Moats

In today’s episode, we do deep dive on the importance of economic moats for early-stage startups, and why they matter.

Rajinder:

Hi and welcome to Matrix Moments. My name is Rajinder and welcoming Avnish as well to this podcast. Avnish, thank you for doing this again. Today's topic is on Moats. And I think this is a hotly debated topic in many of our conversations internally when companies come to share their journey and story with us. Let me start with the first question, which is what are moats and why do they matter?

Avnish:

You kind of conned me into this one because I remember asking you last time what's a good topic to talk about and moats sounds very interesting because we all talk about it. I don't think I have ever had to work this hard on a topic. I’ve probably put in 15-20 hours of research thanks to you and Salonie sharing all the material. And we should definitely reference all of it. And I think in the broader scheme of things— I think it's a third deep dive after Marginal Value Add and Marketplaces. And I think the same caveat applies. We don't know the right answers. We are trying to bring together as much of the wisdom that's out there and maybe adding some color of our own, but this is definitely not meant to be exhaustive. Before we talk about what are moats, why they matter, take a guess, how many of the original S&P 500 companies are still in the S&P 500? And before you answer, how many of the original Fortune 500 companies are still in the Fortune 500?

Rajinder:

50%?

Avnish:

Yeah. It's not that. It's actually 10%. So, it’s 60 in the former and 50 in the latter. So, 60 of the 440 are gone, S&P 500. 450 of the Fortune 500 are gone. And why did they go? Did they have incompetent management, product? No. Most likely they didn’t have strong moats around their business. And therein lies why it’s important. You know, the best investor in the world, everybody knows it's Warren Buffet. Charlie Munger, his partner, thinks very deeply about it. They have really popularized this concept. And to quote from Warren Buffet, he has said, “In business, I look for economic castles with unbeatable moats.” Now, we all know what a moat means in the context of a fort and a castle. It’s the stuff that surrounds it. But I think in business it means a sustainable competitive advantage. And if you have a sustainable competitive advantage, if you drag it up to infinity, you would exist in infinity. The fact that it doesn’t happen tells you that most companies don’t have. So, what are the strong walls that guard your business? What are the barriers to entry? And one lighter way— and I think this is Charlie Munger who said this— is that, you know, “If you're a fisherman going out to fish and there are fishermen all around, who has the edge? Who will catch more fish?”

Rajinder:

Honestly, no one.

Avnish:

And therein lies the point, which is that have you created a sustainable edge or are you just a fisherman throwing out the bait? If you hit, you’ll get lucky. So, I think essentially a sustainable competitive advantage and the reason it matters is because anybody who thought it didn’t matter no longer exists. And most of the companies don't exist beyond— Now, the average life of a company in S&P 500 is 14 years. That’s it. That is maybe 1/5th or 1/6th of our lifetimes hopefully. So, that is how much churn you will see, but I believe we will get into how some of that is changing, but I think that's why it’s matters.

Rajinder:

I think the analogy to the castle and the moat is clear. But to apply this to the world of business, what are the different types of moats one should be thinking about?

Avnish:

So, I don't think there is a consensus. The more I read, the more number of moats came up, which tells me that nobody is very clear. It used to be that you go back and look at Michael Porter's 5 forces. And by definition, therefore, there should be 5 moats. That’s not the case, the point is there is no convergence. We are going to try to give a little bit of what’s out there in our own view, but there isn’t any convergence. But I want to go a step higher and first talk about just look at the first principles of economics. Adam Smith spoke about scarce resources. Land, labor, capital. By definition, if a resource is scarce, maybe that’s the moat. Maybe if you had all the land and nobody else can build a factory, therein lies the moat. If you had all the labor, nobody else can get labor. Therein lies the moat. Now, what was China’s moat in manufacturing? It was cheap labor. What was India's moat or competitive advantage? Now, we’ll come back to sustain. Labor costs are up. But in IT outsourcing, that was the case. Earlier days of Rockefeller, maybe capital was a moat. Today’s day of 0% interest rate and Fed injecting money in everybody, capital is definitely not a moat. So, that’s a very high-level macro view. Then you go down to microeconomics. We all know price is the intersection of demand and supply. So, if I have to have a sustainable competitive advantage charging a certain price, I should have more demand and more supply or something like that. So, I think when you put this all together and put all the reading together, what I have identified— like I have given a caveat before, this may come across as a laundry list and we are to build on it as we move along.

