Software Social

Michele continues her chat with Summit founder Matt Wensing about ways indie SaaS founders can think about moats and competitive advantages. This episode: cost advantages, size advantages (big and small), and false moats.

Show Notes

Michele continues her chat with Summit founder Matt Wensing about ways indie SaaS founders can think about moats and competitive advantages. This episode: cost advantages, size advantages (big and small), and false moats.

Recommended reading on competitive advantages: The Little Book That Builds Wealth

A couple friends of this pod have launched their own shows for entrepreneurs lately! Check them out:
Ship SaaS Faster (Simon Bennett + Volkan Kaya): https://shipsaasfaster.com/
Marketing Retro (Adrienne Barnes + Josh Ho): https://marketingretro.substack.com/
The Weekly Build (Marie Ng + Jesse Anderson): https://www.theweeklybuild.com/
This Indie Life (James McKinven + Dagobert Renouf): https://indielife.fm/
The Non-Tech Founders Podcast (Laura Elizabeth and Nathan Powell): https://nontechfounders.transistor.fm/

Huge thanks to all of our listeners who’ve become Software Socialites and support our show! You can become a supporter for $100 a year at softwaresocial.dev/supporters
 
 
 

Creators & Guests

Host
Michele Hansen
Co-Founder of Geocodio & Author of Deploy Empathy
Editor
Cory Stine
Audio Editor
Writer
Meghan Coleman

What is Software Social?

Two indie SaaS founders—one just getting off the ground, and one with an established profitable business—invite you to join their weekly chats.

Michele Hansen 0:00
Hey everyone, its Michelle here. And this week, we're gonna have the second part of my conversation with Matt wensing, about competitive advantages and moats for indie software businesses. So in the first half of this episode, last week, we talked about network effects, and switching costs and intangible assets. And we get into the rest of the main types of competitive advantages, as well as some sort of fake or things that seem like sources of moat, but aren't really in the end of this episode. So here we go. Let's get into the next one. cost advantages. And I think this is actually one of the easiest ones, for, especially for indie founders to take advantage of, which is, is it cheaper for you to provide a service that a huge company would be much more expensive for them to do. And, you know, remote work is, you know, now, you know, big trend and everything, right, but I mean, even going back to 2006, right, when you founded your first company, for a long time. And I think still to this day, those of us running small companies, we have a built in advantage, because basically all of us are remote. Now, granted, that might mean you're just one person working in your home office or from your kitchen table. But the fact that you don't have a 510 year Commercial, real estate lease, and all of these buildings, you have to keep lit and heated and staffed and security and the fact that you don't have, you know, several 100 employees. Yep, that has advantages and disadvantages. But that is can be a huge cost advantage, that you don't have those kinds of things weighing you down. And especially if you're moving into a market, if your cost advantages mean that you can cut your competitors prices by 50%. Right, you can beat them by 50%, especially if I mean, this is really applying to, you know, sort of a highly competitive market from, from an economic sense, right, where there's, there's, there's minimal differences between companies, right? If you can go in and undercut everyone significantly, and you can make it easy for them to switch, then you have a very good advantage going into that market

Matt Wensing 2:31
completely. And I think the thing I'll add to this is those are all the their real physical costs, real estate, colocation, etc. I think about the clock running during a meeting and think about what it costs, the cost advantages, like how much does it cost for this meeting to happen to make this decision, etc? Like, like, a company? Yeah, exactly. Like, which, which is real payroll costs, which is real, you know, cost of acting. And so, you, the advantage you have is, yes, the software is better technology is cheaper, hard drives, distributed work, but never underestimate how much time and money has to be spent by, you know, an incumbent or somebody else to get to the same place as you mentally right, or, or decisively or from a product standpoint, and that that's kind of what keeps this whole engine going. Right is that it's it's inevitable that, you know, if we succeed, our businesses turn into these incumbents, sadly, or but but wonderfully, sadly, the same time, but then somebody else can come up and do things cheaper, faster, better, and so that, you know, the cost advantages here. To me, the real challenge is how do you maintain those cost advantages as you get bigger, which we could talk about for hours? Because then you're getting into things like? Yeah, how do you empower and keep your teams autonomous, and fast and agile and learning, even when you're 500? Employees, versus versus five? Right. And that's, I would say cost management something like you said, we start with the real challenge is if you can keep it, you know, that's, that's powerful.

