The Small Business Administration is a government organization charged with stimulating small business activity in the United States. If you plan on starting your company in the US, you may want to consider the SBA as a source of alternative capital, mentorship, a directory of third-party resources and general support. SBA programs are not for every company, however, as there is an application process for funding and the programs are not always the best fit for high-growth technology companies.

While the SBA does provide grants to some startups, the organization generally provides capital to businesses by guaranteeing a percentage of capital loaned to the company by a third-party lender. As a result, in order to receive an SBA backed loan, you typically need to find both an interested lender and receive the approval of the SBA. That approval can take as long as 120 days unless you qualify for their express programs (which are generally limited to small amounts of capital or companies that are majority owned by veterans).

SBA loan guarantees are capped, but they are often enough to provide seed capital for a startup.  Since they are structured as debt, however, your company will need to generate enough cash to make payments on the loan over time.

These loans are generally designed for small businesses – not high-risk, high-growth startups. By requiring that third-party lenders make the loan, most high-tech startups won’t qualify. Traditional small-business lenders, such as commercial banks, are generally looking for companies with a track record and often assets to leverage as collateral. As a result, your idea for a new website may not fit the bill.

It is worth noting that the SBA (via the SBIC) supports the high-growth venture ecosystem by providing funding to some venture capital firms which in-turn invest in high-growth startups.  If you are seeking direct support from the SBA, however, it will most likely be in the form of a guaranteed loan.

While it’s worth exploring SBA loan opportunities if you’re looking for alternative forms of capital, these loans often won’t be a fit for many high-growth ventures.

Tech-lite companies often rely on data to create value and barriers as they scale. Being able to structurally think about what data your company is and is not leveraging may enable you to

1. deliver more value and create additional barriers from the data that you are currently mining or
2. identify other types of data that you can and should be capturing. While no framework is without exception, I have attempted to create a structure that should help you take inventory of your data.

The diagram below illustrates how I segment the world of data into key types: identity, descriptive, subjective, activity, relationship.

Identity: The lynch-pin data type is identity data. Simply put, this is a unique identifier that enables us to relate all other information to a unique person, group, corporation, institution, digital asset or otherwise. Identity data enables all other data types to be related, making descriptions, comparisons and relationship possible.

Descriptive: This data type includes all objective information that is used to describe the identity. Most commonly this includes demographic information either provided by the entity itself or by third-party data sources.

Activity: The actions of an identity, such as their browsing behavior, fall into the activity data bucket. This type of data is obviously largely unique to living identities (people). You can’t track the search activity of digital assets.

Subjective: The subjective data category refers to opinions offered by the identity about other identities. Both qualitative and quantitative ratings of services and products fall squarely into this bucket.

Relationship: This data type refers to information about how identities relate indirectly to other identities. This bucket includes both contextual relationships – an identity is adjacent to another and the more obviously relationships found in social graphs.

While identity data makes the other four types of data relevant by connecting each type of information to a unique entity (persona, place or thing), each of the other four types of data type can be used to create barriers. Descriptive data can make a directory more robust; activity data can make advertisement targeting more effective; subjective data can be the life blood of a review site and relationship data is the building block of a social graph.

While there are many applications for each type of data, it’s important for you to think about how your business can leverage each type.  I recommend that you grab your team and spend a few hours at a white board brainstorming all of the different types of data that you can be capturing and how you might use that data to create both more value for your customers and greater barriers for your competitors.

 

There are some barriers that arguably don’t change in their ability to deter competition as the relative scale of competitors changes. This category generally includes protected intellectual property in the form of trade secrets and patents.

These barriers have proven to be critical for numerous companies, especially in the analog world of physical products. Pharmaceutical startups rely on patents and Coca Cola on trade secrets. In the information technology world, however, intellectual property related barriers often play a less central role as there are often numerous ways to skin a cat, making it difficult to defend every permutation. That said, there are technology companies, such as Google and Microsoft, that have leveraged intellectual property to secure their market positions.

It’s worth highlighting the fact that while patents do not provide indefinite protection (since they expire), their strength as a barrier is not determined by the relative scale of the competition. For this reason they are included in this category of barriers in my framework.

There are two questions that need to be answered in order to determine the significance of a static barrier.

First: “Does the barrier provide sufficient protection?” If the patent, trade secret or otherwise only protects either a non-core element of the business or does not prevent another company from solving the same problem using a different methodology, the barrier may not be very robust. The more that static barriers shroud key business assets from competition the more robust that they are.

Second: “How defensible is the barrier?” Intellectual property can be expensive to defend. If the legal cost associated with protecting a patent would bankrupt the company, it’s not viable to sustain the barrier.