One is definitely supply-side economies of scale. Think Walmart. Think chain stores. You know, the ability for the next unit that you get into your supply to be cheaper than the earlier unit fundamentally and therefore, you are creating a moat with the buyers. Over the last 20 years, maybe 15 years in the advent of marketplaces, demand side economies have scaled. You and I have had a discussion on marketplaces. So, classic network effects where each new buyer actually creates value for other buyers. There's also cross selling. I think Bajaj Finance in India has shown how you can create demand side moats because you can keep cross selling to the same customers. There’s clearly technology. Apple's closed ecosystem. What Google came up with— Google was not the first search engine. Yahoo was the first search engine. Google had better search technology. So, there’s technology and IP. Here's one I think about I don't hear much about. Switching costs. And there are so many 80 to 90 percent gross margin SaaS businesses that continue to grow. Why don’t new players come and crash those margins and why do these people have a continuous edge? Now, we can say maybe great product, maybe technology IP. I think there’s inertia. I think inertia is a moat. If you are delivering well to a customer, they’ll just stick to it. So, switching cost. Brand ultimate. So, Warren Buffet talks about customer loyalty, but brand we all know, if you are asked Coke versus Pepsi, hardly anyone will say either one. And the reality is, well, maybe they taste a little bit different, but the reality is it’s not that different. So, I think brand is a big one. To me, underlying brand— and we’ll come into the actionability of some of this— is what I call customer love. And I believe that’s a real input and we’ll come to what you can do. But you know, the daily input, which makes imperceptible changes and differences over a period of time, really compounds and that’s what really builds up that. Here’s one I read somewhere which I really resonate with and obviously resonates a lot for us at Matrix. Founders. What are the 3 companies that Elon Musk is associated with? Actually four maybe.

Rajinder:

Paypal in the old days and then there’s Tesla. There’s SpaceX.

Avnish:

I didn’t even have Paypal in that. So, Paypal, Tesla, SpaceX, Hyperloop. Boring Company, which is Hyperloop effectively. All whacked out world changing ideas. What is the common thread? It’s that founder. If you look at Amazon, we will talk about Amazon as a case study. Customer obsession. Where did it come from? If you look at Apple, design. Design obsession, where did it come from? So, there are examples. So, Jeff Bezos, Elon Musk, Steve Jobs. It is almost the founders who created a culture within that company that's very hard to replicate, but can be sustained. And in Apple's case, you have seen that it has been sustained even after Steve Jobs. It became so ingrained, but it really came from him. So, I think that's a very interesting one. And I think that is something that I know at Matrix we talk about in our foundersfirst! thinking, but it is something that really— And then there’s the boring one. Regulatory. Spectrum license fees, oil drilling license, telecom spectrum license, NBFC licenses. Least interesting because it's just license, but very valuable. My own view, it’s going away. You’ve seen space exploration licenses have been given away.

So, I think in the 21st century this may go away, but never underestimate the power of IP patent driven moat, which we spoke about earlier in technology and the regulatory moat, which is related to licensing and stuff. Here’s a point. One other thought is it is not necessarily the depth of the moat that matters. It’s the width. It becomes harder to cross. If somebody can go deep, they can crossover potentially. The wider it is— So, it’s the direction of where the moat is going that is more important than a point in time. And I think that’s very important for people to keep in mind. Finally and we’ll talk about this again as we go along, if you can spot it very easily, it probably doesn't exist. Conversely, if you can create it very easily, it probably doesn't exist. None of these examples that we have taken are overnight success stories. They’ve taken a very long time.

