Secret Sauce

When VCs talk about a “secret sauce,” they are referring to a startup’s ability to do something that nobody else can easily replicate, something that makes this startup special. Specifically, they want a unique ability that gives the startup an edge, a competitive advantage. In this book, the phrase “secret sauce” is synonymous with “competitive advantage.” Both refer to barriers to entry that keep the competition out.

Before we dive into some of the elements of secret sauces, we need to agree on a definition of the oft-misunderstood phrase “competitive advantage.” First, it is important to understand the difference between a competitive advantage and a differentiation.

Differentiation refers to how a startup’s offerings are better/faster/ cheaper than competitors. If that sounds familiar, it should. We’re talking about value proposition, part of the product/market fit. Recall our definition for value proposition: how a startup addresses specific customer pain points with a better/faster/cheaper solution, i.e., a differentiated solution.

Here’s the confusing thing: having a differentiation appears to give a company an advantage. However, for business strategy purposes, being superior is not considered an advantage unless you can protect it by preventing copycats. If you cannot protect it, everyone will copy your “advantage” and you’ll have no advantage.

For example, Quizno’s took the sandwich world by storm by toasting sandwiches. That was a differentiation. However, there was nothing to stop Subway from installing toasters at every location, which it did, thereby copying Quizno’s idea and eliminating any advantage.

A competitive advantage, on the other hand, is a barrier to entry, something that will stop or slow down competitors who want to copy our differentiation. These are sometimes called “unfair advantages,” though that phrase will probably never catch on since nobody wants to be associated with being “unfair.” But let’s be clear, creating unfair advantages is perfectly legal and ethical. In fact, it is written into our constitution:

“The Congress shall have power…to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”In one sentence, our founding fathers put copyrights and patents in the constitution, guaranteeing an unfair advantage for writers and inventors. They have the exclusive right to profit from their writings and discoveries “for limited times.”

Quizno’s would have had an unfair advantage had they invented and patented the innovation of toasting sandwiches. Then they would have had the exclusive right to their discovery. Unfortunately for Quizno’s, toasting sandwiches was a differentiation, not a competitive advantage. Once Quizno’s proved the market, copycats followed. In conclusion, differentiation refers to value proposition, usually articulated as better/faster/cheaper. Competitive advan­tages, or unfair advantages or secret sauces, are barriers to entry, there to stop copycats.

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Also covered in this chapter:

  • Macro: Comp. Landscape
  • Micro: Key Players
  • Barriers to Entry
  • First-Mover Opportunity
  • Network Effect
  • Sticky Products
  • Trade Secrets
  • Strategic Partnerships
  • Intellectual Property