Michele Hansen 4:14
You know, going back to the analogy I use earlier about boats, the amount of gas that a 27 foot racing sailboat is going to use is much, much less than that of a container ship. Right. The sailboat only uses the gas to get into harbor or you know, if there's no wind, right? Sure. containership is just blowing through fuel, right? Yeah, but at the same time, if they're competing not for speed or agility, but for how much cargo they can, they can transfer and that same boat is trying to compete with the container ship. Right. It is very hard to enter into the container shipping industry right And there's a reason that all the little hobby sailboats are not competing with Maersk. Right. And so that actually gets into the next one, which is size advantage, which is, I think one that is really not available to indie founders, but is one for us to be aware of, as we're looking at the different factors that give our competitors advantages over us. You know, an example of that is, you know, to what we're talking about earlier, think about like telegraph wires, right, like going back into the 1800s, like Western Union was basically the Google of the technology industry, because they owned all of the cable. Yeah, they were such a massive company, that if you wanted to send a telegraph, you wanted to have telegraph wires installed in your office, which people did or you wanted to be a telegraph operator, you went to Western Union, because they were so massive, have a lot of choices, which is, I mean, there's basically a monopoly, right. And I think this gets into the what we're talking about regulation, you know, quite frankly, is something that a lot of especially big investors are looking for, they're looking for something that could be a future monopoly. Think about Uber, for example, right, wanting to have a monopoly over the taxi market, which can often lead to regulation. But I think the bet there is that in the 510 1520 years, how old is Facebook now, before regulators are finally wise to the fact that it is a monopoly, the potential for outsized profits is enormous, even if you only get to enjoy that monopoly for five to 20 years,

Matt Wensing 6:45
worked for Standard Oil, still working pretty well, for Standard Oil? Yeah, this is interesting, because those companies at some point, can turn around and say, I mean, this is this is Amazon, right? Amazon economies of scale and logistic side is absurd. At some point, those companies can exhaust their opportunity, or get regulated one or the other. And then they really become platforms for others, which kind of feeds the innovation loop again. So Amazon says, Okay, well, we've reached this point, how about we release AWS for the world? Or we've reached this point? How about you can ship something for your own business using Amazon's supply chain? Right. And rather than let it discourage us, Mr. Singh, the upshot here is that through selfish interest, you now coming on the scene with an idea can take advantage of some of these economies of scale that have been built out for you that your, maybe your competitors in your category didn't have when they started. So the fact that I could start a weather company in 2006, and have effectively infinite harddrive space for pennies, was an economy of scale that I had access to that my competitors never did. And so you want to be Amazon, if you can be Amazon, be them. It's like the old saying, if you can be Batman be Batman, because that's the best position to be in. Be yourself unless you can be Batman, I think is how it goes. But if you're not that, at the very least you can take advantage of this growing platform effects. And I think that's where it really gets frustrating is more like, okay, Facebook, you're this giant graph and utility. But you're not a platform for anyone, you're not sharing that it's not creating wealth. For others, it's not something anybody else can build on. If it were, you end up with Windows or Microsoft, maybe in its less monopolistic days, where I'll I can build applications to the whole world now. And it's just going to work because I can build on this thing called Windows, Facebook and others, are really not fostering innovation when they're closed down from sharing that platform with others. And I think that's where it gets in trouble. But if I were starting out, I would kind of try to flip the economies of scale thing around and say, what are what are these new platforms that are being invented that I can use that, you know, current market leaders? Yeah, they're having a meeting next Friday to talk about the role of AI in like, in clip art or something like that. Meanwhile, you're sitting there going, Wait a minute, like I could generate clipart, using an AI bot, like today. That's, that's amazing. And I don't even need to have a bunch of meetings. So yes, it works both ways. And I agree that you're not going to get rid of the platform's, but building on them can be smart. That's such

