# 6 A Strategy for Each Swimlane: When to Dig a Moat

6 A Strategy for Each Swimlane: When to Dig a Moat

In the world of business, success is often measured by the quality of products, the talent of employees, and the speed of growth. However, it is precisely these successful companies that need to be most cautious and proactive in implementing strategies to protect their margins from the erosive forces of competition. This is where the concept of "moats" comes into play.

Moats, as defined by Hamilton Helmer in his book "7 Powers," are barriers that safeguard a business' margins against competition. There are seven types of moats: Economies of Scale, Network Effects, Counter-Positioning, Switching Costs, Brand, Cornered Resource, and Process Power. Each of these moats serves a unique purpose in shielding a company from the threats of competitors.

But when should a company start digging its moat? According to Flo Crivello's Mind the Moat, as soon as success becomes apparent, it is crucial for startups to establish the foundations of more permanent moats. Startups often begin their journey with a training wheels moat - uncertainty. This uncertainty keeps competition at bay long enough for a moat to be built. However, once success becomes obvious, the training wheels moat dissipates, and it is imperative for companies to have their moats in place.

The need for moats is directly proportional to the certainty and ease of building a product. The more obvious and easier to build an idea is, the faster a company needs to dig its moats. On the other hand, if an idea is less obvious and more challenging to build, the company has more time to establish its moats.

There are two types of uncertainties that dictate the depth of moat needed: Novelty Uncertainty and Complexity Uncertainty. Novelty Uncertainty refers to the uncertainty faced by deeptech companies, questioning whether they can actually build what they claim they will build. Complexity Uncertainty assumes that a company can build its product but questions whether there will be a profitable market for it. The depth of the moat needed is determined by the equation: How Obviously Good Your Idea Is - How Hard it is to Build.

When it comes to raising funds, the easier it is for a company to raise money, the more immediate the need for moats. For example, Airbnb faced significant challenges in raising money initially, which allowed them the time to develop their Brand and Network Effects moats that have protected them throughout their journey to a $91 billion market cap.

In the realm of generative AI, the lack of moats has become a cause for concern among venture capitalists and industry experts. The lack of uncertainty in this field leaves little room for startups to establish their moats before attracting serious competition.

In conclusion, implementing moats should be a strategic priority for companies as soon as success becomes evident. The type and depth of the moat required will depend on the certainty and ease of building a product. To ensure long-term success and protection from competition, it is crucial for companies to identify and develop their moats at the right time.

Actionable Advice:

1. Identify the type of uncertainty your company faces - Novelty Uncertainty or Complexity Uncertainty. This will help determine the urgency and depth of moats needed.
2. Evaluate the ease and obviousness of your idea. If it is easier and more obvious, prioritize digging moats sooner rather than later.
3. Understand the importance of moats in attracting funding and protecting your company's margins. Develop and communicate your moats effectively to potential investors.

Remember, a well-constructed moat can be the key to long-term success and protection in a competitive business landscape.