Thursday, June 11, 2020

Some notes on moats



Economic moats are frequently on my mind when assessing products/startups. Leo Polovet's How to De-Risk a Startup surfaces this topic as two related risks:

  • Short-Term Competition Risk
  • Long-Term Competition Risk

Below are the 5 core resources I return to in order to think through those risks.

You have Discovered Product/Market Fit. What about a Moat? - Tren Griffin

  • Why does a business need a moat? The answer is simple: even if a business discovers solutions to the value hypothesis and the growth hypotheses without a moat the probability of the business being financially successful over time is remote. 
  • Mistakes are easy to make when trying to make predictions about moat strength, value and duration. 
  • Predicting the future of a moat is so hard because the markets in which they operate are complex and adaptive. 
  • Moat creation is incredibly hard and rare and maintaining one is hard as well. It is a big mistake to confuse a moat shortage with an innovation shortage.
  • The existence of a moat is critical to reducing competition risk.


Charlie Munger on Moats (First of the Four Essential Filters) - Tren Griffin

  • 4 Skills Related to Moats
    • Creating a moat
    • Identifying a moat that others have created
    • Identifying a startup that may acquire a moat before it is evident 
    • Describing a moat in academic terms
  • 5 Primary Moats
    • Supply-Side Economies of Scale
    • Demand-side Economies of Scale (Network Effects)
    • Brand
    • Regulation
    • Patents and Intellectual Property

CB Insights: 19 Business Moats That Helped Shape The World’s Most Massive Companies
  • Network effect moats
    • Marketplace network effect
    • Data network effect
    • Platform network effect
  • Cost moats
    • Switching costs
    • Sunk cost
    • Cost advantage
  • Cultural Moats
    • Brand-based
    • Tradition-based
  • Resource Moats
    • Intellectual Property
    • Knowledge
    • Regulatory

A Taxonomy of Moats - Jerry Neumann

  • Value is created through innovation, but how much of that value accrues to the innovator depends partly on how quickly their competitors imitate the innovation. Innovators must deter competition to get some of the value they created. These ways of deterring competition are called, in various contexts, barriers to entry, sustainable competitive advantages, or, colloquially, moats.
  • Moats draw their power to prevent imitation from one of four basic sources:
    • The state
    • Special know-how
    • Scale
    • System rigidity
A Taxonomy of Moats - Jerry Neumann


Measuring the Moat - Michael Mauboussin

  • There are three broad sources of added value: production advantages, consumer advantages, and external (e.g., government) factors. 
    • NOT brand: "brand is clearly not sufficient to ensure that a company earns economic profits, much less sustainable economic profits"
  • Production advantages
    • Process advantage
      • Indivisibility
      • Complexity
      • Rate of change in process cost.
      • Protection
      • Resource Uniqueness
    • Economies of scale
      • Distribution
      • Purchasing
      • Research & Development
      • Advertising
  • Consumer advantages
    • Habit and high horizontal differentiation
    • Experience goods
    • Switching costs and customer lock-in
    • Network effects
  • External Factors
    • Government



August 2020 Learning List

Photo by  Bekky Bekks  on  Unsplash Information from the past month I'd actually consume again