Why do startups chase growth to build business moats?

Flywheel- The actual secret behind Amazon’s success

Paul Graham once said STARTUP = GROWTH

But why growth is so crucial for a startup?

Let’s understand from the end why startups chase growth over profit?

In almost every sector you will either have a Duopoly (Two big companies) or a monopoly (One big market leader).

They may occupy more than 50% of the market share.

Few examples

1. CRM — Salesforce, and Hubspot (>50% market share)

2. Ride-hailing — Uber, and Lyft (>80% market share)

So, from Edtech to Foodtech you will find duopoly in every mature sector in every country around the world.

But how is that relevant to growth?

Well, the actual reason behind this monology and duopoly is a business moat.

Every new emerging market or sector gives rise to 100 companies but ends up maturing with one or two after a few years.

This is built by burning a lot of cash and acquiring customers at any cost (CAC)

But how does it work?

But Let me first oversimply this by understanding Moat

A moat is a deep, broad ditch, either dry or filled with water, that is dug and surrounds a castle, fort, or town, historically to provide it with a preliminary line of defence.

The moat surrounding a castle or fort

So business Moat is a durable competitive advantage that enables a company to be profitable in long term.

Let’s understand this with a few examples

The reason you are using what’s app or Instagram is that everyone in your network uses it.

This is the example of a direct network effect where the value grows exponentially (not linearly) every time a new user comes on the Platform.

And this network effect powered most tech companies like Google, Twitter, LinkedIn, etc

Virality coefficient in network effect

Now tweak this network effect a little in the case of an e-commerce brand like amazon and you will have a flywheel that creates another type of moat (Economies of Scale)

Let me explain it

More customers on amazon bring more retailers to sell their products. This further increases competition between them with more variety at less prices.

This low price increase order and further reduce the per-unit cost (Economies of scale).

Growth loop in network effect

Now combines these individual growth loops together and you will have a flywheel.

Now amazon can serve any customer across the country at the cheapest rate because of network effects and economies of scale.

Amazon’s flywheel

Now tweak this concept a bit you can make different types of business moat-like Switching costs.

It is found in the case of Software (The actual reason why some companies still use the classical software that feels it was built-in 90’s)

Types of the business moat

Well, there are many types of the business moats that are used by a business trying to dominate a specific sector.

Here is the list of a few more articles I have written about startup and growth

1. CAC & LTV are confusing! So I have simplified them to get you up to speed (fast)

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