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I think moats are lame

CEO of Brightmoat

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“I think moats are lame.”

Thanks, Elon. You’re so helpful, especially when it comes to convincing B2B SaaS owners to leverage moats to grow their base. Then again, Elon Musk hasn’t played in the field of B2B SaaS in a long time, has he?

“What matters is the pace of innovation. This is the fundamental determinant of competitiveness.”

On second thought, maybe Mr. Musk is right?

Classically, moats kept invaders at bay while protecting people within the castle walls – the same moats also kept the people on the inside from having the freedom to leave. For B2B SaaS owners, the intensity of moats has gone from wide, deep pits infested with gators and snakes to little dugouts occupied by stuffed animals. The barriers that kept most of us from creating a competitive SaaS product are far more permeable than they were 5-10 years ago. Today, anyone with a basic understanding of AWS who can find a friendly full-stack engineer and a designer from Upwork can create a SaaS product that would have seemed revolutionary a decade ago. Furthermore, all of this can now be done for a fraction of the cost.

And it is only getting easier.

You can watch a few YouTube tutorials and subscribe to a few affordable SaaS products and create a demand generation engine that would be the envy of the SaaS founders of yesteryear. When COVID changed the world, SMB only adopted these methods and applications at an accelerated rate – and most of them started as a weekend project and launched on a shoestring budget.

Welcome To The Main Event

It is the most exciting (or daunting?) post-COVID, cheap-low-no-code, indie hacking, bootstrapping, creator economy. Forget about the annual reports – innovation is now measured by the hour. Are you paying attention? Because this matters to you. Even though your metrics, margins, and growth look good today, you could be an hour away from everything going sideways.

As easy as it was to build and sell your SaaS, it will be just as easy for someone else to replicate it. You may have shipped a prototype over a free weekend a year ago; just imagine what a new competitor can do with the tools that have launched since then? It is no wonder that the number of SaaS businesses has exploded.

Even with your head start, your “special feature” is no longer unique. As everyone copies ideas and creates similar-looking products, you are left with no choice but to compete head-on and watch your profit margins wither away.

Perhaps Elon was right. Focusing on building moats around your SaaS is an idea from the past and a waste of your energy. The new recipe for success now means you have to work harder than your competition, innovate faster, and do everything a little bit better. This may be how China became a global superpower with their 996 culture (working from 9 AM to 9 PM, 6 days a week!), but is it worth it to step on a hamster wheel that only seems to spin faster by the day?

We might have a better solution, one that induces less anxiety.

Meet (bright) moats.

Economic moats enable businesses to maintain long-term competitive advantages over their rivals while protecting their long-term profitability and market share. In other words, they enable businesses to make money for a long time. Warren Buffet coined the term for what he looked for in the businesses that he would either buy or make long-term investments in. Moats, to Buffet, were all the reasons a company could potentially still be prospering 20-30 years after he discovered them.

“The products or services that have wide, sustainable moats around them are the ones that deliver rewards to [owners].”

While the economic landscape and pace of innovation have dramatically changed since Buffet’s golden age of value investing, the principles behind a robust economic moat are as strong as ever. There is a good reason some things are timeless and hold value: because they work.

And while there is a plethora of articles and studies written on networks and economies of scale moats for Big Tech (Facebook, Microsoft, Google, etc.), very little has been said about moats for niche B2B SaaS. By design, it’s difficult to get the same network or scale effect to a niche business, but that doesn’t mean you can’t develop valuable moats that will help you maintain and grow your reposition.

There is hope.

In the showdown between Elon’s pace of innovation and Buffet’s trust in moats, who comes out on top?

A New Hope

It’s tempting to follow Elon – after all, his pace of innovation is one of the main factors behind his rise to billionaire status. But before we let him KO your moat, let’s give the moat godfather, Mr. Buffet, one more chance.

“Pace of innovation has made moats vulnerable but not irrelevant.”

Buffet acknowledges the benefit of accelerated innovation, but that doesn’t mean your moat is useless. After all, Buffet’s portfolio continues to grow because of the wide moats that surround them. Strong moats help businesses survive through major platform shifts – like going from physical applications to the cloud and onto mobile platforms and into Web 3.0. A moat keeps your customers with you even when the business variables change.

Consider the irony in Musk selling out Tesla Tequila in minutes (for $250 each, with the empty bottle selling on the secondary market for just as much), which is the very definition of a brand moat, to only then go on and call moats “lame.” The truth of the matter is that moats are built to defend the incumbent’s market position, stifle new and brave upstarts, and lead businesses to complacency. By definition, moats are the antithesis of innovation. But what if they didn’t have to be?

What if you could look at moats through a brighter lens?

What if, instead of being stale swamps full of grouchy gators, moats were crystal clear and evolved and got wider as businesses innovated and improved?

What if moats could be used on the offensive?

Fear leads to the Dark Side.

Where Elon and Buffet agree: no moat can defend against complacency.

Does your moat exist because you fear the market? Or because of your ambition to grow within it?

Moats dug out of fear (think monopolies, intentional lack of interoperability of products) stifle competition and create ineffective businesses.

On the other hand, moats built from ambition are the holy grail of great businesses. These moats evolve and grow as you innovate and adapt to platform shifts and technological tidal waves. Apple, Google, and even smaller businesses, like Dribble, etc., all have these moats.

They are the difference between a mediocre business and a great one – as you can guess, these are the kind of moats we love at Brighmoat.

In our following thought pieces, we will help you identify the brightmoats in your business and how you can and should build more of them. For now, let’s recap on why moats are awesome and why your SaaS needs one.

Why Bother With A Moat?

Ultimately, moats are what allow businesses to compound growth and profits over time. You don’t need to make enormous impacts to get significant results – after all, compounding forces is what ultimately caused the Ice Age (no joke, google it).

If you can architect moats into your products and services, you can move mountains. It’s as close as you can possibly get to conducting SaaS alchemy.

With a moat you can:

  • Increase organic revenue growth
  • Increase LTV by increasing pricing and cross-selling other products and services
  • Reduce user churn
  • Attract better talent – younger generations want to work with businesses that stand for something

Moats are a powerful strategic framework for building your products and services. They focus your attention on building the features and functionality that will increase the long-term defensibility of your business. Understanding moats as they relate to B2B SaaS business gives you the answers to two essential questions:

  1. Does this feature, function or effort build a sustainable competitive advantage?
  2. Does it offer value to our customers?

It’s hard to build a moat; that’s why they are called moats. But when you build an effective one, you will most certainly see economic magic happen.

So how do you build a moat? You could get a CAT 336 and pick up a few gators (we hope your neighbors have a sense of humor). Or you could subscribe and follow Brightmoat to learn more about the process of building simple, yet effective, moats

Learn how to gain an unfair competitive edge, read B2B SaaS success stories, and explore new exit tactics & strategies. Subscribe to get new posts in your inbox today.

Dmitriy Dobrov

Dmitriy Dobrov

Dmitriy is the co-founder and the moat evangelist at Brightmoat. He spends most of his day evaluating the moats of profitable niche B2B SaaS. He also helps Brightmoat’s portfolio company CEOs grow their moats. If you have enjoyed this article, want to know more, or have any questions, feel free to write to dmitriy@brightmoat.com.

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