Rajinder:

Very helpful. And I think you laid it out very, very interestingly. I think at this point around, when you speak of depth, is it more the different moats that you laid out and saying how—

Avnish:

No. So, let’s take an example. Depth would be IP. Let’s say I have some unique IP in the point in time. I have depth, but I’m not getting new patents as I go along. I’m not widening that gap. Somebody will come with a new technology and it’s gone. So, I think the point is more directional and we’ll talk about data-driven moats. But are the moats increasing with time or is it a one-time moat? I could argue depending on the products you launch. I mean, we have invested in B2C consumer brands. What are they doing?

Rajinder:

Well, first and foremost, you know, directly engaging with consumers, digitally native in one way and then particularly—

Avnish:

Who are they disrupting?

Rajinder:

Well, they’re disrupting the traditional consumer goods companies who are largely offline

Avnish:

And who are supposedly the best brands in the world. If Dollar Shave Club needs to be bought for a billion plus by Gillette, Gillette’s brand was suffering and this brand was created. So, my point is the direction with the passage of time, all the companies that have dropped out of these valuable companies list is not because they didn't have a moat. It's because they didn't keep focusing on widening it and building on it.

Rajinder:

So, there was another point that was going on in my head, which was how some of these reinforced on top of each other so the brand and the customer love actually is at the one side

Avnish:

Absolutely. And I think we’ll come to that in the Amazon case study. You know, I was thinking through this and studying this. It almost with hindsight feels like a playbook that has been executed at Amazon. So, we’ll come to that and I would argue maybe even Reliance is doing that as we speak.

Rajinder:

So, I think you mentioned this point a little while earlier, which is how data-driven technology is the new oil and data-driven moats. Is that generally a good way for one to think about moats in the new/old way tech kind of is really driving innovation?

Avnish:

So, I think, first of all, this data is the new oil, the saying itself, one should explain because I think oil is a very valuable resource, but not in its crude form. It has to be refined and then used. It’s not even combustible model. So, I think data is the same. It can be garbage in/garbage out, but there’s a lot of talk about data. This is more just my view and some of the research. I think it’s just one of the moats. And the reason we talk about it a lot more because in the last 20 years, the digital world has taken off. I mean, we are lending in some of our companies off this data. So, it’s definitely an important moat. It depends on how you use it.

Here’s my hypothesis. I think it probably could be of 3 types. One would be just simple— so, I don’t think, by the way data is a separate moat and that’s the larger point. I think it fits within the framework of the existing. So, one would be economies of scale. Google has the most amount of data index. So, it will find the best way, but it’s not just that. Google has a lot of technology and IP that refines that data. Like that 1 button click ‘I’m feeling lucky’ and you go straight to that article. So, I think one is that. Bajaj Finance will be one example of a data economy of scale. AIML - I think the best example is TikTok. Everybody today recognizes this because it’s such a controversial company, which is kind of a pity actually. It is AIML. It is an artificial intelligence data science company and just a recommendation engine. Think about this. Which is the largest database company in the world?

Rajinder:

Probably Amazon.

Avnish:

Oracle.

Rajinder:

Okay, database.

Avnish:

Did you read who they’re looking to buy?

Rajinder:

Well, actually, I haven’t seen this one.

Avnish:

This morning. TikTok. And therein lies that logic, which is the largest database company in the world looking to get the best personalization and data engine in the world. So, even though people might say what is Oracle thinking, actually, Oracle is thinking really well. Hopefully, this thing will be released before the answer is known on Oracle and TikTok. Now, one very interesting one, which you and I covered the last time, is market networks. If you ask me, that’s the true data-driven moat. The definition was that you use like a SaaS engine and then you build a vertical on top of it. We covered it in the marketplaces podcast. Like to start a new Google is very hard because you have to get all that data. Of all that data-driven moats that are actionable, I think this is the most actionable and then obviously the TikTok personalization, all of that is quite actionable, which is you get data going - like a Practo. You get a marketplace going, get all the doctors and then you start building the market network on top with the patients. So, I think that’s where kind of data fits in. Ultimately, I think it’s underlying economies of scale, and it’s underlying technology and IP, and it’s underlying market networks. So, all three. Network effects, which we discussed as demand; economies of scale, which we discussed as supply; and technology IP, which we discussed separately. It’s the same moats. Data is driving a lot of them. And if you bring it together, then it’s probably one of the hardest moats to bridge.

