There are hundreds of startups for investors to choose from. So what criteria do they look for when deciding whether to fund a particular business model? Jan Rivkin, a strategy professor at Harvard Business School, believes there are just three distinct, sustainable advantages for a new business model.
If you’re looking for startup funding, it’s a very good idea to determine if your particular business will feature any of the three. If not, you need to think about what you can do to build a brand that embodies at least one of these attributes.
ONE: Provide something that no one else can. Rivkin mentions DeBeers’s one-time monopoly on the diamond market, a patent on a blockbuster drug, or the secret formula for Coca-Cola. The Apple OS is another good example. Admittedly, this is the toughest differentiator to master because there’s very little that can’t be copied by another competitor.
TWO: Sustained growth through positive feedback. Rivkin says this is where a brand’s market-leading position helps it move even further ahead. Facebook is the classic example today. Think of it as buzz that’s very hard to replicate. Tesla Motors is another good current example. Sometimes this can even come down to a single product, like the iPhone.
THREE: Create a complex business model that has to be replicated in full. A good example here is Southwest Airlines. Competitors have been unable to match Southwest’s no-frills model that also creates consistent high profits. Wal-Mart demands ultra-low prices from all suppliers that can be passed onto the consumer.
I would also add one more criteria to Mr. Rivkin’s short list: Create an entirely new model. Take fast food. The common wisdom was that profits came as a result of low prices, expanded menus and operational efficiencies. But Chipotle changed the equation. They use fresh food, top quality ingredients and beautifully-designed restaurants to create a new category of dining – fast casual. Chipotle sales have quadrupled since 2000.
These differentiators aren’t easy to come by. And essentially, that’s the whole point. Investors are always looking for the select few ideas that have a distinct competitive advantage. That’s where they have the best chance of making a substantial profit, and that’s their number one consideration.