No moat, no future: Why defensibility is now a startup’s greatest asset

In recent months, the conversation about moats has shifted from background noise to a central question in venture funding. Why? Because in a world where hundreds of AI startups are now wrapping the same foundation models, defensibility is suddenly just as important as growth.

Moats are no longer an afterthought for scaling companies. Investors now scrutinise a founder’s defensibility strategy from day one, often before product-market fit is even clear. For founders at Seed or Series A, this can be unsettling - but it’s also an opportunity. The companies that define their defensibility strategy early are the ones that have the best shot at building lasting, valuable businesses.

And yet, much of what’s written about moats misses the point. Moats aren't something you design into your business like a feature. Neither are they just a collection of competitive strengths conjured up for the investor pitch. They are the by-product of the capabilities you deliberately build from day one.

Today we unpack how early stage founders should think about moats - not as a theoretical framework, but as a set of actions you can take to make your business difficult to compete with.

Why moats are back at the top of the agenda

If you’re building on GPT-4, so are your competitors. If your application depends on open-source LLMs, so does theirs. This is the uncomfortable truth: the vast majority of AI startups are not defensible.

As VC investor Kyle Harrison puts it, “The conversation has shifted from ‘GPT wrappers have no moat’ to ‘foundation models have no moat’”. If Sam Altman himself says that spending billions to build a foundation model isn’t the defensibility people once thought, where does that leave your app?

It leaves you with one choice: focus on what is defensible. Moats are no longer optional. Investors are demanding that founders show how they will survive the commoditization of technology. As Rick Zullo of Equal Ventures writes, “moats represent the only way to create sustainable, long-lasting value as a company”.

The message from investors is clear: early-stage startups need a strategy to build a moat. This is now a core part of due diligence at Seed and Series A, irrespective of whether you're building an AI app or a quantum computer. If you’re not thinking about it, you’re already behind.

What is a moat?

Before we talk about how to build one, let’s be clear on what a moat is. A moat describes your company’s competitive defensibility. It’s what keeps others from taking your customers and destroying your margins. Without a moat, you’re a feature. With a moat, you’re a business.

In his excellent blog on the subject, investor Elad Gil offers a helpful overview of traditional moats founders can aim for:

• Network effects (think: Instagram, where more users make the platform better for everyone)
• Platform effects (Salesforce, with its AppExchange, is the classic example)
• Data moats (owning proprietary data, like Bloomberg or Epic in healthcare)
• Scale economies (AWS, which offers better prices the larger it gets)
• High switching costs (Oracle’s enterprise software is notorious here)
• Regulatory moats (banks or healthcare companies operating in highly regulated markets)

Each of these moats, if built well, makes your business stronger over time. They also make you harder to compete with.

But with the pervasiveness of AI, the game is changing. Jerry Chen at Greylock has argued that we are entering the era of the “System of Intelligence”. He believes AI-powered applications that combine data across platforms to deliver smarter outcomes are the next defensible businesses. In other words, moats are moving up the stack. It's no longer enough to be a System of Record (owning the data) or a System of Engagement (owning the user interaction). You need to be the layer that makes sense of all the data and powers better decisions.

A good example of an AI-driven System of Intelligence is Datadog. It integrates data across multiple systems in an enterprise’s infrastructure, applying machine learning to provide predictive alerts, identify security vulnerabilities, and automate workflows. Another example is Salesforce’s Einstein AI, which analyses customer data from across Salesforce’s suite to deliver intelligent sales recommendations and predictive customer insights. These AI layers are becoming the “brains” of enterprise systems - cross-platform, data-rich, and harder for competitors to unseat.

Moats don’t exist on day one. But the plan to build them should.

Whatever your sector, here’s the key insight most founders miss: moats are built, not born. At the earliest stages, your company is defenceless. Elad Gil says it plainly - most early-stage startups are “easy to copy”.

But that’s OK. Investors aren’t asking whether you have a moat at Seed; they’re asking whether you have a strategy to build one over time. Rick Zullo calls this your “moat trajectory”. He and Equal Ventures are ruthlessly focused on evaluating whether founders have a credible plan to build a moat as they scale.

What forms the foundation of a moat? Your capabilities. As Zullo puts it: “Ultimately these are the engines of your competitive advantage, determining the persistence and scope of your moat. While these may never appear on a balance sheet, they are the single most valuable asset of a company. Identifying how to build that intangible asset is core to a company’s business model and requires deliberate planning to unlock.”

This means your capabilities - the things you get better at the more you do them - are your competitive edge. They are the precursors to a defensible moat.

What capabilities should you build?

Moats don’t appear overnight. They are the outcome of building these distinct business capabilities - intangible assets that let you operate more effectively and earn superior returns over time.

Zullo expands on Hamilton Helmer’s 7 Powers and Bruce Greenwald’s classic strategy thinking to create a simple, practical framework for founders. He groups capabilities into three categories. Understanding these will help you decide where to focus your efforts - and where your moat is likely to emerge.

