Software is a though market, because you're not just competing with the person across the street, you're competing with the world. With just a laptop and an AWS account, anyone has access to an infinite amount of computing capabilities.
I've been thinking about startup ideas almost all my life and I don't actually think I ever came up with an idea that was truly original. You start googling and discover that lots of people have had the same idea for a long time. In order to create a monopoly, not only do you have to be right, but everyone else needs to be wrong. And that's risky business. You might end up in a blue ocean, with no competition, but also no food.
I really like the idea of choosing what not to do. It's hard, but it forces you to focus on a clearly defined value proposition. It's especially valuable for startups where you have few resources by definition and need to create some value to some customers.
Do you think "technically hard to execute" could be a defensible competitive moat ? I'm thinking of a product that's complex enough that few people would even try to copy it. You don't need to be smarter than everyone else, but you need to combine orthogonal skills that few people have. Something like, it's really hard to be the best at boxing or the best at chess, but you could become the best at chess boxing. (It's a real sport by the way: https://en.wikipedia.org/wiki/Chess_boxing)
Thanks for your comment, and many thanks for discovering Chess boxing, haha.
I would say that it's fantastic to have such large markets. Software knows almost no boundaries, so we can build products used by billions of people across the globe. This scale of operation has never been seen before. Additionally, software has a zero marginal cost which is why successful software businesses are so profitable.
Now, as you said, the brutal challenge is that anyone can build a software product. If your product isn't defensible, a guy in a cheaper location will create the same and lower the prices. Thanks to a quick google search, I learned that the average yearly salary for a software engineer in San Francisco is $167,042 versus $7,665.72 in India and $8554 for a SWE in Manila, Philippines. There is no way to win a price war from Silicon Valley. In my opinion, there is no way to win a price war, period. It's a loser game.
Technically hard to execute isn't a moat in itself because great technicians can always be hired, and technology gets commoditized over time. It's, however, excellent to win the early race and start building competitive moats. Look at Snowflake, which is incredibly hard to make technically. Their competitors have finally matched their technology, but now they are so embedded into their customer's operations that there is a high switching cost. They also benefit from scale advantage, network effect, and tons of intangible assets, including a great brand.
Look at the most valuable SaaS companies such as Salesforce, ServiceNow, Shopify, Atlassian, or Veeva. You will realize that none of these products are hard to build compared to electric cars, GTP-3 type of models, or space rockets. These web apps are easy to build and super defendable from day one as customers input data (data network effect) or embed the product within their operations (high switching cost).
You don't need an original idea to succeed. You need an idea that creates value for customers while being defendable from competitors.
I've got a feeling that I'm selling sand now haha! You're right in your analysis, although I would say that starting your first business as a sand seller, when you're poor, is a less risky way in life to succeed on an existing market. Especially a market where customers have already been educated by competitors, and the market research has already be done for you. That way you gain time, and the financial barrier to entry is lower in R&D. Because there's already a market and you can compete to deliver a better product at a lower price, you can still reap the benefits (although much lower in absolute value because it's obviously a race to the bottom speaking of pricing — towards being a commodity).
It's exactly what we are doing at Crisp, and to me, coming from a non-entreprenarial family, it was really the most rational bet. Crisp now provides us with plenty financial resources to settle in life, depend on no one (as self-mades), and one day become the water seller through our next venture. Only this time, taking more risks and creating an actual product which doesn't exist yet.
Don't be too harsh on yourself; Crisp is a great business! Although some products have similar features, you benefit from a scale / low-cost competitive advantage. Almost no teams can provide your high-quality service while benefitting from your low structure cost. Adding to that, there is a high switching cost as Crisp is for customers their live chat, ticketing system, CRM, knowledge base etc. You found a good niche by building an insanely great product for small startups seeking affordable prices. Crisp is an amazing success story.
Thanks for your comment. Nice article. I hesitated between Vanguard and Wealthfront. The first charges 0.07% per year, the second charges 0.25%. I went with the cheapest provider because fees eat returns for breakfast!
Thanks for the great insights Nicolas. Love it.
Software is a though market, because you're not just competing with the person across the street, you're competing with the world. With just a laptop and an AWS account, anyone has access to an infinite amount of computing capabilities.
