Why Just Being Innovative Isn’t Good Enough

In 2008 a startup called Modista created a great new way to display goods on eCommerce sites. Investors were excited. In 2009, the founders decided to raise and had $600k in commitments from investors.

Before the founders collected the money, Like.com sued them for alleged patent infringement. Patent litigation can cost $1-$2 million. Their investors decided against transferring the money and the company was shut down. Their founders had a vision, but never had a chance to execute it.

If you have a vision for why your company should exist and how it can change the world, it's worth thinking about how to protect it. The business world isn't run by fun, innovative, well-meaning entrepreneurs. It's run by people who protect their bottom line. Innovating isn't always sufficient. Raising money or making money is one way to increase your hit points to make sure you have enough time to execute on your vision.

I think lean companies don't always realize the risks of being small. There are protections that companies gain by being big, which aren't afforded to the small. Big companies like Apple and Google can spend years in patent litigation without impacting their bottom line. Small companies can't play that game.

Here are some things to think about when you decide to stay small:

Fighting a monopoly is difficult. Some have their interests tied to government legislation. Taxi drivers in San Francisco filed a class action lawsuit against Uber. Uber has also faced legal challenges in New York, Chicago and elsewhere. Instead of shutting down the company, the company was able to afford the lawyers to fight back and even change legislation. Uber is projecting $26 billion in revenue in 2016.

When you have money, you can operate negative margins in order to prioritize growth. PayPal spent $20 for each new signup. At one point, they were losing millions of dollars per month. If you were a new, less capitalized company in the payments space it would be extremely difficult to compete with them. PayPal was ultimately acquired for $1.5 billion.

Patents were intended to protect independent investors, but they often have the opposite effect. Many patents have been granted to non-unique technology. It can cost $1-$2m and two years to reach some kind of outcome. Modista was small and folded. Hipmunk was 'big,' having raised $15m, and sued their patent troll.

Big companies sometimes think they can get away with treating small companies badly because they don't think small companies can afford to fight back. Best Buy violated an NDA and stole a partner's technology. The startup wasn't able to use that revenue to scale their business, so they had to sell. The founders had a vision. I'm sure they would have preferred to execute on it.

When I think of these examples, I realize the importance of raising more than you need, growing revenue and moving faster than you would have otherwise. Whether intentional or not, I think the founders that survive are those who know how to protect their vision; they make sure they have enough capital on hand to deal with the inevitable problems.

Related reading:

Ben Horowitz has a great post on the fat startup.

Warren Buffet talks a lot about investing in  "economic castles protected by unbreachable 'moats.'"

Jessica Livingston wrote a great piece on things that can prevent your startup from succeeding. She talks about a tunnel of monsters along the way that try to prevent you from succeeding.

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