I remember pitching a machine learning company 6 ish years ago and all the VC folks wanted to talk about were moats. What's your moat? Do you have a data moat? How easy would it be for competitors to get access to the data you have?

It turns out most of the good answers at the time ended up being a crock of shit. Let me explain:

Let's say you have a product. It does a thing. That thing it does is specific, but is more or less a web 1.0 product (workclout.com falls into this category). Basically it's got some forms and such that are laid out nicely for a user to put stuff into a database and then get some reports on that stuff. This is not to say they don't have value, they absolutely do! People pay for these tools! They're everywhere! BUT they're not particularly hard to build. Sure it might take you a long time but it's more or less linear development where there are no real surprises along the way. There might be a lot of surface area, but you'll get there eventually. Podcast hosting, music apps, job boards, Airtable, CRMs. All kinds of super useful stuff isn't laden with crazy tech and futuristic patents. It's a bunch of forms and charts.

In short, these products can be copied. And every day, every month, it get's just a little easier to copy them as new developer tools become available. You can now buy a template for an AirBnB clone and have it online in about 15 minutes.

So software isn't usually a moat.

What About Brand?

To varying degrees, yes, but not for the tiny companies we're dealing with.

What About Customers?

A confident sales person once said during a job interview, "if you (a competitor) can get 10 customers, then so can I". As a developer who sometimes pretends to be a sales person, I thought that was a crazy statement at the time. I sort of get it now. Given two sufficiently similar products (though hopefully slightly differentiated) if new product A has X customers, then product B should also be able to get X customers. But that abstracts the ugliness of the real world. The best product does not always win, etc. Still, it's true enough. Also, it's much much easier to start something from scratch if you can point to a competitor and do something slightly different and start picking up look-a-like customers. Things get different at the fortune 500 level or fortune 1000 (getting one customer in this group usually means they're exclusive with you, but not always). At the small level we're dealing with customers in the 100s is great for freemium (self-service) SaaS.

So customers are partially a moat.

What About Team?

I had this conversation with Mikey (CEO of Cold Email Studio (CES)) this week since a couple competitors both let go of teams in the Philippines and Ukraine. CES hired 10 people all at once (that company is 20 people now!). This was a stroke of luck, and though some of them may not work out, I think most will since we literally hired an entire team that had already worked well together.

Outside of this one-off opportunity to scoop up a great team that's already worked together, it has taken us a full 18 months to make 3 key hires. Finding great people is hard for any company whether they're a 2nd tier public company or flush with VC funding. Finding great people as a bootstrapped or small company is even harder. Having a good team in place (not just great founders) is so far the closest thing I can think of to a real moat. A group of people who work remarkably well together is a super power. As an insider at the company, I know how good our team is, but it's one of the toughest things to convey to an outsider. We tend to use poor proxies like previous work experience or where we got our diploma (if any) from. I personally got very lucky when Mikey joined as a co-founder and took over as CEO. He then hired amazing people. It's a skill, and it's very very difficult to replicate once it's in place.

If a competitor  looked at our productized services business and wanted to replicate it, they could do it in a "day" if they had the skillset themselves. If they were any good they could probably get back to a full time income in a year. Perhaps less. But there's just no way to scale that out by yourself. You need a team! And hiring a team in my opinion (as a developer) can be harder than building product.

So Team i think is a moat... but wait... when we buy these companies, we don't get a team! We become the team! So for us, the XO team must be the moat.

So... do moats exist?

Certainly! But most startups don't really have any yet.

I don't believe most companies have a moat other than the combination of team, customers, and product. Combination is the operative word. People over index on how hard it will be for others to build the same product they built. People perhaps under-index on how hard it will be to hire a great team (outside of the founders) as well as getting customers. I've seen some people get insanely lucky. We all have. It's a bias in the media to only write about successes, but more often than not it's a grind the whole way through from MVP to first customer, to first hire, to nth hire, to exit.

Increasingly, when we buy something we're looking at growth rate (in addition of course to product, customers, etc). If we can discover great tools whose team laid the content foundation for sustainable 5% MoM growth we are buying profit machines and will (patiently) shepherd these products all the way to the bank.

I really phoned this one in. Been stacked all week due to our recent acquisition of https://www.inlytics.io/. I swear to the gods (all of them) it's an axiom of acquiring companies that the first week is an absolute dumpster fire.

Anyways, Happy Friday

✌️,

AP