Prasad and I have been blogging about cloud computing and how it has sparked a massive round of new web services innovation. The advantages of using cloud computing for a startup’s backend are obvious; Prasad has touched on them before: low capital outlays; no long term contracts; Scale up and down on a whim; high availability, security and reliability, etc. However, if it is easier for your startup to enter a market due to cloud computing, then it is also easier for others. One way I’ve seen startups attempt to build barriers to entry/competitive differentiation is by using the data created by customers as a weapon.
Customer created data can be a great way to increase stickiness. Online banking portals use this very technique when they suggest that you sign up for their online bill pay. Banks realize that customers are much less likely to switch providers if they have to re-key and re-enter all of their service providers account numbers. In the same way, I’ve met with several great startups that are using data uploaded or created by customers as a means of keeping those very same customers from leaving the service. Additionally, if there is a network effect based on the information put into the startup’s system, then this barrier to exit increases in potency as the startup gains users. If the system gets better the more a customer uses it then the customer’s data can also be leveraged into making the experience better.
Venture capitalists can accept the idea of a barrier to exit driven by customer data. However, this leads to the obvious question: how will the startup gain users? For some reason, a number of technology companies that I’ve connected with recently can’t articulate a go to market strategy beyond “if you build it they will come.” Most VCs are probably looking for a bit more vision than that. The marketing discussion represents a way to really convince the VC that you’ve got intimate marketplace knowledge - you know where your customer are and you know how to speak to them.
