Moat

Factual definition

A moat is a durable competitive advantage that helps protect a company’s returns from competition. A useful core competency is not necessarily defensible enough to constitute a moat.

Related variants Core competency, Core competencies

Moat in practice

Hypothetical: an engineering supplier has hard-to-replicate expertise and customer qualification relationships. Those capabilities may support an advantage if competitors cannot readily match them.

Cutting research spending may weaken that advantage; it does not imply a predetermined change in the exit multiple.

For the hypothetical engineering supplier, ask customers what replacing it would require: new qualification tests, redesign work, production disruption or simply a new purchase order. The answer identifies the proposed protection instead of assuming that repeat purchases prove a moat.

Then examine customers who did leave and competitors who did qualify. Their experience can reveal whether the obstacle lasts or merely delays a switch.

Compare the advantage with the spending needed to sustain it. If retaining the qualification requires engineering work, removing that work from the budget may undermine the protection the buyer is paying for.

• switching costs
• network effects
• brand
• scale
• a license

How Shayne Fitz-Coy uses Moat

Software was priced as though customer captivity lasts forever. Moats are subject to change.

Across my portfolio companies we have canceled almost every software product and rebuilt the tools in house, at fairly junior levels in the firm.

Payroll, accounting and billing have all been rebuilt. What survives is the software too cheap to bother replacing, and that is the test to run before you pay for stickiness.