Understanding Moats: Leading vs. Lagging in the Startup Landscape
Every founder is familiar with that dreaded question on slide three of their pitch deck: What is your moat? The typical answers revolve around technical differentiation—be it a model, a dataset, or an architectural advantage. However, this differentiation often fades within a year, as competitors catch up or replicate innovations. The question that lingers is, What if there’s no immediate moat? What if the moat is earned rather than engineered?
Leading Moats: Founding Strengths
Leading moats are typically present at the founding of a company. They manifest as technical differentiation, a novel architecture, or a proprietary dataset. These attributes are particularly common in infrastructure startups, where the product itself is the technology. Founders can easily showcase these leading moats in their seed deck, allowing them to attract early-stage investments and attention.
However, while leading moats can provide an initial edge, they may not guarantee long-term success. The landscape is constantly shifting, and what starts as a unique advantage can quickly become commonplace.
Lagging Moats: The Fruit of Execution
In contrast, lagging moats are built over time through consistent execution. These moats include economies of scale, established brand recognition, fruitful channel relationships, and embedded workflows. Unlike leading moats, lagging moats cannot be illustrated on a competitive landscape matrix because they are accumulated through years of operation.
Application companies tend to cultivate these lagging moats, while infrastructure firms often rely on leading moats to gain traction. It is the long-term execution and strategic positioning that insure application companies against new entrants.
The Salesforce Example: An Earned Moat
Take Salesforce as a case study. When it launched, Siebel Software boasted superior technology. Yet, Salesforce never had a leading moat to speak of; what it had instead was exceptional sales muscle, a solid brand, and a decade-long head start in the burgeoning cloud-CRM category. The competitive defenses that safeguard Salesforce today—its reputable brand, substantial customer base, and established partnerships—were all earned over time.
Snowflake: A Case of Leading Moats
In sharp contrast, consider Snowflake, which carved out a unique space by separating storage from compute when no one else did. This pioneering approach provided Snowflake with a leading moat, offering it the runway necessary to develop lagging moats such as marketplace distribution through hyperscalers and strong brand recognition among CIOs. The switching costs embedded in every data pipeline cemented its place in the industry, making it harder for competitors to infiltrate its market share.
The 7 Powers Framework
Hamilton Helmer’s 7 Powers framework provides valuable insight into how to distinguish between these types of moats. According to this framework, economies of scale, brand strength, and switching costs are inherently lagging. They necessitate significant volume and time to manifest convincingly. On the contrary, counter-positioning, cornered resources, and process power can act as leading moats—provided they exist at the startup’s inception. Yet, most application-layer startups often find themselves without such advantages at the point of founding.
Network Economies Are Earned
Another crucial aspect to consider is that network economies are typically earned. Platforms like Slack, Figma, and GitHub managed to amass a substantial user base before clones could effectively catch up, establishing a foothold that would insulate them from immediate competition.
The Gradual Growth of Application Companies
Ultimately, application companies earn their moats as they navigate their respective markets. Factors such as unwavering focus, strategic execution, and the rapid evolution of the market play significant roles in this process. Over time, the moat that once seemed like a distant goal materializes into a formidable defense against competitors.
The reality for many founders navigating the application layer is simple: the moat takes time to build, but it is no less sturdy or important for being constructed in a slower, more organic fashion. When asked about their competitive edge, a candid response could very well be: We are building one.