Michele Hansen 9:38
a good point. And and a good inspiring point. And I you know, I think for us, right? We compete with Google. But we also wouldn't be where we are without Google, right? Because we could tell everybody that we are competing with Google on Google. And I think that really shows the difference between Facebook and Google, quite frankly. I Uh, yeah. Which, you know, I mean, a conversation about regulating them is a whole different conversation, and probably one for us to have over beers when I'm in Texas, not I think I think people would tune out as I talked about the but it's fast about Brandeis his perspective on competition, and you know, right. Um, but yeah, like, you can use the fact that there are these big competitors, you can use their platforms, right. We also compete with AWS, we also got $5,000, in free AWS usage when we started out, right. And actually, they entered the market after us, you know, so dust off my shoulders a little bit. But you, you can use those platforms to build something. I think the difference there is really that. I mean, social media is just such a weird anomaly. And in so many ways, and that's also something that you, you know, if you can't like go out and really build a unique new utility, I mean, I guess Elon Musk is trying and I guess Google tried, right. And actually, they they basically failed, right? Like as Google Fiber was, like running in Kansas or something for a while. And then

Matt Wensing 11:14
I think it's barely made it to my neighborhood in Austin, Texas. So it is okay. It is. Yeah, it is. It is okay. But it's not setting the world on fire.

Michele Hansen 11:25
I mean, that shows you how hard it is right? And how defensible that kind of a size effect is that not even Google can enter into this, what 100 130 year old market?

Matt Wensing 11:41
Something about atoms that are very difficult to move around and mountains of All right, thanks, right. It's yeah, I mean, it's durable.

Michele Hansen 11:48
But if but hey, right, we can, we can all use the internet cable that's already been laid to do things. That's right, we can use Drupal to do things we can, you know, we can use all of these platforms. So I think to close, and we're nowhere close to being done yet. Because there's two more things I will talk about our fate fake sources of mode, or things that appear to be sources of mode that actually aren't. And the two examples of UK sites, and I'm wondering if we can come up with more. The first one is brand. And the second one is actually team and the idea of betting on the jockey not on the horse. And I think there's a really interesting because brands, for example, so one of my favorite parts of this book is that it has a chart in it of moats by industry. And you see that, you know, you know, utilities, of course are at the way top software is very respectively, you know, in the top quarter. So hats off to us. But then you think like most of the if I asked you to name five brands off the top of your head, I bet most of them would be consumer brands, and things like consumer staples, right? Toilet paper, bandaid Kleenex, right, like all of these things. They're actually poor sources of moat because somebody else can just make something. And those brands are so easily destroyed. And consumers can be so fickle when it comes to a brand as well. It's also very easy to switch tissue brands in a way that it is not to say switch internet providers. And then also the one on teams were at a no actually kind of made me think of people who follow Justin Jackson probably know his example of, you know, the wave you pick is more important than I think I'm butchering this, Justin, but it's like the wave you pick is more important than your surfboard, right? Like the industry you're in is more important than the JavaScript framework you pick. You know, that is going to shape the returns of a business. Yep, the industry you're in and those underlying factors like if you can successfully build a business in an industry that has potential for moat. But studies show that the impact of a CEO when controlled for the industry, that actually doesn't make a difference, right, like you can put a mediocre CEO in charge of utility. And they will get better returns than a superstar CEO running a consumer staples brand that has limited potential for moat.