1. Scale capabilities
Scale gives you leverage. As you grow, everything gets cheaper, more efficient, and harder for competitors to replicate.

• Demand-side scale: As you grow, acquiring customers becomes cheaper and easier. Uber exemplified this strategy by focusing on one city at a time to achieve network density before expanding.
• Supply-side scale: Spreading your fixed costs across a growing customer base lowers your cost structure. AWS offers cloud services at massive scale, driving down costs and making it hard for others to compete.
• Risk aggregation: By distributing risk across a wide range of customers or assets, you stabilise your business. This is a core strength in insurance companies like AIG, where scale reduces volatility.

2. Network effects capabilities
Network effects drive compounding value. The more users, data, or partners you have, the stronger the pull for future customers.

• User network effects: Each additional user makes the product more valuable for others. Slack and WhatsApp are classic examples - more users mean more conversations and interactions, boosting utility.
• Data network effects: The more data your system captures, the better it performs. Google Search becomes more accurate and relevant as more users contribute searches and clicks. Salesforce CRM gains insight and predictive power as it aggregates customer data.
• Platform network effects: Developers build on your platform, extending its functionality and increasing its value. Shopify’s app marketplace attracts third-party developers who create tools that make Shopify more powerful for merchants.
• Local density network effects: In geographically concentrated markets, density creates its own defensibility. Uber built early dominance by focusing on local network density in major cities - each new rider and driver improved the experience for others in that same market.

3. Organisational and structural capabilities
These are internal advantages and external barriers that protect your position and make it harder for competitors to displace you.

• Brand: A strong brand drives customer loyalty and increases willingness to pay. Tesla has built a brand that commands premium prices and passionate customer evangelism.
• Regulatory barriers: Patents, licences, and other legal protections prevent competition from entering your space. This is a powerful advantage in industries like pharmaceuticals or utilities, where regulatory approval can take years.
• System of record: Your product becomes the core system businesses rely on to run their operations. Salesforce CRM, for example, is deeply embedded in its customers’ workflows as the single source of truth for customer data - making it hard to replace.

The new capability of the AI age: Speed of innovation

In rapidly evolving tech spaces, a new structural capability comes to the fore: speed of innovation. Digging the deepest moat means prioritising "product velocity".

We’re seeing this play out in real time. AI is moving at a pace that puts even the stickiest applications at risk. A startup that relies solely on being a system of record or holding customer data can find itself displaced by a new entrant that offers radically better capabilities - faster, smarter, and with less friction.

Pace of innovation is becoming the fundamental determinant of competitiveness, even for the largest companies. Salesforce didn’t become entrenched just by locking in customer data - it has continued to evolve its platform, integrating AI (Einstein), expanding its ecosystem, and moving upmarket. Microsoft reinvented itself multiple times, and today it’s leading the AI arms race with OpenAI partnerships and Copilot across its product suite. These companies exemplify how product velocity strengthens all other moats over time.

The fastest teams, the ones who stay closest to customers and who ship relentlessly - they’re the ones who end up with the deepest moats.

Build your 'capability statement'

These capabilities don’t appear on your balance sheet, but they are what make your company more competitive over time. As they strengthen, they become the foundations of durable, defensible moats.

Zullo provides a construct that helps early stage founders capture and focus on their core capabilities:

• “If you are a business that yields customer advantages because of localised economies of scale, make sure you dominate every market you are in, don’t dilute yourself across too many. Getting density is ALL THAT MATTERS.”
• “If you are a business that yields resource advantages because of platform dynamics, make sure you make your platform the most accommodating to third-party developers. Being the ‘go to’ platform is ALL THAT MATTERS.”
• “If you are a business that yields customer advantages because you are the system of record, make sure you lock customer data in wherever possible. Owning as much customer data as possible is ALL THAT MATTERS.”

And here are 2 more we have created recently with DeepTech founders:

• “If you are a business that yields competitive advantage through proprietary data collected from sensors, hardware, or simulations, make sure you are continuously capturing and refining unique datasets that no one else can replicate. The exclusivity and scale of your data is ALL THAT MATTERS.”
• “If you are a business that yields competitive advantage through regulatory approvals and certifications, make sure you secure and leverage these barriers to entry as early and broadly as possible. Becoming the certified standard is ALL THAT MATTERS.”

What this means for you

If you’re an early-stage founder, here’s the hard truth: you don’t (yet) have a moat. And that’s fine. What matters is whether you have a credible, deliberate plan to build one.
Ask yourself:

1. What capability will we be world-class at in five years?
2. How does that capability compound to create defensibility?
3. Are we aligning our product, go-to-market, and culture around building it?

Moats aren’t theoretical. They are the result of focused execution. Investors are looking for companies with a defensibility strategy today, not someday.

If you’re not building those capabilities now, you’re leaving your future to chance. And chance isn’t a strategy.

Let's talk.