Welcome to another edition of the Atlanta Small Business Show. It’s said that imitation is the sincerest form of flattery, but for startups or business owners, experts recommend you build barriers to entry against future copycat competitors. Joining us today, is George Deeb, Managing Partner at Red Rocket Ventures, startup expert, and author to tell us more.
Since starting at Red Rocket in 2010, Deeb has advised or mentored over 750 B2C and B2B businesses. He has a large network of contacts in the startup, digital, and venture capital communities and specializes in business planning, growth strategy, corporate development, fundraising, sales, and marketing.
Transcription:
Jim Fitzpatrick:
Thank you so much George for joining us once again on the show.
George Deeb:
Yeah, it’s great being here Jim.
Jim Fitzpatrick:
Sure. So why should startups care about building barriers to entry?
George Deeb:
Well, if your startup is successful as everybody hopes it will be success will typically attract copycat competitors, right?
Jim Fitzpatrick:
Yeah.
George Deeb:
So when those copycat competitors come along you want to make sure you’ve got that defensible moat that has been built around your business so that when they start attacking you and trying to take your customers away you’ve got something that you can stand on your own two feet and defend against.
Jim Fitzpatrick:
Okay, now you’ve got everybody’s attention. So you have to give us an example of a defensible barrier to entry.
George Deeb:
Yeah, there’s a few things here. I mean, in the technology world or any other space as well, patents are certainly one form of protection that if you can get a patent protection that protects your assets and your IP that’s one form of protection.
George Deeb:
The second is making your business hard to replicate, right? If it takes a lot of time and capital no one’s going to want to have to replicate that particular build out, then that’s a second barrier to entry.
George Deeb:
The third is exclusive long term contracts where you locked up the market for a few years and it’s your space and your space only, that would be a third thing?
Jim Fitzpatrick:
Sure.
George Deeb:
And then the fourth thing is if there’s high switching costs, that once the customer has implemented your product or service and they’re working with it and they’re living with the data from it they don’t want to have to switch it. So those are just a few examples that you can work with.
Jim Fitzpatrick:
Sure. And in business they sometimes refer to that as stickiness right?
George Deeb:
For sure.
Jim Fitzpatrick:
It keeps that customer with you because it’s just easy, might be too big a deal to change, so a lot of clients say I’m just going to stay with you guys rather than looking around, right?
George Deeb:
That the dream. If you could make your business sticky to use your word that’s exactly what your long term goal is.
Jim Fitzpatrick:
Yeah, that’s right. What are some of the pitfalls if companies don’t do this?
George Deeb:
Oh manufacturing I mean where do you even start? If you don’t you have a risk of you have a very strong couple years of upward sales mobility and revenue growth followed by a couple years of losing market share and losing sales as people are kind of nipping at your heels.
George Deeb:
And the best place to see that, I’m not sure I can think of an specific example off the top of my head, but in Facebook a lot of these kind of one off consumer products, like the dog grooming glove where you brush your dog with the glove,, the first guy that does that, they’re going to kill it right, they’re going to have amazing sales, amazing momentum, and then everyone’s going to see that and they’re going to say, oh, I can source some of that in China, and I can build a competing product and a competing brand, and now you have a hundred companies trying to sell that same dog grooming glove. And then nobody’s making any money because all the competition is kind of taking all the profit out of it from an advertising perspective, so that’s sort of an example.
Jim Fitzpatrick:
Sure. I think it’s probably worth noting that the very person that might be your competitor could also be working for you right now. That’s happened to me a couple of times in business where my VP of operations or what have you all of a sudden steps out and says I’m resigning from the company and I’m going to go do some other things or what have you. Well those other things were to set up their own business and become a competitor of mine right, have you seen that done and is there anything that you recommend on that?
George Deeb:
Yeah. I mean the best thing to protect yourself on that is just making sure you’ve got a good non-disclosure, non-compete agreement in place with your employees at the time they are hired, right?
Jim Fitzpatrick:
Sure.
George Deeb:
For exactly the situation. If they become disgruntled or want to take the company secrets and kind of do a business in your face you at least have a document to point to, you can take them to court and you can do a cease and desist and stop them from doing it because they have a signed agreement that said they wouldn’t.
Jim Fitzpatrick:
But George you don’t understand, this was a friend of mine of 10 years, and we went to college together, and we play golf all the time, our kids play together, and their wives, they get along beautifully, and there’s no need for something like that.