Rajinder:

No. I completely understand and agree. And I think the other example of market networks, which we’ve spoken about, is how do you leverage the data that resides on the platform. Perhaps financial services products for the supply side or the demand side, which then—

Avnish:

There’s a fintech in every company effectively. You could actually put that on top of your data, which is why it’s very actionable because I don't think— It's still cutting edge. People haven’t fully started thinking of moats.

Rajinder:

Avi, fantastic summary again. I was thinking all of this sounds like with enough time one can actually build these moats. But in the new world, with enough capital, is there any moat that is truly defensible?

Avnish:

Wasn’t there a big fund that was setup with that thesis— I don’t want to go into names, but I think that thesis has been tested and proven to be wrong. Yes, capital can be a moat, but not in the way that you go and suddenly crown a winner and say, “This winner has the most capital. And therefore, they’ll be able to build the moats.” So, I’ll tell you where capital can create moats and we’ll come again to the Reliance and Amazon example in this. You’ve mentioned earlier that it looks like things are interrelated and interconnected. That's where capital will be a moat. If you have a cash cow business that can be used to plug into the other business, but they also feed on themselves, it's not capital in isolation. It's capital as one part of a business flywheel. What has happened in the past and some of these “investment experiments” I'll call them, which haven’t worked, is that irrespective of the rest of the flywheel working or not, capital was assumed to be the moat. In isolation, it would not work. However, if the capital is internally generated, I think it is probably one of the most powerful economic moats. So, if you look at Reliance, they were generating billions of dollars through their

Rajinder:

Refinery business.

Avnish:

I have Jio at home. You have Jio at home I’m sure. What is their right to win versus Airtel, or Voda, or whoever in this broadband? They went and laid the cables to every house, which is what they did in 2002. How could they fund it? They could fund it because it is coming out of that cash flow business. And now, of course, they’re getting other pieces of the flywheel going. Amazon, AWS has funded a lot of the expansion of the rest of the— so, you can get this going, but only if these flywheels are kind of working together. Today, not to belabor Jio’s point because obviously there’s a worry of how they compete with us, but JioMart and Reliance Fresh are feeding into each other, which is riding on top of the Jio Fibre. So, just like Amazon created AWS, I think the Fiber is the AWS for Jio platform. But it has to be the flywheel. Tomorrow somebody comes and invest $10 billion into Avnish and Rajinder Company to go compete with the Amazon or Jio. We can’t. You just can’t. You can’t crown winners like that. It’s the whole flywheel— and therefore the element of time. And I think that is very important. Remember we spoke about moats built with time? I think of moat of capital ignores the role time. And it is the time with the capital and very thoughtful building of this that ultimately wins. You can’t just come and say, “I’ll give you a million dollars and now you are the winner.”

Rajinder:

Avi, we did this podcast a few months earlier on margins. If you are to pick in moats and margins, which one would you pick and why?

Avnish:

Yeah. When we did margins, I wanted to pick gross margin. When we’re doing marketplaces, I wanted to pick market networks. Now that we’re doing moats, moats is the best. We’ll see how this evolves. Obviously, high gross margin with moats. That would be the best. But let me give you a counterview. We spoke about SaaS businesses. Sustainably high gross margin maybe because of inertia. But those businesses have gotten disrupted when new players come in. If you were starting a business, would you go after a high gross margin business or a low gross margin business?

Rajinder:

Logically high.

Avnish:

Yeah. Good to know. If I am an incumbent in a business, should I let you enter my business? What should I do?

Rajinder:

You would want to crowd out as much as you can.

Avnish:

I think therein lies something and Warren Buffet mentioned this. And he has lived a very long life. He said only once a few times in his lifetime has he seen businesses which can raise prices, but won’t. And those are the best businesses. What do you think by the way is Apple’s gross margin?

Rajinder:

50%?

Avnish:

I thought so. It’s 37.

Rajinder:

Oh, wow.

