There is no moat

We’re all in the commodities business now, act accordingly.

Yes, there are *mostly* no moats left in the B2B SaaS industry. I say mostly, because I do believe some moats still exist and will continue to exist in software, but more on that point separately.

Here is the harsh truth: most SaaS products these days have no structural moats as the cost & time to write and operate software trends towards zero. And this is why everyone is panicking, and a lot of the writing about this problem I see online is an overdose of copium: “speed is the moat”, “fundraising is the moat”, “taste is the moat” are just some examples, which show both a poor understanding of what a moat is, and how lost everyone feels.

Let’s define what a moat is to get this out of the way. A moat is “a durable structural advantage that protects a company’s market position, long-term profits, and pricing power from rivals”. You can clearly see why none of the examples above are durable nor are they high barriers for your competitors.

But listen, do HVAC companies have moats? Does a car dealership have a moat? Do real estate agents have moats? Many of the small and medium businesses minting millionaires every year don’t have moats. But you know what these business have that SaaS typically doesn’t? Free cash flow. I would argue the same can be true for many successful software businesses too, so why is everyone in software panicking?

Well a couple reasons:

1. Software enjoyed special treatment when it comes to valuation multiples even when losing money, but maybe that special treatment will no longer apply. The growth rates and market concentration enjoyed by certain winners won’t be available to many going forward and that changes the picture significantly. Which leads me to my second point:
2. Venture-like outcomes are going to be more difficult, especially if you raise a lot of capital, because of these lower growth rates and a much higher difficulty of the emergence of winner-takes-most markets. Increased competition naturally puts a lot of pressure on growth and will ultimately suppress prices and margins too.

So what do we do know?

If software becomes a commodity, we need to run our businesses like commodity businesses. What does this mean?

1. Operational efficiency, economies of scale, cost structure, margins, distribution and cash flow become the main levers for managing this type of business.
2. This means low cost of delivering the service, high automation, low headcount.
3. Competitive pricing, perhaps even lowering prices over time as opposed to increasing them.
4. Finally, even in commodities there is room for differentiation, great positioning, and great customer service.

Anyway, enough with my rambling. Next time i’ll tell you more about what I think are the remaining software moats, if you want to go after building one of those.