George Deeb:
It’s a familiar story, it happens with lots of founders. And at some point I try not to mix friendship with business, I try to keep them separate. But if you’re going to get into business with a friend just know that the relationship can sour and make sure you’ve got your protections in all cases.
Jim Fitzpatrick:
That’s right. Often will sour, I’ve got so many friends of mine where that was the case, they went into it, it sounded great at the barbecue on a Sunday. Yeah, let’s open up a business, let’s go to town with this, let’s go to market with this idea. And one thing leads to another, there’s no really formal written business plan or there’s no any kind of a partnership agreement or what have you, and somebody ends up with a company or corporation and it gets very convoluted down the road right, especially as profits start rolling in. All of a sudden everybody thinks they’re more of an owner because they had the idea and the other ones was just tagging along. And I can’t tell young entrepreneurs enough times that from the get go you really have to spell everybody’s rollout and get it in writing and agree to a, is it a management agreement that I’m referring to George that is a good idea to have?
George Deeb:
Well, the corporate charter, you’re operating agreement that everybody’s kind of working from,
Jim Fitzpatrick:
Operating agreement, right. Sure.
George Deeb:
That’s the very first document that gets formulated when you’re setting up your business or your LLC or whatever it is. So those are the rules of engagement that everybody’s agreeing to front, just make sure you get a good lawyer to help you document it and get the protections in place for all parties.
Jim Fitzpatrick:
That’s right. Hey, one of the examples that we were talking about earlier to make sure that you’re protecting your barriers and such is a long term contract and the importance of having that, right, with your clients. Talk to us a little bit about that.
George Deeb:
Yeah. I mean to me a long term contract is multiple years in length, kind of 3, 4, 5 years in length is sort of what a long term agreement could look like. You want it exclusive to you where you can get it. Not all partners will give you an exclusive but if you can get that exclusive agreement where they’re not going to let a competitor come in and offer similar services to their customers that would be awesome. The best example I can give here is when I was building my travel business I explored. We had a five year exclusive partnership agreement with the National Geographic where we were going to be the travel solution for National Geographic’s website. So when people were coming to nationalgeographic.com looking for adventure vacations it was actually our technology, it was our trips, it was our customer service center that was powering that for us, for them.
Jim Fitzpatrick:
Oh gosh. Wow.
George Deeb:
And it was amazing. It helped us piggyback on their brand name and their association and their hugely trafficked website and helped us get our overall company off the ground. So that’s an example that I have personal experience with, but you could see it, whether it’s Waste Management locking up the trash services in your cities, or Halliburton locking up defense contracts. You want those exclusive long term agreements for yourself.
Jim Fitzpatrick:
That’s right, that’s right. And have your attorney… Make sure you have a good attorney in this area of contract law for sure so that there aren’t loopholes later that you find out about that the client can take advantage of when in reality you find out oh, they signed a three year contract but man it’s like Swiss cheese there’s so many holes in the agreement that they’ve got so many exit ramps to get out of that agreement. And then you go back to your attorney and they’re like oh yeah. we didn’t really think about that, or we didn’t think they were going to do this or that. And I’ve been in that situation myself where you think you’ve got a ironclad contract and lo and behold you find out later on their attorney was better than your attorney and they can get out of it pretty easily, right?
George Deeb:
Yeah. That advice is spot on. And I’m going to go back to National Geographic as an example. When we cut the deal with National Geographic we negotiated it with their CEO and their CFO, very high level strategic executives that saw the value of building a travel business. When we went to execution and actually had to launch the partnership, and now you’re dealing with various magazines and various editors and various publishers and their website and their retail stores and their cable channel and all the different stakeholders involved, they knew nothing about us, they knew nothing about this agreement, they didn’t have an economic incentive to see us succeed. And it was like pulling teeth to kind of get them to execute what I thought we were going to execute towards, I wish I’d had a better detail up front.
Jim Fitzpatrick:
Yeah, for sure. And a good attorney and a good accountant are going to be your greatest assets going into business. I don’t care if you’re selling a widget for a dollar or you’re selling a contract for multi millions of dollars, but if you don’t have those two in your corner you can get into the weeds very, very quickly, and it can be very expensive for you. Talk to us about switching costs, I think that that’s a very interesting point and can help business owners as well figure this out.
George Deeb:
Yeah. I think there’s a couple pieces to that. That once the customer has got your product up and running they’re not going to want to make that effort a second time, right?
