Building Moats: The Intersection of Success and Merit

Building Moats: The Intersection of Success and Merit

Introduction:
In the ever-evolving and competitive business landscape, the concept of building moats has gained significant traction. Moats, as defined by Hamilton Helmer in his book "7 Powers," are barriers that protect a business's margins from the erosive forces of competition. Companies with the best products, talented people, and rapid growth find themselves in dire need of moats to sustain their success. However, the question arises: when is the right time to dig these moats? This article explores the relationship between success, uncertainty, authority, and the necessity of building moats.

The Importance of Uncertainty and Novelty:
Before discussing moats, it is crucial to establish the role of uncertainty in startup success. Startups thrive in an environment of productive uncertainty, where competition is kept at bay long enough for a moat to be built. Jerry Neumann, in his work "Productive Uncertainty," suggests that uncertainty is the only moat that can create excess value for a new startup. For startups with obvious and easily replicable ideas, the need to dig moats becomes urgent. Conversely, startups dealing with novelty uncertainty (technical risk) or complexity uncertainty (market risk) have a longer runway to develop their moats.

Defining Moats and Their Types:
To understand moats comprehensively, let us delve into the seven types outlined by Hamilton Helmer: economies of scale, network effects, counter-positioning, switching costs, brand, cornered resource, and process power. Each type of moat serves as a barrier against competition, safeguarding a business's margins. For a detailed exploration of these moats, Flo Crivello's "Mind the Moat" provides definitions and examples.

The Intersection of Success and Moats:
Moats do not guarantee product-market fit (PMF); rather, they protect and enhance a successful business. As Fred Wilson of Union Square Ventures emphasizes, PMF should be the primary focus before considering moats. With success, the training wheels of uncertainty are shed, and the need for more permanent moats arises. It is essential to strike a balance between success and the development of moats to ensure long-term sustainability.

The Role of Merit and Authority:
In the pursuit of building moats, the question of authority and merit arises. If one must rely on someone else's name or authority to validate a point, its merit comes into question. True merit stems from a robust foundation of knowledge and evidence. Merit should be established through showcasing one's work and proving the validity of ideas. Authority naturally follows from merit, rather than the other way around.