I've been thinking about startup ideas almost all my life and I don't actually think I ever came up with an idea that was truly original. You start googling and discover that lots of people have had the same idea for a long time. In order to create a monopoly, not only do you have to be right, but everyone else needs to be wrong. And that's risky business. You might end up in a blue ocean, with no competition, but also no food.
I really like the idea of choosing what not to do. It's hard, but it forces you to focus on a clearly defined value proposition. It's especially valuable for startups where you have few resources by definition and need to create some value to some customers.
Do you think "technically hard to execute" could be a defensible competitive moat ? I'm thinking of a product that's complex enough that few people would even try to copy it. You don't need to be smarter than everyone else, but you need to combine orthogonal skills that few people have. Something like, it's really hard to be the best at boxing or the best at chess, but you could become the best at chess boxing. (It's a real sport by the way: https://en.wikipedia.org/wiki/Chess_boxing)
Thanks for your comment, and many thanks for discovering Chess boxing, haha.
I would say that it's fantastic to have such large markets. Software knows almost no boundaries, so we can build products used by billions of people across the globe. This scale of operation has never been seen before. Additionally, software has a zero marginal cost which is why successful software businesses are so profitable.
Now, as you said, the brutal challenge is that anyone can build a software product. If your product isn't defensible, a guy in a cheaper location will create the same and lower the prices. Thanks to a quick google search, I learned that the average yearly salary for a software engineer in San Francisco is $167,042 versus $7,665.72 in India and $8554 for a SWE in Manila, Philippines. There is no way to win a price war from Silicon Valley. In my opinion, there is no way to win a price war, period. It's a loser game.
Technically hard to execute isn't a moat in itself because great technicians can always be hired, and technology gets commoditized over time. It's, however, excellent to win the early race and start building competitive moats. Look at Snowflake, which is incredibly hard to make technically. Their competitors have finally matched their technology, but now they are so embedded into their customer's operations that there is a high switching cost. They also benefit from scale advantage, network effect, and tons of intangible assets, including a great brand.
Look at the most valuable SaaS companies such as Salesforce, ServiceNow, Shopify, Atlassian, or Veeva. You will realize that none of these products are hard to build compared to electric cars, GTP-3 type of models, or space rockets. These web apps are easy to build and super defendable from day one as customers input data (data network effect) or embed the product within their operations (high switching cost).
You don't need an original idea to succeed. You need an idea that creates value for customers while being defendable from competitors.
I've got a feeling that I'm selling sand now haha! You're right in your analysis, although I would say that starting your first business as a sand seller, when you're poor, is a less risky way in life to succeed on an existing market. Especially a market where customers have already been educated by competitors, and the market research has already be done for you. That way you gain time, and the financial barrier to entry is lower in R&D. Because there's already a market and you can compete to deliver a better product at a lower price, you can still reap the benefits (although much lower in absolute value because it's obviously a race to the bottom speaking of pricing — towards being a commodity).
It's exactly what we are doing at Crisp, and to me, coming from a non-entreprenarial family, it was really the most rational bet. Crisp now provides us with plenty financial resources to settle in life, depend on no one (as self-mades), and one day become the water seller through our next venture. Only this time, taking more risks and creating an actual product which doesn't exist yet.
Don't be too harsh on yourself; Crisp is a great business! Although some products have similar features, you benefit from a scale / low-cost competitive advantage. Almost no teams can provide your high-quality service while benefitting from your low structure cost. Adding to that, there is a high switching cost as Crisp is for customers their live chat, ticketing system, CRM, knowledge base etc. You found a good niche by building an insanely great product for small startups seeking affordable prices. Crisp is an amazing success story.
Excellent piece, thank you Nicolas.
There is an excellent notion (a bit long!) about competitive moats, that I think you will find insightful : https://www.notion.so/The-Defensible-Startup-9decc67b9ac249cf839f55f78dd13197
Thanks for sharing! Interesting content!
Again a very interesting piece, thanks!
Your example of Vanguard reminds me of an analysis I did a few years ago on robo-advisors, indeed, it was Vanguard that came out as the leader of this market thanks to its moat: https://medium.com/@benoit_deangelis/pourquoi-la-revolution-promise-par-les-robo-advisors-na-t-elle-pas-eu-lieu-34f64b0f51ab
Thanks for your comment. Nice article. I hesitated between Vanguard and Wealthfront. The first charges 0.07% per year, the second charges 0.25%. I went with the cheapest provider because fees eat returns for breakfast!