10 Ways Build a Moat in SaaS (Updated)

SaaS markets are even larger than we ever imagined. Show something interesting, which is that there's moats, that these leaders, as great as they are, as great as these Zendesk and Hubspots and even Datadogs and others. And Atlassian, they're old. Atlassian, I think, was founded around 2002, Zendesk and HubSpot well over a decade ago, 15 years ago. So it's not their shiny new code base that is, that is helping them accelerate. There's some truth, of course, these products are refactored and have new features and all of that, but there's moats in SaaS. And this is something personally I didn't get as a SaaS founder. I was worried there were no moes. I felt that like any small great team of five or ten engineers could reproduce what I built, that the large tech companies, the Adobes, the Salesforce or others, could clone anything and leverage their brands and platforms to, to kill any startup. And it turns out to not be true for a lot of reasons. But one of them is that there's more moats in SaaS than we think. And, and we know about these moats. We're like, we're locked in, we're locked into a Facebook or even a LinkedIn. It's hard to leave, it's hard to get your, your, your structured data and, and your Persona out. And we, we don't think about moats and SaaS quite the same way as in some consumer activities, but they're there. And I want to walk through 10 types of moats in SaaS and bring them up, because I think this is, if nothing else, a great conversation to have with your team. How are we going to build moats? And you don't have to have a moat on day one. If, if there was a moat on day one, you could never get started. But it's something to start to think about. Even after a million ar. Where can we lean in on so that others can't outflank us, so that we have something that is moaty, that is ultimately defensible, that others can't copy? So let's talk about 10 types of brands, or rather 10 types of moats. Number one is what I just said, brand. And this is something that a lot of us old timers in SaaS did not get in the beginning when we, when, when, when SaaS was smaller, we didn't realize we were building brands. We didn't realize that the boxes and the Adobe signs and DocuSigns and all these early Ones would become brands that having hundreds of thousands of customers or 10,000 and millions of users would create a brand. But it does. And 80% of buyers at the end of the day pick the number one or number two brand in a space. So we don't have time, most folks don't have time to qualify a hundred vendors and most folks don't have the resource to do it. We pick what's trusted and known and not everyone does. 20% of folks have a time to do discovery or they have a unique need. If Zendesk is great, but if they need something specialized for e commerce they might find gorgeous or they might be happy have been happy with their call center software, but they needed something that ran natively in the cloud. So they found a talk desk or a 5, 9. So that discovery does happen, but not, not for most customers. They buy one of the top brands. So of course in the beginning you don't have a brand. But turns out in SaaS we get one earlier than we think, often by just a few million in revenue. We have what I call a mini brand, which is that not everyone's heard of you, of course, but folks in your most important niche, your most important insertion factor, your most important market segment had a third of you. If you close Google and Facebook, you'll probably start closing Twitter and all the rest and LinkedIn and all the others, et cetera, et cetera. You usually find a niche that you nail and pretty quickly you'll get a mini brand in that space. Folks will tell other friends, other folks in their industry and you'll start to get that going and then maybe around 10 or 20 million in error, you'll have a real brand where generally people have, have heard of you. And what's actionable here? I guess what's actionable here is just lean in, realize that your brand matters, measure your mps, take care of your customers, promote your brand more, do more podcasts, get on stage, do whatever you can to make sure your brand is a 10, that your MPS is not just good, but maybe 60, 70 or higher. And don't, you don't have to measure the ROI in everything you do. The last thing you want to do in the early days is hire head of marketing. That only works on brand. I mean, you know that works when you're big for sure, but, but not when you're a scrappy startup. But you don't want to just do demand gen. You want to do things that enhance your brand. Do a user event, build a community, build a real authentic content Marketing platform, a social media strategy, most importantly, bring your customers together, even if it's just on zoom, even if it can't be in the rural. Bring your customers together regularly in some type of forums or events or otherwise so they can amplify your brand to each other. But invest in your brand. It is defensible. It is defensible and much more than we ever thought in SaaS. Today we could debate. Is Zendesk the most innovative support platform? Is, Is