Static barriers can provide meaningful value if they prevent competitors from solving the same problem in a different way and are defendable. If they don’t meet both of those criteria, these barriers may not prove effective.

While barriers that erode as your competitors scale usually relate to the process of a company entering a market, there is a category of barriers that can play an important role in determining the relative success of competitors after they have entered a space. Many of these barriers are scale advantages. This category broadly includes brand, resource advantages and other scale related barriers. In the information technology sector, these advantages often take the form of data scale and network effects.

For an example of data scale let’s consider Yelp. When a customer goes to a user review site, he wants user reviews. That’s pretty intuitive. And simply put, this is a case where generally having more user reviews is better. Every additional review of a restaurant or vendor makes the service more valuable to people who visit the site. The reviews are a competitive advantage that creates a widening gap between Yelp and me-too sites with every new review.

To highlight the significance of this barrier, let's take an extreme.  Imagine how difficult it might be to convince customers to use a brand new review site that has no reviews when Yelp is in the market. To acquire customers, the new entrant will either need to have a pretty unique value proposition that fundamentally differentiates it from Yelp, spend lots of money paying people to create reviews, or deploy a massive advertising campaign to get early users. Closing the scale gap becomes increasingly expensive.

Similarly, network effects can create significant barriers as companies increase their relative scale. If you want to sell a couch, given the choice, a user would want to list the item on a site that has the most buyers. The presence of more buyers increases the likelihood of finding a match and the potential of having the price bid up. This powerful dynamic has made it very difficult to for new entrants to compete with companies like Craigslist and eBay, both of which benefit immensely from network effects.

In the markets where these forces are most important, scaling rapidly may be the single greatest determinant of your company’s success. When these forces are at play, simply by being the largest, you may crush competitors with better user experiences, features or other competitive advantages. While many entrepreneurs have thought of creating a Craigslist competitor with better user experiences and features, to date none have displaced the company. While other companies have developed more appealing UIs, Craigslist benefits from huge network effects – a force to be reckoned with.

To determine the extent to which data scale and network effects are central to your company you need to answer this question: “Does incremental scale (user reviews, buyers, sellers, etc) make my core service incrementally more valuable to the next customer?” Notice the emphasis on the word “core”. Non-core features that have these properties often do not provide robust barriers.

Understanding the extent to which your company can build data scale and/or network effect barriers is of critical importance for understanding the potential of the company to scale. If you can find a way to leverage data scale and network effects in your company you should, and if these barriers are core to your company’s service you probably should make scaling your company your primary priority. You may want to raise more money and potentially forego maximizing short-term monetization opportunities in order to securely establish your scale barriers before someone else does.

I’m defining a deterrent as a significant initial investment of capital or time that can discourage new entrants. High fixed startup costs and know-how are examples of barriers that can be eroded as your competitors scale their operations. Whether entering a market requires significant up-front capital or years of product development, these barriers decline as competitors invest more capital or time in building their companies.

This doesn’t mean that these barriers do not serve as significant deterrents. Would-be competitors may have a difficult time raising capital from investors when the investment opportunity requires investors to sink lots of money into the company before understanding how successful the company is likely to be. Similarly, if it takes an extensive amount of time to ramp-up product development, entrepreneurs may be better off pursuing other ideas that can get to market more quickly.

Ultimately, the significance of these deterrents is a function of the cost in dollars and/or time to overcome them. Taking the extremes, a space that only costs $100 thousand of up-front capital to enter is less protected than a space that costs $100 million. Similarly, if the required internal know-how required takes 3 months to develop (for example, optimizing user experience) it is less of a deterrent than learning to create a product that takes years of research (as is often the case in pharmaceuticals and biotech).

In the information technology world, these barriers are more commonly associated with the tech-heavy companies that required significant investment of time in development.

If you’re counting on these barriers to keep competition from your spoils it’s important to be realistic about how strong of a deterrent these barriers really are. When you want to believe that your company is untouchable, it’s easy to rationalize these barriers as being bigger than they are. Just remember to ask yourself what it took to get your company started. As technology improves it’s likely that it will cost the next person to enter your space less time and money than it did you.

Image Provided by Shutterstock

I have written about the role of barriers in scaling IT companies. I think it’s worthwhile to explore the different types of barriers that you might have or look to create in your business.

While no framework is perfect, I categorize them into three groups:

1. Deterrents: Barriers that erode as your competitors scale their operations,
2. Scale Advantages: Barriers that strengthen as your operation’s relative scale increases, and
3. Static Advantages: Barriers that are unaffected by the relative scale of your operation versus your competitors.

Each category can provide robust or weak barriers. What differs is how the strength of the barriers is determined.

I will explore each of these categories in coming posts.

