Dear early-stage founders,

How often have you heard the question

"What's your moat?" from investors?

And how many times have you had to piece

together a loosely held patchwork of an
answer because, in the early days, there was
very rarely a real moat formed?

Investors are mistaken to be asking about

moats at the early stages.

They should be asking about capabilities.

Read on to learn how to reframe the moat

question for investors and get past this
potential investor rejection.
 Given our experience running due
diligence for 15+ VC funds, we always
seek a sustainable competitive advantage
in potential investments that will prevent
margins from eroding over time.

Rarely is that sustainability built in from

day 1.

However, we need to see how that

sustainable moat can be formed over time
—otherwise known as the "moat trajectory."

Here are three ways to answer

investors' moat questions, impress them
with your knowledge of moats, and
overcome any potential rejections due
to a lack of moats.
 #1
Reframe Moat As
"Capabilities"
According to Equal Ventures, companies must
build "capabilities" before establishing a
moat.

"Capabilities" are the engines of your

competitive advantage, determining the
persistence and scope of your moat.
 Actionable protocol #1
Run your company through the following
questions to determine which capabilities you
can build.

Orient your company around building that

capability and express to investors why it's
possible or already occurring.

Here are 3 examples of capabilities:

1. Scale

Does your company have the capability to enable mass

demand generation, lower production costs, and
manageable risk due to reaching scale?

Does your company have complexity baked in,

extraordinary speed to adapt, or resource efficiency
that makes it harder for competitors to catch up?
 Actionable protocol #1
2. Networks Effects
Does your technology have interoperability, cult-like
branding power, marketplace characteristics, customer
stickiness or critical mass in local geographies, user-
generated content value add, and/or platform dynamics
(attracting others to build on top)?
Does your technology increase in value over time as users
join, or do your systems become more powerful and
valuable as customer utilization increases?

3. Organizational Design
Does your company have a customer-oriented
organizational design, i.e., focusing on more expensive
customer acquisition to benefit from locking in that
customer for a long time post-purchase?
Does your company have patents, IP, tariffs, licensing,
regulation, or contract/state-granted ownership of
resources?
Does your company have brand power, centralization
capability, high sunk switching costs, high alternative
product search switching costs, a high probability of
uncertain switching costs, and steep learning curves
involved in switching?
 #2
Focus On Current
"Stickiness" And
"Defensibility"
 We have established that true moats in the early days are
impossible, but capabilities are.

The two most straightforward capabilities to point to and

convince investors of are "stickiness" and "defensibility,"
given the repeated and reliable examples one can point to.

Examples of "stickiness" include:

Hubspot's all-in-one inbound marketing platform, including
a CRM, CMS, social media management, email campaigns,
etc., makes it challenging to migrate to another competitor
once this is all interwoven and built out within Hubspot.
Spotify's personalized playlists and continuous algorithmic
learning feature affect the relative value of another
streaming service that is not trained on your listening
habits over time.

Examples of "defensibility" include:

Tesla has proprietary battery, self-driving, and electric
powertrain technology that put it years ahead of other
automakers.
Veeva System's unique regulatory expertise (aka
regulatory capture capability) and close relationships with
Pharma companies make it difficult for new entrants to
meet the industry's complex compliance needs.
.
 Actionable protocol #2
Ask yourself:

1. How does your

company/product promote
customer lock-in from day 1? This
will be your "stickiness" level
2. How does your
company/product exhibit
defensibility from day 1? This will
be your "defensibility" level.
 #3
Study And Present The
Moat Trajectories &
Playbooks Of Admired
Companies
 Moats form over time - but what does that mean in action?

Here are two examples:

Coca-Cola:
In the 1800s, Coca-Cola developed its secret formula, which became
its critical intangible asset.
In the 1900s, they focused heavily on branding, advertising, and wide
distribution, which fueled brand power.
New products were produced through low-cost production, and global
scale and distribution enabled market dominance.
Today, a diversified portfolio, distribution network, and brand
recognition provide pricing power, making it difficult for competitors to
challenge

Amazon:
In the late 1990s, Amazon created a superior online retail experience
through selection, price, and convenience around one item: books.
In the 2000s, they moved into general online retail, forcing economies
of scale through their logistics network and growing customer base.
Amazon Prime in 2005 increased customer switching costs and repeat
purchasing
They used their scale and customer relationships to enter cloud
computing (AWS), streaming video, and voice assistants (Alexa),
further locking the customer in
Today, Amazon's moat is based on its massive scale, logistics
capabilities, prime ecosystem, and adjacent businesses like AWS,
which produce cost advantages and are a single hub for shopping,
business, and entertainment.
Actionable protocol #3
First, plot your future moat
using the first principles derived
from the Coca-Cola and Amazon
examples

Then, justify why each step is

possible in your particular case,
but use examples of moat
trajectories like these to justify it
can and has been done.
 Tl;Dr
Early-stage founders should reframe the "moat"
question from investors by focusing on their
company's capabilities and moat trajectory.

Instead of trying to convince investors of a fully

formed moat, founders should highlight their
startup's potential to develop scale, network
effects, and organizational design capabilities.
Additionally, they should emphasize current
levels of "stickiness" and "defensibility" in their
product or service.

Finally, by studying and presenting the moat

trajectories of admired companies like Coca-
Cola and Amazon, founders can demonstrate
their understanding of how moats are built over
time and justify their startup's potential path to
sustainable competitive advantage.
 What are your other
thoughts on moats to
help founders fundraise
more effectively?

Comment below!
 Thanks for reading!

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