HubSpot the best CRM for SMBs? You know what? It doesn't matter. It truly does not matter for 80% of customers are just going to pick Zendesk or HubSpot. And you can do that. You may not be able to take Zendesk and HubSpot on straight ahead, but you can do it in your segment, in your niche. You can, you can own that and own the brand and take brands seriously, especially if you're skeptical of it as a founder. The second one obviously is data. Data lock is real. LinkedIn is a very visceral example. It owns the human record. But think about if you've ever even contemplated, say leaving Salesforce, all that workflow, all that structured data, I mean technically you can export it, but, but not really. Data Lock is real. So personally I am opposed to being aggressive on Data Lock. I actually think the more portable you can make your data the better because customers will buy more. They will be reluctant, especially with a new vendor, to have Data Lock to embrace Data Lock. No one wants to take a risk on a new company at 1 million, 5 million, 10 million ARR. Where they know their data is trapped if the vendor doesn't end up performing for them. So make it easy to export your data, but at the same time structure it. Dashboards more early dashboards win in the enterprise, build way, build analytics, build all the things that if people leave you, that's okay, you'll let them leave. There's no hostages here. But the structured data is so powerful they won't want to leave. So that's really points two and three, which is data and structured data. Point four is partners and ecosystems. And it's hard to build a partner ecosystem early. You need your own base. But once you even have a mini brand, once folks know you in the industry, other folks will want to integrate onto you. So lean in here, build a better API early, build web hooks earlier, and most importantly, invest, have ahead of your partner ecosystem. As soon as your partners maybe even amount to 100,000 in revenue, 150,000, just make him or her break even as soon as you have enough partners to justify higher make the higher it compounds. And if you go back and listen to the webinar I did for with the podcast rather I did with Brian Halligan So you have HubSpot a few. Just before COVID hit I asked him how powerful it is that that HubSpot gets so many of its customers from his partner ecosystem. He laughed. He's like it's incredibly powerful. It's an incredible moat. Same thing with Shopify. If you, if you look under the covers with Shopify's numbers, you'll see so many of Shopify deployments and implementations like HubSpot are done by partners. They don't do that themselves. HubSpot doesn't have an army of of of folks to implement and deploy HubSpot nor does Shopify. But their partners do. In these partners in the beginning they may support a couple of vendors and ecosystem but they they align on one. If I'm going to do a CMS, I might align around WordPress. If I'm going to do E commerce, I might align around Shopify. I'm going to do marketing Automation or more HubSpot. These partners pick one and most SaaS folks are not great at this. They're not great at supporting partners in their ecosystem. They enable it maybe a little late with, with a little again with a little bit of an API or some web hooks, but they don't lean in deep. As soon as you find partners working for you, lean in. Because most folks won't, they won't get it. They won't get the HubSpot Atlassian Shopify playbook that partners were so critical to 30, 40% of the revenue at Atlassian, 40% of the revenue at HubSpot from these partners and ecosystems. So do it. Lean in here. And as founders, be patient. Be patient. Because it takes time for partners to deliver direct revenue. Don't try to over monetize them. Salesforce charges its partners a lot of money today, don't get me wrong. But back in the day when we launched on Salesforce it was free. There was no charge other than a little bit for certification to be on AppExchange. Shopify waited years to heavily monetize its ecosystem. Zendesk still hasn't. Zendesk still charges nothing to be on its ecosystem. Don't get get long term greedy here with your partners. And yes, you can eventually take a rake at 10, 20 more percent, 25% of the revenue at scale. It works for Salesforce. But you're much better off having them make you number one. That's where you run away from things. And a lot of folks don't even charge, especially don't charge their implementation partners anything and often not their API and product implementation partners. They defer that revenue. And as CEO you have to invest there because your sales team or others may want to over monetize your partners.5 that we just touched on, which is related to that is integrations. The reality is for a moat, most vendors only integrate one or two third party apps. Some of course will do a ton. Once you get really big, you may have to backwards integrate the top all the top partners in your ecosystem. But I will tell you, for example, there's so many applications we use at Saster where the only integration partner they have is Zapier. It's it, that's it. I'm looking at SAS