Hello everyone. Today, we’re talking about a startup’s “moat” or competitive advantage. An investor usually has to believe that your competitive advantage is different enough for customers to care and is defensible. That is to say — it’s hard for someone else to simply copy. Here are the 3 most common moats used by startups.
1. Network effects — This is the most powerful and a good example of a company that uses it, is Facebook’s Instagram app. You see photos from your friends, meaning that the product gets better with every new user and it’s hard to leave the app, because you can’t take your friends’ content with you. If you want to understand just how powerful this can be — recall how many times a year we have a privacy or similar scandal with Facebook — does anybody stop using the apps? No — instead they use Facebook to complain about Facebook.
2. Tech Advantage — This is a pretty good one. An example of a company using this might be Zoom — their technology for video and audio is better than others, so for the last 6 months we’ve all had to use it non-stop. Of course, someone could catch up but Zoom is unlikely to slow down in this area and will continue to take advantage of its headstart. A company like Google and their long term dominance of web search shows this moat can also be used for a sustained advantage.
3. User Experience — Providing a better user experience can work out very well but it’s the hardest advantage to maintain. Dropbox is a popular storage tool because it’s easier to use than Box or Google Drive, of course other apps could simply copy Dropbox’s interface but Dropbox would still have a headstart. This moat is weaker than a tech advantage because it’s usually easier to copy interface and visual elements vs algorithms. Most companies that pursue this route tend to add in Network Effects later to strengthen their lock-in, e.g. Apple’s iPhone was a better experience but customers were locked in originally by the App Store then later by iMessage and Facetime.