The durability formula - How it will determine your startup's future value
https://www.nfx.com/post/durability-formula-will-determine-your-startups-future-value
Nearly all of the value in technology companies is created in the out-years, long after you start. But you can only capture the value in the long term if you design for durability from day one. There are five main factors that build lasting power for startups.
Durability = Network Effects + Economies of Scale + Brand + Embedding + IP
Network Effects
A network effect is when one user makes the service more valuable for every other user. Once your company gets ahead, users won’t find as much value in your competitors’ smaller networks.
Economies of Scale
When you get bigger, a host of advantages accrue to you. More users mean more volume, which means you can get cheaper prices from suppliers, which means lower prices for customers, which means higher conversion rates, which makes advertising more effective than the competition. The numbers all move in your favor, and math is hard to compete with.
Brand
Certain companies inspire customer retention and a higher willingness to pay because of the recognition of, and preference for, their brand. Homo sapiens are tribal and emotional. They identify themselves with brands. For instance, those who want to associate with Apple will not comparison-shop. There are deep tribal psychological barriers that make it very hard for competitors to break in.
Intellectual Property
In software, intellectual property (IP) is not typically an effective strategy. Software moves too quickly and the patents don’t really stick. However, that’s different in bio and techbio.
IP protection continues to be a durability source in bio and techbio companies, even in the 2020s. Patents can be issued and defended in these sectors. (With bio companies, note that these sectors are becoming techbio, meaning the companies are becoming more software heavy than before, so they are starting to acquire durability factors we typically see in the digital world, namely network effects, scale, brand, and embedding.)