University. We have 10,000 founders and execs on SAS University. The only they only have two, two integrations really. Slack and Zapier. That's it. So Slack went really early. This we forget about why Slack took off. But one of the early things Slack did was they were very open and they got everyone to integrate on their platform where Hipchat and others were more closed. That was historically the way they worked. Slack was so easy to integrate with and everybody did. As soon as it took off, even at a few minute revenue, even at 5 million revenue, everyone had done an easy, elegant Slack integration. Same with Shopify and same with Zapier. And the, the interesting, interesting reason I bring up Zapier is it's the other side. It's like when I'm building the, the vendor that, that runs SAS University, Mighty networks. They only have so many engineers, they could pick other things. But Zapier has so much market share. That's it. And of course so we're going to use, we already did it at Saster. We're using it even more when it's the default option. So lean in on integrations, make it easier, stop with the gates, enable them, help folks to build on your platform. And everyone's somewhat open these days. Not everyone, most of us but, but few of them make it a core competence, make it an excellence to get as many partners as possible building into them. And again that can be a moat because time and time again folks are only going to want to integrate the number one or maybe the number one two player into their own software platform. Okay, point six, which we talked about a little bit again but a nuance is agencies and implementation Partners. So when we Talked about the HubSpot and the Shopify and briefly at last seen partner ecosystems, there's all different types of partners, but agencies, again, are something a lot of us don't get. These especially for SMBs. And there's, there's sort of for, for, for enterprises, there's implementation partners, there's big folks like Accentures and others that will go in. And if you charge your customers a million dollars a year, they'll generally charge 1 to 3x that an Accenture might charge 3 million to deploy a $1 million piece of software. At the high end, the folks with those, with those top relationships win. I have one startup I invested in that's doing well. It's at nine figures. But one of these big sis like Accenture, they basically only integrate. They only bring this one partner in to their deployments. Now they support everyone in the ecosystem and there's multiple vendors. But in this one space, when this huge SI picks this system integrator, they just pick this one partner again and again. You want to be that in the enterprise. So lean in on these implementation partners. Do whatever you can to make the big sis happy. And for SMBs, it's often agencies, it's small shops. You can even just see them sometimes walking around tech centers or other towns that get web stores up or marketing up. If agencies work for you, folks that just want to sell software over the Internet won't get it. They won't get how. Shopify again and HubSpot and others worked with agencies. But it's magical if you can do it. So as soon as you see even a handful of these agencies using you, if you've never worked in that ecosystem, if you don't even know what an agency is, learn, listen, go talk to them. Talk to every single agency deploying your product and realize there's thousands of them. There's, there's literally thousands of these agencies out there. This long tail. We recently did a five interesting learning on sasser.com with Avalara, which is a leader in tax tax software. And they have 20 or 30 of these agencies are their top folks. But then there's 9,000, their long tail that make up about half of the revenue. And Avalara Also look@sasser.com For Avalara, you might have heard of them. They get the majority of their revenue from SMBs from agencies too. And it is a long tail distribution. The top partners are super important. But then thousands of them also bring in and deploy Avalara when customers have a problem how do I manage tax across every state and jurisdiction? It's a headache. They'll pay maybe ten grand for Avalara and then the implementation agency. The agency will then charge them $20,000 or 10,000 or $30,000 to deploy it. If you're the one with that relationship, they're going to go to Avalara or HubSpot or Shopify or you again and again and again. Okay, point seven. This one's murky. I don't love it. But for a moat, long term contracts, bear in mind they're remote. I don't like it. I don't like long term contracts. They make it. I don't like it. Sort of ethically I don't like it because it makes a product smell like it's not that good. I don't like it because it's sort of a ripoff. But, but if you're good at it, it works. If you're good at if it works. ServiceNow is, you know, one of the top two or three SaaS companies, Enterprise. They only do three year contracts now. Why is that? Well, ServiceNow could take the better part of a year to deploy. So if you sign a one year contract and you're not live in production, it's kind of a bummer. You want a multi