When to dig a moat

https://www.notboring.co/p/when-to-dig-a-moat

Success accelerates the need for moats. As soon as success seems obvious, startups lose their training wheels moat – uncertainty – and should have at least the foundations of more permanent moats in place.

In Productive Uncertainty, Jerry Neumann wrote that “the only moat that can create excess value for a new startup is uncertainty” because “uncertainty keeps competition at bay long enough for a moat to be built.” The more obvious your idea is and the easier it is to build, the faster you need to dig moats. Conversely, the less obvious your idea is and the harder it is to build, the longer you have to dig moats.

Neumann calls out two kinds of uncertainty: Novelty Uncertainty (~technical risk) and Complexity Uncertainty (~market risk). Novelty Uncertainty is the kind faced by a lot of deeptech companies: uncertainty over whether you can actually build what you say you’re going to build. Complexity Uncertainty assumes that you can build it, but questions whether there will ever be a big and profitable market for it.

New startups have a limited window of time during which they’re protected by the cover of uncertainty to dig moats, and if they don’t dig them by the time others catch on, their excess profit will be competed away and they’ll struggle to achieve a good outcome.

Hugging Face used the five years that it operated under Complexity Uncertainty – before AI became the obvious thing – to dig moats, the most powerful of which is Network Effects.

This is why strategy is important for startups, even if it’s uncool. At its simplest, early stage startup strategy is about directing limited resources towards digging moats before you’ve removed enough uncertainty to attract serious competition.

https://www.notboring.co/p/in-defense-of-strategy

If you’re building a physical product, you might focus on scale economies. If you’re building a SaaS product, you might focus on switching costs. If you’re building a social app, you’ll probably focus on network effects. No matter which industry you’re entering, if you get to this point in the diagnosis and the best potential moat you can come up with is brand or process power, you might be in trouble. Both take a very long time to develop, if they do at all, and when they do, it’s often through some emergent magic.