Interesting thoughts of the defensibility of business models.

Brad and I had a really interesting conversation about our investment thesis, which we're constantly kicking the tires of and refining.  We were talking about businesses whose value is driven by peer production, like eBay, Craigslist, and and we discussed the defensibility of businesses whose barriers to adoption are just as low as their barriers to exit.  This also came up when we recently presented to our LPs a little progress chart on our investments for a number of criteria.  For each of our investments, we had trouble filling in the little defensibility bubble and it made me think about the nature of defensibility in the first place.

What is a defensible business anyway?  Last time I checked, we lived in a free country with a government that promotes competition and curbs monopolistic behavior.  Any customer of a company can choose to stop being a customer at anytime, right?  Now, perhaps switching costs are high, but I would argue that they are capped to the degree that customers would be unwilling to sign up for a product whose switching costs were so high that, in the event of poor performance, they could not afford to leave. 

Plus, I always thought of defensibility, at least the way its been thought of, as a very selfish mindset.  If your model is to be the only company who can do something, that's not nearly as effective as being the best company offering the product.  Shouldn't your focus, when it comes to customers, be on providing the best service--one they want to choose--versus limiting their access to alternatives.  I don't like the idea to build a business around keeping your customers locked up in a pen.  Better to leave the barn door open and know they come back every night regardless because they like being fed. 

Plus, some companies become obsessed with defending, that they lose sight of their offense--their innovation and product quality.  If your customers aren't being serviced, they'll leave, no matter what the business.  We're thinking a lot about that with  Of course, you always have to keep an eye on competitors, but in the end, what can you really do besides try your hardest to be the number one destination for anyone who wants to remember anything on the web.  I mean, if Google launched a tagging service, do you think Joshua would be like, "Well, screw this then, I'll just go back to trading"?  No, he'd be up nights and weekends making sure that he and his team offered the best product possible--and that's what it would have to be, because it certainly wouldn't be worth the effort to attempt to "defend" and prevent Google from doing anything.  Calcanis posted one before on this... about how businesses are built on 1) hustle, 2) passion and 3) resiliency, and I think in Web 2.0, where services are easy to sign on to and easier to stop using, that's even more the case.

When I was at GM Asset Management, we saw a lot of late stage VC deals whose "barrier to entry" was that they were the only ones who had a certain technology.  However, we started to realize, and this is why the Union Square Ventures pitch rang true to me, that pure technology advantage was a fleeting notion.  Maybe you were, in fact, the only ones with a technology, but that doesn't mean you were the only ones with the solution.  In other words, there are always many ways to skin a cat. 

In today's world where community creates value, I think that you will develop businesses that are actually more "defensible" than their command and control corporate hierarchical predecessors.  Sure, a computer science major could duplicate the eBay website over a weekend, but he certainly couldn't stock it with a million items.  The value of eBay, etc. is in all of these thousands, millions, etc. individual little agents all acting independently.  Its very hard to get them all to act en masse, and there's definitely a power law going on here.  As more people use these services, the stickier each incremental user will get.  Why would that first guy ever use the eBay knockoff without a community of people buying and selling products?  That's not to say people won't leave or new services won't get created, but it will take time...  hopefully enough time for the company to improve themselves enough to make someone not want to leave.