year contract, it's a multi year commitment. But if you do it the right way, it's good. Long term contracts work well in SaaS. There's two ways they can work. One is sort of as a ripoff. You can force folks to do it to mask, churn. I don't, I don't love that. I hope you don't love that. But the other way is tie it roughly to the commitment the customer's making. And if it's a two to three year commitment to get value out of your product, then maybe ask for a multi year contract so that you have time to provide that value. And bear in mind two things. One, in the early days it's okay to give them an out. Like people, the sales team will be against this. Your VCs may against it if a two or three year contract makes sense. But you, but they can get out in 90 days. It's actually a win win. Accounting may not love it, but here's the reality. Most of them will not use that out clause. They will just see it as a three year contract. They will pay you if it's prepaid, cash upfront. Even better. That, that's really nice. If you treat your customers well, very few of them are going to use your out clause and if it gets the deal done, it's totally worth it. Maybe not when you're at 100, 200, 300 billion in error, but it's totally worth it. So a three year contract with a 90 day out, trust me, if your product is more work to deploy, that's a lot better than having to manually renew the contract each year. And then a related point on the other side, just bear in mind you can buy out your competitors contracts. Not enough folks do this. But if you're, if your industry is going with a lot of long term contracts, consider buyout deals where you don't literally have to write them a check, but the overlapping contract period you don't, you don't charge them for but that net. My point is it turns out three year contracts are a partial mode. You see it in a whole bunch of industries. You see it at the high end with ServiceNow, but you see it with SMBs a lot of times where there's a hardware component or an other upfront cost. I think we'll see it a lot when Toast IPOs, which should be a massive IPO, but Toast has got that hardware component and they often sign these three year contracts and they're a partial moat. It works and done right. They're not, they're not, they're not, they're not so yucky. Point eight Emote and this is one that people are trying to play now in the best of times in SaaS, which is using massive amounts of capital to play not just where you win, but also where you lose. This is called dominant dominant strategy. And it's not a playbook that is obvious to those of us that aren't veterans, but veterans and SAS get it? And what is this dominant dominant playbook? Again, you'll start and you may find a niche where you're really strong. Maybe it's, maybe it's in a certain type of tech customer, maybe it's an insurance, maybe it's with a certain type of SMB and you'll get really good at that, you know, and then maybe you'll grow, maybe you'll hit 10 million. And maybe in the old days you could only raise 5 or 10 million in venture capital, but now you could raise like 50 or more or a hundred million. What do you do with that money? Well, one interesting thing to do is to build a team and play dominant dominant strategy. And that's where you try to win categories where you're weaker, where you're not obviously the best vendor, where there is an established player. And if you do that, you get better at it over time. And I know in the early days we all want to play in categories where we have a 50% win rate. 40%, 60 or 80. And that makes sense. It's very capital efficient, it's fast, the team loves it, they love the quick wins. But if then you put teams on industries where you're weaker, but at least have some customers. Imagine you have a thousand customers. 50 are in insurance. You're not that strong. You have a vertical competitor insurance, but you do have 50 customers. What if you put a team on it? Now, it might be expensive, but I bet that team can grow that 50 customers to 100 and then 250. We know how SaaS compounds if those customers are even reasonably happy. This is a way to build a kind of a moat which is dominant. Dominant strategies. You are everywhere. You are everywhere and you start to swarm the folks that are too specialized in verticals. And again, it requires a lot of capital and some expertise and you may even need to hire some help. But massive amounts of capital done right, mass amounts of capital alone do not create a moat. They just create money. You could flush it all down the drain. We all know folks that were very capital efficient and won their markets. The Atlassians, the Qualtrics, the others, they really raised, you know, zapier that we just talked about, none of them really raised much principal capital or any. In the case of Qualtrics and Atlassian, they still won. So capital loan doesn't let you win. But if you do it the right way, which is dominant, dominant strategy, you can run the tables. Okay, moat number nine, which all founders think about. But I want you to think about it as a moat, which is being the most enterprise vendor. And there are categories