Matt Wensing 14:39
It's really good. Yeah, I think brand the origin of brand is interesting because it was very important and very powerful back in the day when advertisers could first start saying something like, you know, buy Fleischmanns you know, yeast because that's going to be that's the name you trust. And it really worked It actually started out as a consumer safety really, like, I need to know that I know who made this, I'm not just going to the general store and buying a jar with no label on it. Like, and I know that it's relative, it's the same that I bought in Kansas is the same and I'm gonna buy here in Oklahoma,

Michele Hansen 15:16
actually, I wonder if the word brand that you to that point. So my, my husband is a big whiskey fan. And he was reading this book on the history of whiskey and saying how, you know, going back to I think prohibition days in beforehand, in the Wild West, which was then you know, Kentucky, they, the distillers started putting the wax tops on top of their bottles with their brand, like a cattle brand on top of the bottle. So you knew that the distributor had not adulterated or mixed it in with something because it was a very big problem that the distilleries would great example send their, their liquor to the distributor, or the stores and then they would dilute it and add in other things add in turpentine, God note water. Tobacco spit, I think was a big one. Right. And so if you bought whiskey that had, you know that Maker's Mark, wax seal on it with the brand on top, you knew exactly what you were buying?

Matt Wensing 16:21
Yeah. Yeah. And I think this goes back to even, you know, kings and queens sending, you know, letters to each other with their branded seal on that wax letter. And it's it right, it's a guarantee, it's a guarantee of quality. Yeah, based on how much you trust, that leader, that company that whomever and so brand started out super powerful. For that reason, I think brand has become so much flimsier. Now, in a way, there's some brand allegiance. But ultimately, if you talk to a company like Unilever, or Anheuser Busch, and I've talked to these companies, brands really means relationship with the vendors and distributors, it means shelf space, it means distribution, it means we can ship 50 tons of beer to this location this week. And we have all of the best spots in the Walmart, you know, aisle for us. So I don't care if the local brewer does whatever, he doesn't have distribution, he doesn't have the relationships, he's not going to get shelf space. And so the biggest threat to brand is things like Dollar Shave Club and online, because now you're saying we have distribution. It's just going to be online. And we'll send it to you if the consumer can suffer through that. But then we talked about Amazon supply chain brand has become more difficult to defend over time, because we don't worry as much we have things like oh, the FDA, these certain guidelines, consumer protections, that's protecting us from drinking something with what tobacco in it. Right. So we don't have to worry about that on one hand. And on the other hand, we have the internet to create distribution. And so I agree brand is easily it's easily spun up. And it doesn't mean doesn't carry the weight that it used to i I can agree with that. I think it's a tremendously powerful door opener, I think it you know, if you want to start a conversation with somebody, we're all most of us are guilty of this still. People are introducing themselves, Oh, where do you work? Well, I do this, this, this and I before that I was at Google as a whatever, whatever. Like instantly you say that one word. And people attribute. Like, whatever that word means to them, they instantly attribute it to you. Right? So

Michele Hansen 18:34
yeah. Oh, yeah. I'm not saying it's not powerful. Barry, it is not, it's not are not as defensive. Is it defensive? Are those brands easily tarnished? Right? Because it could be someone? Oh, I worked at Google. And their reaction could be, wow, you must be one of the minds of your generation or sees you must be really unethical. What did you work on? Like, selling advertising to children? Like, right, you know, like, so it can certainly go both ways. I agree. It's a very powerful, it's still worth something I think, you know, sort of, you know, the, in many ways, and I think this is something you've kind of alluded to of the you the outrages of the day, right? That could very easily be your brand, like, what is it? What did they say? Your goal every day is to not be the main character of Twitter. Right? Yeah, that shows how easily a brand can be destroyed, like, you know, I think of there so when I was when I was starting out, I worked at an agency and one of the competitors and in our area was actually a huge agency had tons of big brands as their clients. They were pretty much the premier marketing advertising agency in our area. And then I remember that one day one of their staff members, I guess was going on a business trip to Detroit to meet with their customer who was headquartered in Detroit who was an auto brand. And they tweeted from the brand accounts, something to the effect of geez, people in Detroit can't effing drive. Oh, my God. Now, they should not have tweeted this from their personal account, they definitely should not have tweeted it from the brand account. And that basically killed that company they had, I want to say they had over 100 employees like they were the premier agency to be at. And it killed their business. Almost overnight, I think they shut down within six months of that.

