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Myers, One Year discussed on Software Engineering Daily

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Myers welcome to software engineering daily thank you sits really exciting to be here yes and we're going to talk about the concept of competitive software businesses we're GONNA talk about investing in software businesses because you work at red point which is an investment company there's a term in investing called a moat and a moat is defensible advantage that accompany can have can you explain what a moat is and how a software company can build a moat so an economic moat is businesses ability to maintain its competitive advantage over its competitors new it's really based off of the idea of of Medieval fortress right so you're fortress that is the the business keeps the competitors out so raising barriers that make it harder for them to overtake you and it's mostly considered it defensive measure for the company and so one thing that's interesting here is you only have the ability to create competitive modes when you're in a competitive environment is to some degree these modes exist you can generate profits and when you're in a perfectly competitive market you can't generate profits and so you can't have a competitive moat one thing that I like to think about is kind of the fortress versus the moat so if the fortresses the company in the motives of the fence you know you really should be thinking about both of them one year creating the company you know the former the company should generate the ladder the economic moat and so it's important to set out at the beginning thinking about both junction not one or the other and how does this play out in software companies are we talking here about actual technology or is a moat a sales process or a marketing strategy or a hiring procedure yes so much actually come in a lot of different forms we traditionally think of about them more on the pick sides early stage investors note can be innovation like a differentiated technology that competitors can't really replicate another way to think about it in terms of product is low cost of production so now with clouds services it's easier than ever to get a company off the rounded founders no longer have to buy wreck servers or by storage raise an creeds competitive advantage compared to incumbent that may still have to be running a data center I can also use offshore teams as lower cost per head as another example of low in production costs which is a moat you know it's become really well known over the past few ears there are such things as data moats and one thing about a data mode is ability to not only collect data from your user base but also provide insights from it that other businesses that don't have that data can do an example of that in the software industry is some of these are companies like you pat and fortress I q have amassed massive data sets around the use of their technologies and this data moat better positions on going forward over RPA companies another network effects that we sometimes see an enterprise software where users get more value as there are more people using the software it's not only because of word of mouth is a very influential power but once everyone is using your product people don't want to abandon it really Z. High switching costs so this is the idea that once a team uses a solution people don't want to leave it you can use the ada here to create mods like superior workflow or institutional knowledge not a really great example of this we think about all the time is actually Jira for bug tracking it's ubiquitous everyone knows it people use the workflow every day maybe not everyone likes it but they still use it anyway because there's a high switching awesome retraining the people on a new system you know exporting and importing data from the old into the new the lag time of switching systems you know you don't want delivers to be unproductive and so this costs creates a nursery that keeps users on the existing solution and slows the growth of new ones one way that businesses try to create switching costs in like deeper tech infrastructure companies is usually because it's really hard to install figure integrate managing run these solutions like even take mainframes right I know they're not software like you suggested but they're still around today because the switching costs are so high some businesses crystalize their product moat through certification programs like I worked at CISCO CISCO CPI was notorious for this right like giving people credit for learning the back once they do they don't really WANNA move off those products we as early stage investors think about economic modes at the beginning of the business more in terms of the technology gene product but that doesn't mean there aren't other ways people can build boats on the go to market side of the house right so their brand mode so communicating companies unique advantage why they really stand out one of the best ways to build a brand moat is actually creating a brand owned term we recently invested in a company called op Sanni the credit their own brand new term for continuous cloud optimization Sio for short hubs spot they created inbound marketing drift coin personal marketing so kind of affiliating with the term that you create can be really powerful also on the go to market side of the House you have distribution modes so locking up sales channels like digital channels like owning the hacker news community owning read it exclusive good market partnerships can be really helpful for selling into Sei's that will only work with you some businesses have regulatory moats you know you have Ip trademark and licensees I don't focus my time on regulated industries to the same degree but you can have advantages there but what's really important about this is that most can be both wide or deep so a wide Komo relies on several factors twins product differentiation innovation and may be great branding while a deep moat is more difficult to overcome but his isolated to a.

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