Defensibility & Competition

There is a lot of discussion of whether building “a mere wrapper on top of GPT” is defensible.

In this post I argue most SaaS software starts off default non-defensible (hence all the HackerNews posts & Reddit threads saying as much), and tend to build a moat over time. In parallel this post delves into different forms of moats as well as competition more generally.

Most early stage startups are not very defensible

Many tech startups will launch an early product within 6-12 months of founding. Teams will initially be 2-5 people with a mix of eng/product/other. Definitionally, it is easy to copy or clone something that has taken a handful of people a handful of months to build.

There are of course counterexamples to this - either in terms of it taking longer to build a technically challenging more defensible product (see eg Snowflake), or there are considerations around IP (for biotech), deals (e.g. payments needing a backend), regulation (“we need to be a broker/dealer first”), talent (“there are 20 people on the planet who can train this sort of foundation model”) or other areas (for example, pre-existing open source software that is being commercialized by the team who created it).

However, the vast majority of SaaS, consumer, and certain types of AI companies are easily and rapidly cloneable. Yet many massive companies have been formed in areas that a priori may be easy to copy or build.

Adding defensibility over time

While a handful of startups start off with defensibility intact, the vast majority do not and need to add defensibility over time. There are a few forms of defensibility that tend to emerge:

Most of the forms of defensibility above take a few years to build.

Why aren’t there more fast follows?

Given that most startups take time to build defensibility, this raise the question of why more startup founders don’t just copy companies that are already working, but early in their journey?

Reasons may include:

1. It is sometimes hard to know what is actually working, versus hype.

2. Founders have a lot of pride in what they build, and may not want to just copy and out-execute someone. Often when a startup copies another’s idea, they put a unique spin on that approach or product versus default blankly copying it. All these tweaks and changes tend to make the product worse.

3. Perception that “the market is over” so no one copies a company even if it might be tractable to out execute them.

4. It is harder to hire strong employees to work on what is initially a clone company. People assume more defensibility than tends to exist early, so are harder to convince to join your efforts until traction is clear.

Startups & incumbents - evolution of competition

Most good startup ideas are definitionally non-obvious (otherwise everyone would be doing them). Often, good startup ideas seem small, niche, or toy like. Only desperate people will go and build in these areas as they may seem too small a market or use case initially to large incumbents.

Often in the first 4-5 years of a successful startup’s life, its main competition is other startups. After a company starts to break away from the startup pack, and proves a large market, that is when a big company tends to remobilize and steer into the direction of a startup. This is often done via cross-bundling and cross-selling - for example Microsoft Teams was successful versus Slack as Microsoft bundled and cross sold Teams to its existing enterprise customer base. This allowed it to gain rapid share. Usually this transition from startup competition to incumbent competition takes between 4-7 years. Incumbent market entrants can either be extremely fierce (see Microsoft Teams) or a bit of an afterthought (see Microsoft Bing versus Google, or Google Plus versus Facebook).

In other circumstances, an incumbent may be aware of a large and obvious opportunity and steer into it much faster - we are seeing this happen now in multiple areas of generative AI where incumbents like Microsoft, Github, Notion, and Intercom are amongst the first to act. Similarly, Meta and its sub products Instagram quickly copied SnapChat stories, curtailing its international growth substantially. Fast market entry or expansion by an incumbent can at times be the death knell for a startup, especially if done early (i.e. the first 1-3 years of startup life).

As a proto-founder, it is worth thinking through how aggressive the incumbents are for your potential product area, how clear they are on the opportunity you are going after, and how likely they are to act. You can often find this out simply by meeting current executives at the company, or asking former employees. Earnings call transcripts can also be revealing at times, as can prior bias to action and ability to ship by an incumbent.

Focus: Navel-Gazing-Centric vs Competition-Centric vs User-Centric

There are roughly three forms of focus for a company. Some large incumbents become so focused gazing at their own navels (or, relatedly their regulators’ navels) that they forget about users and start to create competitive openings for others to exploit. These large companies often have process after process and approval after approval on how to launch, how safe and “equitable” a product is, how to set goals and OKRs, performance reviews, executive reviews, legal reviews, marketing reviews, PR reviews, pre-review meeting reviews, how to map across every single geography at once, etc that they never launch anything that good anymore (or perhaps, launch at all). If you see a company that has not launched anything new in a while, they are probably doing the above.

Another form of company focus is competitor-centric focus. These companies continuously copy what their competitors are doing or have announced, versus what users are actually asking for or want. These companies are externally focused (which is good) but not customer focused (which is frequently bad), and often forget they exist to serve their customers. Sometimes these customers win in a market via lobbying or regulation, but often they end up derivative or staid. Some incumbents may succeed via this strategy - they just copy competitors or buy and bundle them, and keep relevance and market position via that motion.

There is an odd form of competition-centrism with a subset of early stage founders - where all the founder talks about is their competitors - often in a bitter tone about how X company is getting too much press and is raising money too easily and they do not deserve it - and maybe they too should go and do a giant unneeded funding round. For some reason, most bitter founder companies tend to fail.

Finally, there is user centric focus. User-centric companies tend to have a better understanding of their customer and their ongoing needs leading to superior product, sales, customer success, and pricing approaches. By aligning against the customer, more things tend to go right. While being customer-centric helps enormously in most cases, occasionally an incumbent is just too dominant for a superior customer experience and product to win.

What does this all mean for the “wrapper on OpenAI”?

The takeaway is that serving a customer need well is often more important (and harder) to think about than defensibility. In many cases defensibility emerges over time - particularly if you build out a proprietary data set or become an ingrained workflow, or create defensibility via sales or other moats.

The less building and expansion of the product you do after launch, the more vulnerable you will be to other startups or incumbents eventually coming after and commoditizing you. Pace of execution and ongoing shipping post v1 matters a lot to building one forms of defensibility above. Obviously, if your company is defensible up-front it is better then if it isn’t.

Beware the fast-acting incumbent[2] with the easy to add product space that is an obvious and necessary extension of what they are already doing.

NOTES

[1] Examples where things are less clonable includes areas that have deal or licensing moats (e.g. it takes a year to get a banking deal or a broker/deal license), IP (this is stronger in biotech where IP protection matters more), pre-existing open source software that is being commercialized by the team who created it, or other areas.

[2] In general founder-led companies will be more aggressive then non-founder led ones, although Nadella at Microsoft is an impressive counter example of this. Looking at a past history of bias to action (or not) is often revealing as well.

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