Dan Hockenmaier · 10 min read · Product Strategy
How to tell if a startup has a moat
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This article presents a framework for evaluating whether a startup has a defensible moat, arguing that moats are more critical than ever in the AI era where building products has become commoditized. The authors identify four compounding advantages that drive long-term value and outline a three-step process to assess whether a startup possesses one. The framework can be applied in about an hour after receiving a job offer to meaningfully improve the odds of joining a winning company.
Key Takeaways
- Moats are more important than ever in the AI era, as anyone can build products quickly, making differentiation through compounding advantages essential for long-term survival.
- Only four compounding advantages truly matter: switching costs, network effects, scale economies, and a fourth (cut off in the article) — these are self-reinforcing flywheels, not just temporary edges.
- The three-step framework for assessing a startup's moat includes: identifying a compounding advantage, gauging how strong it could be, and measuring whether it's already working.
- A company can show strong growth and team quality yet still fail if it lacks a moat, as fierce competition will eventually stall growth and prevent major liquidity events.
- Evaluating a startup's moat is a learnable, structured process that can be completed in roughly an hour and reveals critical insights about the business's long-term viability.
Excerpt
👋 Hey there, I’m Lenny. Each week, I share deeply researched product, growth, and career advice. For more: Lenny’s Jobs | Lenny’s Podcast | Lennybot | How I AI | Become an AI-Native Builder and my other favorite AI/PM courses . Subscribe now P.S. Get a full free year of Cursor, Notion, Replit, Lovable, Wispr Flow, Linear, ElevenLabs, Factory, PostHog, Granola, Brain.fm, Waking Up, and more, by becoming an Insider subscriber (while supplies last). Learn more . Moats! Does anyone have one anymore? As AI makes it easy to build anything, this is one of the biggest questions on people’s…