Avnish:

Yeah. At that scale. So, I think low gross margins can be a massive moat if you’re able to make money. Amazon, I mean they keep crashing prices. So, when you start Jio, create crashing prices. What was the EBITDA of Airtel and Vodafone before Jio came? I don’t know their number, but it was 35 to 45 percent. Very profitable throwing of cash got disrupted. And therefore, it is actually very counterintuitive. I would enter a high gross margin business, but then I would build enough moats to make it a low gross and protect it with a low loss gross margin by making it lower gross margin. Otherwise, I’m leading a flywheel. And for me, as I was researching this, that was a big aha that you actually see some of these companies and what they do. And they basically just make it unviable for you to enter the business. So, I thought that was pretty interesting. Amazon Basics. So, go to any product on Amazon where Amazon is— So, you’ll see Amazon’s choice. Amazon’s basic product, obviously, they’ll put that as choice. This is that data also kicking in and recommendations and everything. Will be the cheapest product, but it will be at the highest rate. How do you compete with that? Which is a scary thing because then these companies— Once these things start moving, there is just no stopping. And guess what? Yesterday, Airtel became $2 trillion dollars. I don’t think everyone has comprehend.

Rajinder:

You know, now I feel like going out there and actually implementing this. How is it actionable? Can you actually create these things? Can you accelerate the creation of these things?

Avnish:

And I think with hindsight you can see it, but let me give you— This is a view of the Amazon journey. It’s not the Amazon journey and I don't know how much of it was, is now with hindsight than— I think a lot of it was foresight. I think this guy is just brilliant. He just didn’t talk about it because otherwise others will know. I believe Jio is executing the same right now. So, let’s start. Customer love, customer obsessed guy, started with that. So, that’s how the flywheel first started. Once he started getting customers, so that’s the demand side first. No network effects yet. Just pure customer love driven demand side. Started going backward integration. Warehousing, logistics. All by the way inventory model. By doing the inventory model perfected the warehousing and the logistics piece of it and then said, “Why do I need to build the inventory? That’s the hardest part of the business.” So, I have the customer. Now, I have this layer whether it’s fulfilled by Amazon and stuff like that and opened up the marketplace. The minute you open up the marketplace, lots of data starts for you through the system. Okay? Next thing you know, recommendations are kicking in. You must also buy this, buy these things put up together. With that, understanding what the data is, suddenly you start seeing Amazon Basics come in. Amazon Basics comes in. The profit margin start crashing. The minute profit margin starts crashing, nobody else can enter business. He is— You know, I’m saying he, but the company is getting more and more of these things feeding into each other. Somewhere along the way, AWS first customer is Amazon. That starts then becoming because at that time cloud computing was not that big. If Amazon can run it, good enough for Amazon. Good enough for us. Next thing you know, that becomes a huge cash flow positive business. That is now funding likely. I think if you summarize it, customer love led to increase demand, which led to scaling supply, which led to lower prices, better experience, own brands, and ultimately creating the economic data moat because now the margins are going down. And of course, AWS along the way created that cash flow. Everything was related to each other. And I think therein lies the difference of the Jio playbook ‘til date, but note that everything has been related to each other. So, how do you build it? Build up products that customers love. Really innovate around that customer and surround them with more and more things that they need or get higher and higher market share such that in the first thing in which you got PMF, you can press crash the prices and nobody can enter from there. So, it’s almost like a level of strategy. If that was taught two decades ago, it’s just hard to think about. But I think it was a lot of innovation along the way, but that playbook is pretty clear to me. And I don't think that playbook is very different from Apple and Jio. Look at Apple. How much of their money comes from app store? It’s AWS equivalent, And you know now there's lawsuits they’re up against and all. That's complete rent seeking. In some way, it becomes rent seeking. So, 30% fee is the charge of the app store. Music, how much money does that make? Spotify is a standalone company. So, Apple has just surrounded us. Just surrounded us completely. But their old product is 10x in design, so that’s probably a different edge in IP, but it’s just very hard where you attack them from because you become Apple household, which is why when they were talking about car I wasn’t very surprised. And I’m surprised they haven’t done it because it might happen, but I'm— Maybe somewhere in this analysis that doesn't fit in, but that would have made sense. I think you’re going to see some of that with Reliance and Jio. Keep the refinery out, but using that business as cash flow. Now, this is where you will capitalize. There’s Reliance Fresh. Now, they bought Netmeds. They’re going to do other stuff in pharmacy. So, I think that’s the flywheel that’s being replicated. So, it may sound very hard for an entrepreneur to do this. I don’t think it is because, I mean, 20 years ago, Bezos was just like any other entrepreneur. Maybe Mukesh Ambani and Reliance has an edge in what they do. I think just start with customer love, but that's not the ending point. I think that's the key. Build something that the customer loves, but then keep surrounding them with stuff. Innovation. And Elon Musk tweeted to Warren Buffet around this and they had a nice banter. And he said, “Moats are overrated. Innovation is the only moat.” And the reality is that’s who he is. He is the ultimate innovator, but I think to think that customer love is a good enough moat is also very risky. I think ultimately you have to innovate a lot around that to stay ahead. And to me, the companies that have done that, Microsoft— LinkedIn was a great buy. Again, now with our framework, hopefully people can see the sense in it. That’s how they call it data. Consumer data with LinkedIn. They went after Azure. Where are the crash prices? Do you pay for most of their software? You pay for the Outlooks a little bit, but everything is bundled in. We had EverNote and now we use OneNote. There goes that company. So, you crash prices and then you keep creating the moats. I think one interesting one is Facebook. I don’t think they innovated fast enough but they saw that trend changes very fast and they bought their way through moats, and Whatsapp, and Insta. And again, now in this framework when you see, it’s the flywheel. So, start with customer love, but don’t end with customer love. Keep innovating. Keep running out.

