Startup Defensibility | Competitive Advantage Examples

By Andrew on 10/5/2024

Here are some real examples of how the most successful businesses have created defensibility.

Network Effects: More people, more valuable

Network effects are powerful, but rare. Here’s the reality:

• Canva: Started with a simple design tool, but then users contributed templates and integrations that made it significantly more valuable.
• LinkedIn: Started with profiles, but then added the ability to connect later on. Professional networks created a strong moat.
• Airbnb: More hosts attracted more guests, and vice versa.

Counterexamples:

• Most dating apps: Network effects often localized, allowing for constant new entrants.

Data Moats: The right data matters

Data can be a moat, but only if it directly improves your product.

Winners:

• Google: Search data continuously improves search results.
• Netflix: Viewing habits inform content creation and recommendations.

Losers:

• Many adtech companies: Vast data stores, but easily replicable value.
• Numerous “AI startups”: Data without unique application.

Ecosystem Lock-in: Make it hard to leave

Create a system where users “can check out anytime they like, but they can never leave.”

Masters:

• Apple: Hardware, software, and apps create a sticky ecosystem that makes it nearly impossible for new devices to compete.
• Salesforce: AppExchange makes it painful for businesses to switch CRMs.

Cautionary tales:

• BlackBerry: Enterprise lock-in crumbled in the face of superior consumer products.

Regulatory Moats: The Bureaucratic Barrier

In some industries, regulation is the ultimate moat.

Winners:

• Coinbase: Regulatory compliance as a competitive advantage in crypto.
• 23andMe: FDA approvals created a significant barrier in consumer genetics.

Struggles:

• Theranos: A reminder that regulatory shortcuts can end catastrophically.
• Many fintech startups: Underestimating regulatory challenges has sunk countless “disruptors.”

Combining Strategies

The strongest defensibility often comes from combining multiple strategies.

Prime example: Amazon

1. Network effects: More buyers attract more sellers, and vice versa.
2. Data advantage: Purchase history improves recommendations and inventory management.
3. Ecosystem lock-in: Prime membership ties users into multiple services.
4. Scale: Fulfillment network nearly impossible to replicate.

Another exemplar: Tesla

1. Data moat: Real-world driving data improves autopilot.
2. Ecosystem: Supercharger network adds value to Tesla ownership.
3. Vertical integration: Battery tech to sales, controlling the entire stack.

You don’t need to have a defensibility strategy at launch

Many successful startups didn’t start with a clear defensibility strategy. They focused on solving a problem better than anyone else and found their moat along the way.

Examples:

• Stripe: Started by simply making payments integration easier for developers. Later added an API ecosystem that made it easier to build products on top of Stripe.
• Zoom: Won by focusing relentlessly on product quality and ease of use.
• Notion: Disrupted established players through superior UX and flexibility.

In the end, the best defensibility is often an unstoppable drive to make your product better every single day. Everything else is a bonus.

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