Shattering Myths, Building Moats: A Fresh Take on Competitive Advantage

Ever been cornered with the question, “What’s your competitive edge?” Every founder has wrestled with this query at some point.

Framing your thoughts about this question in the wrong light doesn’t just make the question tougher to answer. It could very well shape the foundations of your business model and your growth strategy in less-than-optimal ways.

For an investor, cracking the code to a startup’s competitive advantage isn’t just beneficial. It’s downright critical.

So, are you ready to take the plunge? Let’s dive right in!

#1 Your competitive advantage should be like a muscle, growing stronger as your business flourishes:

Whenever I delve into the nitty-gritty of a startup, my eyes are peeled for one thing: an economic moat. Not just any moat, mind you. I’m looking for a moat that deepens and widens as the company scales up. This could be powered by the economy of scale, perhaps the network effect, or the data accumulated and trained in the AI model (See my article regarding AI and its competitive advantage)

#2 Technology as a competitive advantage should not be the sole arrow in your quiver:

The word “patent” can sometimes be over-emphasised when discussing competitive advantage.

On one side of the coin, there’s a myriad of ways to sidestep patent claims in plenty of situations (see the Incomplete Contract Theory). Plus, when you’re just a sprouting startup, you’re not exactly in a position to lock horns with the industry behemoths in a legal wrangle.

On the flip side, even patented tech has to compete with alternative technologies with a totally different technical roadmap. The battlefield isn’t littered with patents or academic citations, but with tangible results, these technologies can deliver — like lower costs or higher throughput.

Don’t misinterpret me — I had patents myself in the area of distributed computing and communication. However, if a patented technology is the sole arrow in your quiver, it’s high time to rethink your competitive advantage. You might need to sharpen a few more edges to truly hold your own in the market.

#3 You are not only competing with your competitors:

I’ve read through thousands of pitch decks, yet only a very few touch on the topic of Adjacent Players. However, this very topic forms a crucial section in our investment notes. These adjacent players could be those strung along the upstream or downstream parts of the value chain, or they could be players operating in adjacent verticals. What’s your advantage compared to them? Can you maintain the edge when you grow? If they choose to enter your domain, what will happen?

Reflecting on these queries doesn’t just throw light on your competitive advantage, but it also provides valuable insights into potential alliances or exit scenarios.

#4 Large incumbents are not necessarily lacking in innovation:

I confess I might have a bias against large incumbents. My own startup was acquired by a major player 17 years ago. I’ve had many founders and investors telling me that big corporates are too slow and lack the innovation to replicate what startups do. Sure, I get it. Decision-making in large corporations can be painfully slow, and their risk appetite tends to err on the conservative side.

However, don’t underestimate these giants. More and more corporates are getting nimble, adopting an agile, gutsy stance to keep up with the competition from startups. While the Australian culture may be very laid-back at the moment, the big trio, BAT (Baidu, Alibaba, Tencent), are notorious as ‘startup slayers’ in China. They’ve been known to clone startup concepts, refine them, and then deploy their vast resources to scale.

So, what’s the takeaway here? Whether you’re a founder or investor, don’t fall into the trap of assuming that the large incumbents will sit idle. Contemplate their strengths, which could potentially double up as their weaknesses, and strategise to carve out your own advantage in those areas. That’s your shield against the ruthless competitive tide.

#5 The first mover advantage works under some conditions:

Let’s be honest: the first-mover advantage is often either brushed under the rug or blown out of proportion. The real deal is that being the first mover isn’t an advantage on its own — it leans heavily on a range of other elements. These factors include a business that focuses on a niche sector, a team that’s quick on its feet, a scattered upstream/downstream and so on. But most importantly, A robust and increasingly strengthening economic moat, as we discussed in the very first point.

Final words

In a nutshell, whether you’re a founder carving out your path or an investor looking for the next big thing, understanding and leveraging competitive advantage isn’t just essential — it’s absolutely game-changing.

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