Matt Wensing 20:44
That's devastating. Yeah. And so it's easily lost. It's easy for

Michele Hansen 20:49
us in a way that cables underground or tightly integrated API integrations, or every student learning Photoshop or figma. Now, right, like that

Matt Wensing 21:02
ability to search the entire planet's internet. Right?

Michele Hansen 21:05
Right, those things are not lost quite as easily. And then the other one is team and how and I think this is, I think it's kind of an interesting critique from an investor of investors that investors tend to focus on the jockey, you know, to what you said, Oh, this guy coming in, guy really? went to Harvard. Great. Oh, and he knows, you know, he's my old roommate, son. He's really, really smart. Let's give him $300 million for what he wants to build. Right? That's brand there that's betting on the jockey. And yes, it can be an advantage to a certain extent, as you know, as we were saying earlier, right? If that jockey has 20 years of experience in the industry of insights and contacts and understanding of the of the problems in that industry, that can be an advantage. Yeah. But then if you build your company around that, and all the knowledge in that one person's head, and then they get hit by a bus that is actually not defensible. But it's still important.

Matt Wensing 22:05
Yeah, I think team is likely misunderstood. Most of the time, meaning, you've attributed this brand name to this person who got into that college, because reason that isn't helpful to the business or, right, you're this person's super strong at leading, but actually, that means that they've created a cult of personality. And it's actually a weakness in the organization that you've never seen before. And so I think people are just, I think, there's different investor approaches this one is I'm going to Sequoia their approach to investing is we want to invest in a market and an opportunity that's so big, that even a poor team in a poorly executing team is going to succeed, like you can't help but succeed, because it's going so well. And then, of course, you have people congratulate themselves. When it does, you're like, was it you? On the other hand, at the early stages, you do have people who say, I really believe that I know this person, and that they have the qualities and traits that I'm looking for in a founder or in a leader and I'm going to invest in them. I think those are both pretty strong strategies. I think the team, one that you mentioned, is more of a miss attribution of one of those, which is I'm like ascribing things to this team that are pretty thin, and may not stand the test of time.

Michele Hansen 23:34
I think that's good nuance there.

Matt Wensing 23:37
Yeah. Because I mean, I truly believe that teams make a huge difference. I think we would all agree on that. It's just what do we mean when we say team to unpack it, as they say?

Michele Hansen 23:48
Yeah. So pulling this around? You know, I think it's I think one point I would like to underscore is that while I think every indie founder should understand these concepts, they should read the little book that builds wealth, they should read statuary, and or Farnam street or your battering the O'Shaughnessy podcast, it's good to know about these things, but also that it's okay. That you don't have them. Right and not to let it intimidate you like, and I speak from personal experience here that, you know, God, like we are in a perfectly competitive market from an economic perspective, like best case scenario, our end product, which is the latitude and longitude coordinates for a location are exactly the same as our competitors. Right. That is a perfectly competitive market. And yes, we have very, very wrong. Exactly. We have very, we I think we have very good packaging around it, right. We make it easier to get that information in various ways. We have features that our competitors don't, but, you know, like, like people sometimes ask me whether we've considered getting funding or whatnot. and I quite frankly feel like it would almost be irresponsible for me to go out and an ask an investor to invest in a perfectly competitive market where I am fully aware that we do not have that potential for competitive advantage that would make this 100 million billion dollar opportunity. That doesn't mean it's not a good business, right to what we said earlier. That doesn't mean that those brands that aren't as defensible as say, telegraph tables, cables, like this doesn't mean they're not good brands, or that they're not good businesses, right? I have a great business, and I'm very happy with it. Yeah. But I am also not deluding myself about the dynamics of the industry. And that also means that when I am listening to customers, and you hear those two people say something that's really interesting, and really not being served by anyone else, you dig for that? Because that's where the sources of competitive advantage are. Yeah. And in a way, that's, you know, that's an intangible asset that you are creating for yourself, that does not depend on industry dynamics that you can create for yourself, even in a perfectly competitive market.

