Author: Not Boring

Translator: Deep Tide TechFlow

Deep Tide Introduction: This article dissects the only moat that startups can use to confront giants head-on, which is positional competition. It doesn’t make you do better, but it prevents opponents from copying you. This is the most practical strategic weapon for any entrepreneur seeking survival space under the giants' shadow.

Hello everyone👋,

Happy Thursday! This week we launched the new version of notboring.com, and this is the second article of the week. It’s now the season of closing sprint.

This is a continuation of the series "Strategy is Important, Moats are Key." It is still popular to say that startups don’t need these; they just need to iterate products faster and do better. Expecting such young companies to have network effects or economies of scale is simply too harsh.

But startups cannot afford to relax strategically just because they are young. Fortunately, there is a kind of moat that can help them buy time. This article is a tribute to that.

Let’s get started.

There are 7 powers, but if I had to choose my favorite, I would choose positional competition.

Lindy CEO Flo Crivello defines positional competition in the entry book "Mind the Moat" interpreting Hamilton Helmer's "7 Powers" as: "Build your business model so that incumbents cannot effectively compete due to conflicts of interest."

This definition embodies the reason I like it so much: before startups grow to a point where they can acquire the other 6 powers, this is the moat they use to attack incumbents. Incumbents have larger businesses and more resources, and startups leverage those advantages to attack them. The incumbents’ business is doing so well that they can’t afford to move rashly.

When I first wrote about Ramp in December 2020, I likened positional competition to the five-point palm exploding heart technique in "Kill Bill." When a startup strikes an incumbent with positional competition, the other party may not even realize they are dead yet; but taking a step towards the startup will cause them to collapse.

If the incumbent's corporate credit card encourages customers to spend more through points, then Ramp's business model is to help customers spend less. The incumbents cannot keep up for many reasons, including their software capabilities being far inferior to Ramp's, but the main reason is: if customers spend less, they earn less, and shareholders won’t agree. Other startups like Divvy and Brex play the same game as incumbents, stimulating consumption through rewards and points. Their outcomes have been decent: Bill.com acquired Divvy for $2.5 billion, and Capital One acquired Brex for $5.15 billion. Today, Ramp is valued at $44 billion and is launching a series of products to help customers save money and time, including model routers.

If you want to challenge the king, it’s better not to play their own game with better technology.

The reason I thought of positional competition today is because Zach Dell, CEO of Base Power Company, shared insights about it during a conversation with the host on David Senra’s podcast at the 16:18 mark when discussing how he and Justin determined their business model.

"If you want to challenge an incumbent," he said, "my point is that the best way is to have a business model based on positional competition."

If I come in saying, "I have the best home battery on the market, and I sell it 10% cheaper than the big companies," your margin is my opportunity, right? Those big companies will enter a price war. They would initially copy my product, then lower the price, and finally push me out of the market. But if I come in saying, "I don’t sell batteries; I sell electricity," we will install the battery in your home, and because of our different business model, you only need to pay one-twentieth or even one-fortieth of the price to fully own it, then I can win. If you are one of the incumbents wanting to compete with me, you would have to completely change your business model, and you know how hard that is for a publicly traded company, right?

Base cannot rely on positional competition forever. The moat it uses to protect its profit margins will come from other powers: economies of scale, exclusive resources, switching costs, brand, and possibly even network effects and process capabilities. But as Zach pointed out, there is no better way to start a challenge against incumbents than through positional competition.

This theme has been reiterated by Ben and David on the Acquired podcast: "As Hamilton Helmer says, positional competition is often the power in the takeoff phase." Helmer himself has appeared on the show to explain why: "It’s the only incomplete source of power. If you want real durability, you need another source of power."

Positional competition is there to help you have a good time, not to accompany you for a lifetime. That’s what makes it interesting. It is the power of the trickster god. Positional competition helps you earn time against incumbents (those positioned in such a way that it allows you to attack), but it doesn’t necessarily protect you from attacks by other startups. You need other moats to achieve that.

Ironically, Helmer uses Dell to illustrate this point. Dell positioned itself against Compaq because Compaq's distribution channel made direct sales painful. But eventually, everyone could adopt a direct sales model, and Dell’s positional competition strength disappeared. By then, Dell had leveraged that window to build economies of scale around its direct sales and just-in-time model.

