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When to Dig a Moat

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Summary

This article examines the importance of moats for startups, particularly those in the generative AI space. Uncertainty is key for startups to gain a competitive advantage and build moats, but success can accelerate the need for moats. The article outlines two kinds of uncertainty (novelty and complexity) and provides examples of how companies have used uncertainty to dig moats and protect their success. It also provides advice on how to use limited resources to dig moats before uncertainty runs out.

Q&As

What is the purpose of a moat?
The purpose of a moat is to protect a business's margins from the erosive forces of competition.

What are the seven types of moats listed by Hamilton Helmer?
The seven types of moats listed by Hamilton Helmer are Economies of Scale, Network Effects, Counter-Positioning, Switching Costs, Brand, Cornered Resource, and Process Power.

How can uncertainty provide a cover for startups to develop their moats?
Uncertainty can provide a cover for startups to develop their moats by giving them more time to build proto-moats and customer loyalty before competitors catch on.

What is the formula for determining the depth of moat needed?
The formula for determining the depth of moat needed is: Depth of Moat Needed = How Obviously Good Your Idea Is - How Hard it is to Build.

How have Hugging Face and Runway used uncertainty to protect their businesses?
Hugging Face used the five years that it operated under Complexity Uncertainty to dig moats, the most powerful of which is Network Effects. Runway has used Novelty Uncertainty to build state-of-the-art video models based on its own applied research and to ship products at a rapid clip to stay ahead.

AI Comments

👍 This article provides great insight into the importance of moats for startups. It explains the concept in an easy to understand way and provides helpful examples to back up the points being made.

👎 This article is quite long and could have been condensed. There are some good points in here, but it could have been more concise.

AI Discussion

Me: It's about the importance of building moats for startups, especially when their success is becoming more and more obvious. It's written as a response to the recent debate around whether or not startups need moats.

Friend: Interesting. What are the implications of the article?

Me: Well, the article suggests that as soon as success seems obvious, startups should have at least the foundations of more permanent moats in place. Otherwise, they risk being attacked by competitors and not being able to achieve a good outcome. It also suggests that startups need to consider the amount of uncertainty in their business and how it affects how much time and effort needs to be devoted to building moats. Finally, the article points out that some startups may benefit from taking advantage of the uncertainty in their space to build moats before their novelty starts to wear off.

Action items

Research the seven types of moats outlined in Hamilton Helmer's 7 Powers and Flo Crivello's Mind the Moat.
Analyze the competitive landscape of your business and identify potential moats that can be built.
Develop a strategy to build moats before your business becomes too successful and attracts competition.

Technical terms

Uncertainty: A state of doubt or ignorance about something.
Success: The accomplishment of an aim or purpose.
Defensibility: The ability to defend oneself or one's position.
Product-Market Fit (PMF): The degree to which a product satisfies a strong market demand.
Network Effects: A phenomenon whereby a good or service becomes more valuable when more people use it.
Switching Costs: The cost associated with changing from one product or service to another.
Brand: A name, term, design, symbol, or other feature that distinguishes an organization or product from its rivals in the eyes of the customer.
Cornered Resource: A resource that is limited in supply and cannot be replaced.
Process Power: The ability to control the process of production or delivery of a good or service.
Novelty Uncertainty: Uncertainty over whether a product can be built.
Complexity Uncertainty: Uncertainty over whether there will be a big and profitable market for a product.
GPT Wrappers: Companies that build products on top of OpenAI’s APIs.
Scale Economies: The cost advantages that a business can achieve by increasing the scale of production.