Jim Fitzpatrick:
Yeah.
George Deeb:
If your product’s working and it’s solving their problem what they thought it was going to solve, and they’re a happy customer and they don’t really have a need to go out there and kind of build that all over again. So you want to make sure that either the onboarding experience is one that maybe is more complicated that they’re not going to want to have to run through that again and they’re going to want to stay with you, that’s one thing, that they don’t want to make that second effort.
George Deeb:
The second point is let’s say you’re a CRM business and they’re working their data off of your CRM and they’ve got all the reports and their sequences and their data, all the business decisions they’re making out of your system, well now that they’re making business decisions off of it they’re going to need that data for future months and future years, and they’re not going to want to switch off that platform if it’s helping them drive their business and what they’re making every one of their business decisions around. So those are a couple different examples.
Jim Fitzpatrick:
That’s right. That’s right. Hey, switching gears a little bit with you, speaking of switching, switching gears a little bit with right now we hear about 9.1% inflation, gas prices continue to remain high although they’ve dipped a little bit but they’re still high, interest rates, they’re talking about the possibility of maybe one full point, and what is your take on that? I mean, you’re a very seasoned entrepreneur and you’ve seen businesses small and large, it’s going to be a loaded question, but is now a good time to start a business?
George Deeb:
Well, it’s all a function of what the business is and how it can navigate through some of these choppy waters, right? You can make success out of most any business if you have the right strategy around it.
Jim Fitzpatrick:
Sure.
George Deeb:
And even if the timing is working against you and you got to swim upstream for a little bit, that at least gives you a little bit of time to get ahead of your competitors that otherwise wouldn’t have gotten into this business because of the market conditions. And as long as you’re doing it smartly, you’re not aggressively spending and you’re being conservative with your cash, and you’re keeping your head down and conservative, when the market turns back up again that’s where the business will take off. And if you’re well positioned for that recovery, and you’re the first mover in that recovery, yeah, it’s perfectly fine to launch a business now. That said, it’s harder to raise capital now, right?
Jim Fitzpatrick:
Yeah.
George Deeb:
So your investors are going to be a lot more nervous and cautious, and they’ve gotten comfortable with high returns in the venture capital market for the last five or 10 years and now oops, now we’re running through our first recession and now there’s a flight to quality and they’re not going to get the returns they want, you got to be a little bit more careful.
Jim Fitzpatrick:
Yeah, yeah, that’s for sure. That’s for sure. But a lot of money can be made during recessions to your point if you’ve got that right product or service that fills the need of somebody that’s been paying more dollars for a similar service and then you come in as kind of the low cost provider, you may realize that your business takes off, right? It’s kind of like the people that were selling the protection, what was it, PPE protection during… Those people came in at the marketplace during COVID and they exploded in business right, because they filled the need that answered the market conditions at the time, right?
George Deeb:
Well, I mean you’re talking about being opportunistic and kind of seizing the day, those opportunities are always there. And yes, if you can jump on those there’s a great opportunity understanding it will be short lived right, you’re going to have a short term fire, you’re going to take advantage of those face mask sales, and then it’s going to go away.
George Deeb:
But it’s worth sharing, Warren Buffet is always a fan of doing his best investing during down markets. He thinks that’s when the best cash investing can be done because you’re getting the best valuation, the people are feeling their worst, they’re their most flexible to get the deal done so that you’re buying low and then when the market recovers then you’re selling it not only high but materially higher because of what you purchased it for.
Jim Fitzpatrick:
That’s right. That’s right, yep. A lot of opportunity I think out there still. For business owners that are listening to us or those that are thinking of becoming business owners and entrepreneurs don’t be frightened off by what you see in the media. To George’s point maybe refigure it, maybe pivot a little bit, maybe decide what you’ve got to offer versus the competitors that are out there. It might just be the best time to start a business right now.
Jim Fitzpatrick:
So George Deeb, managing partner at Red Rocket Ventures, author, and Forbes contributor, so it’s pretty impressive right there, Forbes contributor. And now you can say ASBN contributor which blows away Forbes contributor I think.
George Deeb:
Absolutely Jim, I completely agree.
Jim Fitzpatrick:
So thanks so much for joining us, it’s always a pleasure.
George Deeb:
Have a great one, thanks again to invite.
Jim Fitzpatrick:
You too.
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