Rajinder:

Fantastic. This is super helpful. Now I want to go out and implement this. Once I start, how do I know if I’m trending in the right direction? What should I be measuring for example to see these moats are actually getting created in my business?

Avnish:

I think this is easier than it looks. It’s not that hard. Okay? So, supply side, with passage of time— And again, I’m going to keep going back to the point you raised. It’s time. It’s not just capital. Moats build with time. With passage of time, is your gross margin increasing and/or is your contribution margin increasing? Okay, that is telling you supply side is some building economies of scale are building, demand side, you have discussed in the context of marketplaces. Vertical cohorts, people don’t look at it enough. Every new cohort, is it engaging more because it’s getting more value from the earlier cohorts? Horizontal cohort we all speak about, which is the loyalty, smiley cohort. Can you get loyalty up, which is the network effects? Brand, I read about this. It sounds so obvious. I didn’t think of it like that. Is your CAC reducing with time? So, if your CAC is reducing with time, something is happening. You don’t have to spend every time. In the digital businesses, we measure CM2 and CM3. So, is your CM2 increasing with time, which means you’re getting more and more organic traffic? You can also measure it as organic traffic percentage. Tech IP, pricing power. So, if you ask me, now with this framework, I think Apple could have charged 20% and they choose not to because they’re so much money on the app store and they’re making so much with it they just want to keep this business something that’s margin-driven moats, but they will still keep innovating. Look at Tesla. New stuff. But I think that’s the measure of your tech IP. But also, remember Warren Buffet’s comment that only few times in a lifetime you’ll get businesses that can charge more, but don’t. Those are the ultimate moats. And then we spoke about the ultimate economic moat, which is you make the margin such that nobody else can enter. And then then question is can you afford reduced GM and your economics of your business continues to work? Because all these other pieces have kicked in and nobody else— None of your company can make money. At some point, IndiGo had this going in India. They were low cost. When the flywheel was working without the oil price disruption, they had some version of this going. Everybody else was losing money yet these guys were charging the lowest. So, that is the ultimate moat. So, that’s it. One final point, I think— Thank you for putting up this article, really putting me up to this videocast. Great learning for me in coming up with this. Amongst the three, now moats is #1 as something I’ll think about for businesses. And directionally, everybody can do it if you start with the right playbook and think more about the passage of time and the width of the moat than the depth of the moat at any given point. I think that will be my closing on this.

