage fades. This is something that needs to be thought about (and executed) at the earliest stages of a startup.

Next week, we’ll tackle how to evaluate the Market. And, if you have questions you’d like for us to answer, feel free to email them to [email protected] or post your thoughts on the newsletter!

DVC Deal

For DVC Premium Members, we just posted our analysis of Handprint, currently listed on Wefunder!

DVC Portfolio Updates

Pirouette Medical (Deal #80) - Due to demand, Piroutte Medical has announced that they are close to oversubscribing on Wefunder for a third time! Between VCs and 1,400+ retail investors, they have now surpassed $6MM in capital raised.

Pacha (Deal #51) - Pacha, a maker of gluten-free bread, just announced the results of their first-ever campaign with Whole Foods and saw a 99% lift in unit sales and that they’re on track to double revenue this year as compared to 2023. Learn more.

Have a great weekend everyone!

Sincerely, Team Doriot