SBIR Proposal Writing Basics: Understanding Barriers to Entry

Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

Copyright © 2007 by Greenwood Consulting Group, Inc.

As you probably already know, the SBIR/STTR agencies are really emphasizing commercialization in the projects they award these days, both in Phase I and Phase II.  That means you’ve got to do a very good job of describing the commercialization opportunity, even in your Phase I proposal, if you want to have any chance to get an SBIR/STTR award.  

A common part of the commercialization discussion is addressing “barriers to entry.”  In the business world, this refers to how difficult it is for a newcomer to enter a market , gaining customers and market share as they do.  

Some folks don’t realize that there are two sides to the “barriers to entry” coin.  One side is the barriers that might prevent you from getting into the market.  The other side includes barriers to others entering a market that you are in.  Both sides are very important, so let’s talk about both here.  

Why is it important for you to know how difficult it will be to enter a particular market in Phase III?  Because the more difficult it is, the less likely you are going to succeed.  Therefore, you want to find markets where it is easy to enter, as well as markets where you can find ways to reduce barriers to your entry.  

Easy to enter often means “cheap.”  Lore has it, for example, that it is easy (cheap) to become a consultant:  you just print up some business cards, buy a laptop and cell phone, and wait for the customers to beat a path to your door, right?  Of course, it isn’t that easy, but you get the picture:  markets where you are selling services tend to be easier (cheaper) to enter than markets where you have to manufacture and sell products, although some software markets can be relatively easy (cheap) to enter even though you are selling a product.  

But what if the market you plan to enter isn’t easy (cheap) to enter?  What is this second tactic, called reducing the burden of entry?  This means that you find a way to make it easier (cheaper) to get into a market that has relatively high entry barriers.  An example would be pharmaceuticals: imagine the cost of not only bringing a new drug through the discovery, trials and FDA approval stages, but also competing  with the likes of Merck, Johnson & Johnson, and Pfizer.  One way to reduce the hardship (cost) of entering the drug market is to partner with one of these pharma giants, since they are already in the market place and have the deep financial pockets necessary to bring a new drug to market.  

So that’s the first barrier to entry, namely how difficult is it for you to enter a market.  Now let’s talk about the second barrier, which is what can be used to keep others out of your market.

Probably the most commonly mentioned barrier to others entering your market is intellectual property (IP) protection, like patents.  While important, these IP barriers can have limited success:  have you ever heard of someone reverse engineering, or violating someone else’s patent?  So make IP protection one of the barriers you erect to keep competitors out of your market, but don’t rely exclusively on it.  

Another barrier you can offer is innovation.  Start-up and small companies have their IP rights violated all the time (we speak from experience), but one thing they have going for themselves is the ability to innovate—continue to make improvements or advancements on your technology and products so that rip-off artists are stealing only your old stuff.  

Another barrier is to have a big, mean dog.  Remember those Merck and Pfizer folks we mentioned earlier?  If you team with one of them, they now have a vested interest in your success.  They can open doors for you that your stand-alone competitor can’t, and their herd of lawyers may discourage rip-off artists and reverse engineers from stealing your IP.  

Yet another barrier is the Good Housekeeping Seal of Approval.  More generally, this is a situation where your product or service has been anointed by someone of authority as “the” best solution” (or better yet, “the only solution”).  This may be an endorsement by a trade publication or association, or could be given by a governmental entity (e.g., FDA approval, EPA certification).  No only do your competitors lack this endorsement, but customers may be forced to use you because you are the only “approved” source of a particular product or service.   

There are a host of other things that you can offer up as barriers to others entering your market:  your know how, your reputation, industry contacts, timing, and the like.  

Let’s close with a couple of key points.  

First, you need to spend ample time thinking about who your competitors/ partners are in a particular market, and what barriers to entry exist there.  For example, SBIR/STTR companies often assume a company that is already in the market place is the perfect partner as they bring a new innovation to that market.  But think more about this:  that existing firm already has a product/service in that market, and they may be very happy with it and are not interested in anything that might compete with it—therefore, they will (at best) give you a cold reception when you suggest a partnership around your new innovation.  Your best bet in such a situation may be to seek a credible, well financed firm that wants to enter the same market place but doesn’t have a credible product/service to offer—NOW you’re talking about a strategic partnership made in heaven (maybe).  Do your due diligence so you find a good partner, who will help you with barriers and not just want to eliminate you and your product as competition.

Second, like a guy’s hair line, barriers to entry change over time.  Those that kept you out 5 years ago may no longer be relevant or so insurmountable.  And those that you rely on in the first year or so of your entry to the market may also recede on you.  The flipside can also happen:  you may have no barriers to keep your competitors out today, but if EPA blesses next year your technology as the only one they will accept for a certain environmental issue, then you’ve grown a great barrier.  Realize this, and constantly re-evaluate your business strategy based on what barriers you can use and which ones may be used against you.