where there's many vendors, but only one can be the boast enterprise. Right? I mean project management is taking off, say oh my gosh, from Monday.com's IPO to Asana to ClickUp, there's so many exciting folks in project management, Atlassian itself. Which one's the most enterprise? You know, I, I don't know, maybe it is Atlassian. But there's a market for that. For the most enterprise. There's there, there are other markets where being the most enterprise is by far the most important. Right? Ultimately Salesforce started CRM, but in many cases they have one being the most enterprise. But any event, think about this for a moment. If you're starting to close a few bigger customers, are you the only one that's truly HIPAA compliant. Are you the only one that's doing SoC2 white? Are you the only one that's really implementing two factor authentication and all the rest and the proper types of security and encryption at rest? If you start winning all those deals, sometimes the competition doesn't do it. And one of the best ways to learn is from an rfp. When you get a large enterprise customers, they'll give you a request for, for an RFP to win the deal or an RFQ and then look at that RFP and the RFP will be like a checklist of all the ways you fail fail to win in the enterprise. They'll ask you about your disaster recovery or multi cloud strategy, all your security things, everything. It'll all be there. And if you tell the truth, you'll have a lot of gaps, you'll have a lot of it's coming or sort of or maybes. But think about that RFP for a minute. What if every box could be a yes for real like done really well. And then the competition, there's a lot of no's or maybes or kind ofs or it's coming. You will start to win the the six figure and even the seven figure deals to be most enterprise. It truly is defensible when it's done well. And so some folks start there, the vivas and others start start in the massive deals. Some folks grow slowly there over time. But in a competitive market, if everyone's kind of Webby and SMB and SML like all size customers and you're getting some traction in the enterprise, really lean in enterprise, get really good at it and you may have to change your DNA. If you're first time founders, you may never have done this. Your team may resist it, your team may not want to do the security audits and all the RFPs and, and get ahead of everything. But if you do it and the competition doesn't, it's a moat. It, it really is a moat. Okay, my last idea of a moat and this one's crazy. People will tell you it's not a moat, but it's no contract at all. What do I mean? Some of the best vendors today, their moat is that the product is so great you don't need a contract. Look at Canva. I mean Canva is incredible. There's so many versions of Canva not only that are free that you can just try out for, for, for a dollar ten dollars without even a long term subscription. That's an extreme example but you don't have to stick it to everybody with a one year or even the three year contracts we talked about. Maybe let everybody buy they want to buy. The easier you make it to buy, the more customers you close. And if you have an industry where the products are difficult to onboard, where it takes time, where it's complex and you can develop a product that is no contract at all, that you can deploy it very quickly, elegantly and easily 10 times, if your product is 10 times usually to onboard than the rest, that can be a moat no one can catch up. If you are incredibly great at doing elegant deployments, at deploying in minutes or an hour instead of weeks or months, how about no contract at all? How about let people try however they want? And a lot of folks of course have learned this in developer centric products. You can try Twilios and Algolias for nothing to get going but challenge yourself. Could we do this? Could we, could we be such a great product that we don't need a contract, that we'll just earn it? We will earn, we'll earn your revenue rather than forcing you to sign a contract up front before you've even put it into production. So in some ways it's the opposite of long term contracts enterprise, which is no contract all but it's magical if you can be the one vendor at all that can be deployed now, not later. And it creates a moat because you're the only one that is truly that easy to deploy. So what's the meta point here? The meta point here is really that there's more moats in SaaS than we might think. And there are various strengths. Some are truly enduring, some, some could could only last a year or two, but they're real. So if nothing else, go through this list of 10 think about these moats and let it trigger your mind. Which of these moats can we build on over the next 12 months? Where can we win? And think about it yourself and then talk about it with your team. It's a great exercise to sit down with your management team and your senior team and go through these tenants. Where's our moat going to be next year? Go through a checklist and talk about how you can be moatier. People don't do this, they stumble into a moat. But if you're strategic about it, you will win more deals.