Against this backdrop, I was unnerved a bit this week in listening to the words of the manager of a venture capital fund, financed by the Bloomberg group and dedicated to making smallish investments in a large number of companies at their very outset. Unlike most other VC operations, this fund bets that it can identify winning companies from certain indicia that precede any real operations by the companies. In that connection, the interviewee baldly stated that the fund did not seek companies with a reasonable likelihood of first mover advantage, but rather “best mover advantage”. In supporting his position, reference was made to the interview comments made by the President of Stanford University, who stated that almost anyone who comes up with a technology will find himself in short order with a number of competitors who have, in effect, copied the technology. The question then becomes who can best parlay this technology into a successful business plan.
Given this, do I need to revise my view about whether reliance on trade secrets is a valid strategy if it can reasonably offer one first mover advantage? Upon reflection, I don’t think so. Pearson Education, here, describes the advantages and challenges of first-mover advantage as follows:
If the business is first into a market, so the thinking goes, it can establish what the military thinkers would call 'defensible ground'. First, it can capture market share much more easily without having to worry about rivals trying to capture the same customers. Second, when the rivals do come along – as they inevitably will – the first-mover and its management team will have advantages in the ensuing competition, such as familiar products, brand loyalty, the best retail outlets, up-and-running distribution systems, and so on. By beating rivals into the market, the first-mover can consolidate its position and compete more effectively, not only defending its previously acquired share but even continuing to expand.Stated otherwise, “a company's only sustainable competitive advantage may be its ability to learn faster than its competitors.”
My response to that is that it may be true, but only if there are no real barriers to entry or another factors that can slow down the otherwise relentless compression of time. Trade secrets provide one such factor. By slowing down the dissemination of the knowledge and technology to third parties, it potentially enables the person to seek and develop the various aspects of first mover advantage that may confer upon him a meaningful competitive advantage. As such, I still feel comfortable advising that trade secret protection is a reasonable measure to achieve first mover advantage, unless the time function for maintaining secrecy is unusually and severely compressed.