The Acquired classic case library is full of such examples.

When Google launched Android, it could offer it for free because its parent company made money from search. It could fully subsidize all losses, but in reality, it didn’t need to do so because the more mobile searches on Google, the more revenue it generated. Meanwhile, Nokia had to make money from the mobile system itself; offering it for free would kill its business.

This is a good way to think about positional competition: does challenger A do X because its revenue generation method is completely different from incumbent B?

It’s worth noting that if you have Google’s printing press behind you, it’s indeed easier, but thinking about how to disrupt the revenue generation methods of your incumbents is always worthwhile.

Amazon was born on the Internet, built around a direct-to-consumer fulfillment system. Barnes & Noble optimized around physical stores. For Barnes & Noble, fully committing to Amazon's model means reconfiguring capital, top executive attention, and distribution infrastructure, while also enduring a short-term profit decline at existing stores. The Amazon model "has lower profits for them… compared to those profitable stores," Ben said. “Amazon has positioned itself against all cost structures designed for brick-and-mortar retailers,” David added.

This is another angle to think about positional competition: the more an incumbent has invested in its infrastructure, the harder it is to adapt.

Startups with less funding than Google can certainly adopt this strategy. My favorite example is Somos Internet. As I explained in Cable Caballero, we designed an entirely new network architecture and built our own hardware to run it. Existing telecom companies cannot respond because doing so would require overturning the billions of capital expenditures they’ve spent on purchasing and upgrading third-party hardware under old network configurations. Their dilemma is apparent. Coupled with relying on suppliers, most companies simply do not have the technical capabilities or flexibility to re-architect the entire system. Worse, they have incurred massive debt to finance network construction and cannot lower prices to compete with Somos, let alone fund uncertain new network builds.

The two points above also have another side. Anyone who has seen a movie where the villain kidnaps the protagonist's family to threaten him is familiar with this: having nothing to protect is a kind of freedom.

When Microsoft challenged the company that said "no one would be fired for buying IBM," it explained that "Microsoft basically had no baggage." IBM sold integrated computer systems (software, hardware, everything) through the industry’s strongest enterprise sales team. To urgently launch PCs, the blue giant broke its usual model, using off-the-shelf components, Intel processors, and even adopted an operating system supplied by Microsoft. But Microsoft did not grant IBM an exclusive license; it licensed DOS non-exclusively and was motivated to make PCs as affordable and widespread as possible to get the software on as many desktops as it could. As Ben and David might put it, they could say: "We don’t need to make money on hardware. We don’t even need to make hardware."

Microsoft didn’t win because its software was better than IBM’s. IBM ultimately produced good software as well. But IBM needed software to sell high-margin machines, while Microsoft benefited when hardware commoditized. Once hardware was commoditized, all hardware providers had to be compatible with the software layer. Or as Ben put it, Microsoft "only needs to send bits to freely become the integrated core of the entire ecosystem."

This is a fierce form of counter-positioning: the reason the entrant can counter-position is not only that it is willing to eat into the profit pool, but also because it actively benefits from destroying the incumbents’ profit pool.

Then there’s Facebook. When it launched in 2004, it was up against MySpace with its million users. MySpace is a joke now, but at the time, it was soaring. It launched in 2003, reached a million users by February 2004, surpassed Friendster the next month, and grew fivefold to five million users by November.

Facebook's counter-positioning was to declare that cramming a large number of users into a network from the start wasn’t a good idea; a better approach was to start small, using Harvard gentlemen and ladies to seed a network, then slowly expand within that circle.

If you’re MySpace, growth is a good thing, and these nerds are making something small for their nerd friends; what would you do? Stop growing?

But it turns out starting small is better, seeding the network with Harvard gents and ladies, and then slowly expanding within that circle. Of course, it wasn’t always like this, just in the early days. Facebook built a passionate network during its counter-positioning phase, where people chatted with new college friends, poked each other, and the product was so attractive to outsiders (young or old) that when they finally opened the floodgates, a torrent of users came pouring in, and they entered the network effect phase.

People still haven’t learned the lesson.

Earlier this week, a16z partner Josh Elman tweeted, "New moats are just like old moats. Every few years, we fall in love with flashy new technologies, forgetting the fundamental physical laws of consumer software." I’d like to expand on that: what we forget are the fundamental physical laws of business strategy, but since we’re on Facebook, let’s focus on the consumer space.