The NY venture ecosystem continues to grow stronger.

Owen Davis and NYCSeed recently led the charge in creating a new venture accelerator program called SeedStart. Here’s an overview of the program:

SeedStart--New York City based Summer 2010 Startup Program SeedStart will offer promising teams the chance to build a technology product and launch a company with the assistance of seed investment capital, mentorship and other resources. Companies will be selected through a competitive application process and each company will receive a $20,000 investment. Throughout the summer, companies will also receive mentorship from experienced New York City based venture capitalists and entrepreneurs, legal and business guidance, administrative help and technical assistance. At the end of the summer, venture capitalists and angel investors will be invited to an Investor Day where each team will present their product and launch their company. SeedStart will run for 8 weeks beginning in June of 2010.

The program has begun accepting applications and teams of at least two founders can apply at http://www.nycseed.com/seedstart.html by February 28, 2010 to be considered. For information, contact Owen Davis at owen@nycseed.com.

One of DFJ Gotham’s portfolio companies Drop.io (run by my friend Sam Lessin) just launched Presslift, another service that leverages their core technology platform. The new service enables public relations professionals to supercharge their press releases. The old static text releases can now be replaced with press releases that include rich media (photos, videos, audio), have robust access controls, generate detailed reach reports and automated distribution to Twitter, Facebook, and beyond.

The team believes that this service addresses a major pain point felt by the public relations community who sought a more effective way to leverage social media. Some of Presslift’s early adopters in the PR world have become supporters. Here are a few quotes from a recent press release:

Drop.io has already partnered with agency Porter Novelli. PN's EVP, Global Director, Social Media Stephanie Agresta told PRNewser, "we have been an active supporter in launching the product and are committed to using it for our content and for our clients."

Steve Rubel, SVP, Director of Insights at Edelman Digital has also demoed the application and told PRNewser, "The biggest differentiator here is the drop.io feature set and the team's track record for innovation. We're excited about the potential for using it for virtual events."

For the tech community, this service offers another interesting example of what the Drop.io technology platform can enable via their API – a company to watch. For the PR professionals, Presslift represents an opportunity to create more value for your clients by leveraging the power of pictures, video and social media.

We all live in silos. Most of us only interact in the relatively small semi-isolated circles in which we have landed. If you’re a tech entrepreneur, most of the people you interact with are probably technologists or entrepreneurs. Maybe you occasionally bump into a few other nodes of the broader social graph through hobbies or a significant other. Few of us, however, have access to wildly diverse cultures, socio-economic populations, or fundamentally different life experiences.

I live in my own social bubble and I sometimes wish this wasn’t the case. While understanding my experiences in the broader context of diverse backgrounds and the global ecosystem would give meaningful color to my day-to-day perspective, the work-life routine doesn’t encourage (or even often permit) such exploration.

That's why I watch documentaries. Accessing a limited (and, yes, often incomplete) perspective of social issues, diverse cultures and inaccessible situations from distant corners of globe is pretty easy when they pop-up on one of your screens. Watching a good documentary is the opportunity to walk in someone else’s shoes for a few hours – watching can expand your horizons.

This leads me to the point of this post. If you’re into documentaries, you should check out SnagFilms. SnagFilms is a website that is essentially the hulu of documentaries. You get to watch the content for free, so long as you consume a few short ads.

So if you’re interested in learning a little bit about the government-run Iranian kidney market or better understanding the culture of Apple-o-philes, you may want to check out Snagfilms next time you’re on the treadmill.

Note: SnagFilms is not a portfolio company – this is just a customer testimonial.

VCs often require that portfolio companies maintain a certain amount of unallocated options (an option pool) for future distribution to existing or new hires. There is good reason for this as I note in my appropriately named post, Option Pools.

One important but often-misunderstood characteristic about options is that they do not necessarily dilute shareholders. Options only become shares and dilute existing shareholders if they are exercised. If options are not both allocated and exercised, the shares are never issued and the existing shareholders are not diluted.

This nuance is an important one. Entrepreneurs and investors may disagree about the amount of options required to expand the team and scale the business. By offering to create or increase an option pool before an investor invests, you mitigate the risk of dilution for investors that are concerned about the equity requirements of new hires. If, however, you don’t need as much equity to build your team as you set aside in the option pool, you don’t get diluted to the full extent of the option pool. Furthermore, even if you issue (allocate) options to employees, if they do not exercise the options, existing shareholders are not diluted.

It’s worth noting that because options, warrants and the like MAY be dilutive there are usually two ways to calculate your ownership percentage. You can look at your current ownership and your ownership on a fully-diluted basis. The fully-diluted basis assumes that all options and warrants are exercised – the capitalization table is as diluted as it can be.