Lesson: Moats and Flywheels

April 30, 2016 – 10:18 pm

It’s bloody hard to build something new into the world.  Don’t let anyone tell you it’s easy: there’s a lot of unfunded and unrecognised work that you have to do before you can get to the point where fame and/or fortune arrive.  And once you’ve finished the painful birth of your new service or product into the world, maybe even defining an entirely new product category or unserviced market segment, dozens of unimaginative parasites will appear from nowhere and try to eat your lunch.

Hapara had this: we have a track record of beautiful firsts.  First Education solution for Google Apps, first device management for Chromebooks.  And, sure enough, as soon as we’d proven that Google Apps could be improved for educators, Google popped up and entered the space with Classroom.  Dozens of companies sprung up to help educators manage Chromebooks.  I like to think that the Hapara team do it better than those Johnny-Come-Latelys, but regardless of what I think there’s still competition. (I’ve never been at a place that had so many Firsts in such a short period time; there’s something incredible about Tony and Jan’s ability to identify great product niches)

I first noticed a similar dynamic at O’Reilly’s Emerging Technology conference.  My buddy Rael had built a conference where incredible cutting edge technologists, the kind of people who follow Alan Kay’s dictum and predict the future by inventing it.  But I soon realised that while the first movers started as Crazy Dreamers On The Edge, they were quickly joined by competitors who were happy to copy their ideas.  Sometimes those first movers would be beaten by the competitors, who had better market access or other products to piggyback on.  Being first to market doesn’t mean you’ll always lead the market.

So what’s an entrepreneur to do?  I look for moats and/or flywheels in the business plans and pitches that come to me.

Moats are the defences around your castle’s treasure: do you have patents, or an exclusive arrangement with suppliers, or an exclusive arrangement with the major distributors, or all the world’s experts in the field working for you?  Those are the sorts of things that thwart would-be competitors, or at least slow them down because now they have to blaze their own trail to the sweet land of Product-Market-Fit that your startup has identified.

Flywheel is Jeff Bezos’s term for a virtuous circle in your business.  As Tim O’Reilly described it, “your app gets better as more people use it.”  More specifically, I’m looking for geometric (exponential) value in the face of arithmetic (linear) customer growth.  If twice as many people use the telephone, the phone network is four times as valuable because the value of the phone network isn’t just for the new user—now all the previous users can call that new person too.  Amazon’s great at building out parts of their empire such that the success of one part makes other parts stronger; check out Jeff Bezos’s letters to shareholders for more on his thinking.

This is strongly related to the idea of virality.  If number of users is important to you then you want your product to attract users by itself.  The most viral products don’t rely on friends telling friends; instead, merely by using them you’re dragging your friends in.  Examples from history are Plaxo (address book in the cloud, where all your friends were told you’re managing contacts through Plaxo and is this info you have for them accurate?) and any sharing service like Dropbox or Google Docs, where inviting people to collaborate/share files means that they’re becoming users of your service.

Flywheels mean that the time advantage you have by being first to discover the new product/market is directly turned into a more durable value advantage—each new user you get makes your system not just one user’s worth of better.

Neither moats nor flywheels guarantee success, but they can keep the wolves from your heels while you chase it!

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