Rajinder:

Fantastic. Thanks, Avi. I’m going to close this with some fun. I thought of a rapid fire and—

Avnish:

I thought the whole thing was fun. Clearly not. Okay?

Rajinder:

There’s a couple of companies from the portfolio. As you were speaking, I was thinking “Okay, which moats apply to these portfolio companies or what will they be riding over time?” But let me just throw out a few and see what do you think and—

Avnish:

I’m truly unprepared. I’m not prepared for this but let me get my notes of what are the moats. Yeah. Okay. Go for it and then you tell me what you think based on what we have heard.

Rajinder:

Let’s start with the consumer one. Country Delight.

Avnish:

I think it’s customer love. With Country Delight, it’s customer love. What do you think?

Rajinder:

The way I thought about it, it was actually customer love because the product I actually rocks. I have at least 4 to 5 liters that shop up every week in my home.

Avnish:

Ghee!

Rajinder:

The milk. But then that actually creates the demand side flywheel. I think there’s demand density. I think they’re able to actually upsell me into other products as well and then I guess that feedback into the supply side from a supply chain.

Avnish:

Yeah, I think that’s right.

Rajinder:

Yeah, I would think about it.

Avnish:

Yup.

Rajinder:

But then I’m going to give the next company I’m actually going to ask— I actually think it’s the reverse. Ola.

Avnish:

Ola is a classic network effects business, isn’t it? But there you have to aggregate the supply. I mean, supply is the moat there. And supply can create that demand side network effects, but we discussed this in the marketplaces podcast. There are interventions you can make to get that network effects going. Right? But I agree with you. I think it’s supply led, but demand side nearly on top.

Rajinder:

Yeah. Agree with you again. The Fintech ones actually I couldn’t really place, but I think

OfBusiness is an interesting one.

Avnish:

Data. So, what OfBusiness does, it’s so deep— So, lending they are doing of course, but they are so— I mean, you would know. You’re the lead on it. They’re so detailed in— I think all the fintech ones by the way is data. The question is how do you get that data? I think OfBusiness goes deep into the customer’s business and essentially all the ordering happens through them. So, they know the whole reality.

Rajinder:

Yeah. I think the other thing that they are able to do is they convert that data edge to actually then drive customer love and then drive supply side in the economy. You know, my thought process here goes, because of the data edge that they have, they’re actually able to underwrite customers who are underserved by their existing banks or other NDFCs. They’re able to then aggregate enough of these customers and then drive lower pricing on the supply side, which then basically drives customers love because the customers just keep coming back to them. And they keep growing their book with OfBusiness because they see that OfBusiness is able to help them grow their business.

Avnish:

No. But you know, let’s— And Asish might kill us for this. If you were to apply the full framework, what they should probably do is have enough other product lines where they go attack other people’s businesses, other lending product lines or other— I don’t know if it’s accounting for these guys— and crash the pricing on their whole product. I mean, that would be the ultimate because you have the customer and you don’t leave your flank open. It cannot be applied very naively, but I'm saying, as a concept, the earlier point that you keep thinking and innovating, one should not rest on this because at some point somebody will come after.

Rajinder:

No. Very helpful. Listen, thank you Avi. I appreciate it and talk to you soon.

Avnish:

Great. Thanks. Thanks, Rajinder.

Salonie:

Thanks for tuning in. For more Matrix Moments episodes, you can head to www.matrixpartners.in/blog. You can also follow us on Twitter, LinkedIn, and YouTube for more updates.

Reading Material:

• https://a16z.com/2019/05/09/data-network-effects-moats/
• https://www.inc.com/linkedin/don-peppers/customers-can-business-moat-don-peppers.html
• https://a16z.com/2020/05/28/moats-before-gross-margins/
• https://news.greylock.com/the-new-moats-53f61aeac2d9
• https://www.forbes.com/sites/forbestechcouncil/2020/01/21/protecting-ai-startups-with-strong- moats/#7f2f7beccc78
• https://www.entrepreneur.com/article/337233