Matt Wensing 26:13
Yeah, that's really good. I, I think it's just taking $10 million in funding and turning it into 15 over the course of 10 years, would be amazing. For some people. But for most investors, yeah, you're not you don't have a machine where you put 10 in and get 200 out or something. It's not that, but is it profitable? Is it growing? Is it defensible? Give me all those things, for all the reasons talked about the beginning. But not every business is is the first time and frankly, even in the utility businesses, what happens? They're profitable, they're making profit, but a lot of that upside also gets regulated out, or they reached maturity, or they don't have

Michele Hansen 26:51
That's right. They can only Yeah, 10 or 15 profits, right?

Matt Wensing 26:55
Or they're exactly so their stock price ends up maxing out for completely different reasons. It's like, Congratulations, you won the game of Monopoly. But now you that's the end of the road start something else. But which are both great businesses, they're durable and defensible. But yeah, I agree talking to, I love that we sort of end up back at the fact of talking to people is the origin of some kind of competitive advantage, or figuring

Michele Hansen 27:23
out where they are at least, right. Like, even if you have, even if you have an app that Matt sitting there things that he could code up in a weekend or the Microsoft or whatever could you know, code up in a weekend, right? Even if you have that kind of a business where people are copying it, there are going to be sources of competitive advantage. They may not be sources of a moat, that would make Sequoia park up and give you $200 million, or whatever. But they might be enough to build you a nice tidy little 510 20 million AR business. And quite frankly, I think most people would be happy with 100,000 Mr. Or ARR business, right? Like so even if you're building something in a perfectly competitive market, like me, right? You can still find those sources of advantage that give you a profitable business that can and then over time, as you have that profitability as you keep going, you can build those other sources of competitive advantage that are very hard for people to replicate overnight, and are more if not defensible. It'll at least take them a really long time to swim across your moat.

Matt Wensing 28:44
That's right. Exactly. A wide moat is also very good.

Michele Hansen 28:48
Yeah, there's a whole conversation on why versus narrow moats but even if you've got you know a little like wetland that gets damp once in a while, that's better than someone being able to you know, walk up to your your castle or realistically your tent and take a sledgehammer to Yeah,

Matt Wensing 29:05
that's right. Hey, I completely agree. Very good. Very good. Well, thanks for the Yeah, Thanks for the chat. Super fun.

Michele Hansen 29:12
This has been a delight, Matt, thank you so much for coming on and nerding out about moats with me. And I'm sure I and everybody else, we'll see you around on Twitter with your insights, your fortune cookies, as Peter calls them and your your gentle form of trolling, where we know that we know you're trolling because you mean well and you and you want us to be better. It's not from a mean place.

Matt Wensing 29:45
I appreciate that. Really, I do really mean that I tried to not be bland and generic. We all have our brand. So thank you so much. Really great to be here. All right. All right. Take care Michelle. Bye.

Michele Hansen 30:00
And that wraps up my conversation with Matt one saying, I hope you enjoyed it as much as I did and got something out of it, too as well. We'll definitely link to the books and some of the resources we mentioned. But quite frankly, I think everyone would benefit from reading the little book that builds wealth, even though it's written for investors. It'll really give you some ideas and things to think about for your business and especially as you build understanding of your customers and your market on an ongoing basis, help you identify those problems that you hear about that could lead to competitive advantages and moats in the long term.

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Thank you so much everyone for supporting us and keeping us on the air. And thank you to Matt wensing for joining me for this conversation. Colleen and I will be back next week.