Assistants are the hottest product right now, and Instinct is the most watched among them. The experience is great, better than previous assistant products.

But as Ben said: "Better is not counter-positioning." Strategy master Michael Porter wrote: "Operational efficiency means executing similar activities better than competitors. Competitive strategy is about being different."

Better is an advantage; power requires barriers. When incumbents see you are better but cannot replicate what makes you better without harming their existing business, counter-positioning exists.

(Just to clarify: you cannot choose a model that is so bad that pursuing it harms anyone, including yourself.)

Who would be harmed by releasing a useful assistant? Labs have done it in desktop applications, Grok Bot has done it, and other startups are doing it (and by definition, it cannot counter-position against startups), but Instinct is still better. Because it is better, at the end of August, it raised $350 million in a B round at a valuation of $2.5 billion, one theory being that they raise so much money to continue offering services for free, drowning competitors on the way to a new business model (like transaction fees).

But better is not a moat; good luck drowning Meta’s printing machine.

Meta (formerly Facebook) also released their assistant this week. It’s called Muse.

Some early reviews say it’s better than Instinct. I haven’t tried it; better isn’t the point.

The point is that Meta replicating Instinct's model and product isn’t just painful; it’s great! Meta knows you better than anyone else and can recommend things you didn’t even know you needed, solving the cold start problem. As Ben Thompson wrote, they can offer every user "a virtual machine with 8GB of memory and 8GB of storage," which is "a real computer that Meta is making available to everyone in the U.S. and eventually to the entire world. That’s pretty amazing!" They can directly integrate into WhatsApp (that giant but under-monetized messaging app), they can integrate FB Marketplace to help you buy what you want cheaply, they can put it into Meta Ray Bans to let you tell your face what to do, and they can train it in their massive data centers. They can offer it for free until the heat death of the universe (or until that over 10% chance from Anthropic where it kills us all comes true). They can summon network effects, economies of scale, brand, and any necessary moats because they counter-positioned early on and then dug all those moats.

Of course, Zuckerberg has previously tried to replicate or create new products, failed at times, or failed to eliminate targets. Threads didn’t cure my Twitter addiction. But Twitter has network effects. It has moats.

As Josh said, too many startups think new technologies are so incredible that they no longer need moats. They just need things like speed and taste, focus and flexibility, along with that indefinable something unique to startups.

Many startups utilizing this approach will also do well. Large moat companies are willing to spend big bucks to bring that indefinable something into their castle while preventing it from falling into competitors' hands.

I cannot point out Cursor's moat, but it’s an excellent product worth $60 billion to SpaceX. Nvidia acquired Hugging Face for $12.9303 billion; I happened to use it as an example in "When to Dig a Moat" to illustrate how an AI company can leverage the complexity uncertainty window to develop early network effects. Not long ago, I chatted with a founder who mentioned something like, "We don’t care about moats; we just want to make good products," so I gave up, and now that company is valued at about 50 times what it was then, so what do I know.

There are rumors that Meta (and others) even offered ten-figure bids for Instinct!

But after Instinct declined, Meta said, "Fine, I'll build it myself." Because for them, it just requires spending money, and they have plenty of that. Of course, now AI can write code, copying products without moats may be easier than ever, but that’s not the point; without a moat, any good company will be copied, even if a human has to do the work.

We are in a time where AI is too shiny and fresh, and giants are willing to spend big to buy better products than others, but expecting to be acquired is not a strategy, and "better" is not a moat.

I hope Instinct wins, just as I hope many startups can take down their industry Goliath. They are fighting. Just yesterday, they launched a trusted contacts network, allowing people’s assistants to talk to their partners', families', and friends' assistants.

This is an attempt to create network effects, and they are pushing hard. It’s admirable. The question is whether they have enough time to build real network effects before people start using Muse, and Muse will inevitably collaborate with each other.

Time is precisely why counter-positioning is such a powerful weapon for companies without barriers.

It makes it painful for those trying to copy your better product, even equaling suicide. You need to leverage this time to sprint frantically until you establish your long-term moat.

That’s it for today. Tomorrow we’ll be back in your inbox with a new issue of "Weekly Dose of Optimism."

Thank you for reading.