Moat meaning in business: a lasting edge

From castle mound to Buffett

Moat comes from Old French mote, a mound. It meant the castle mound first, and only later the ditch around it. So the word started as the part you defend and ended up as the part you dig.

Warren Buffett made “economic moat” popular. He has been credited with coining the idea in 1999, and the term was in print by November that year. His 1993 shareholder letter already puts a protective moat around an economic castle, six years early. Who used it in business first is unknown.

Most moats aren’t worth a damn

Buffett’s own test is how long the moat lasts. He asks why the castle is still standing, and whether it will be in 5, 10 or 20 years. Most moats, he says, “aren’t worth a damn”.

Real castle moats were rarely full of crocodiles or piranhas. Many held stagnant water, and some held garbage and dead animals. That’s closer to what a lot of pitch decks are defending.

The five moats

Morningstar, whose moat ratings are well known among investors, names five sources of a moat:

• Network effects: the product gets more useful as more people use it.
• Intangible assets: patents, trademarks, licenses, a brand.
• Cost advantages: you can make it for less than anyone else.
• Switching costs: leaving you costs the customer time and money.
• Efficient scale: you serve the market more cheaply than a newcomer could.

Wide, narrow or none

Morningstar grades each company’s moat as wide if the advantage should last more than 20 years, narrow for 10 to 20 years, or none. A slide that says “moat” without naming one of the five would get the third grade.

Moats inside a company

Inside an office, moat means turf. The team that holds the only working deploy script has one. So does the one person who understands the expense tool, and the department that turned the big meeting room into its own office. Grade them the Morningstar way and most come out narrow. They last until somebody writes the documentation.

Moat meaning in business meetings

“What’s our moat?” in a pitch or an all-hands asks why a company ten times your size can’t copy you next quarter. The honest answers are on Morningstar’s list of five. The ones people give anyway are “our team”, “our culture” and “first-mover advantage”. Of all the strategy words in corporate jargon, moat is the one an investor will ask you to prove.

A feature every rival already has is table stakes. A moat is what they’d need years to build. It won’t move the needle on its own either. A moat keeps somebody else from moving yours.

The moat slide at the all-hands

At an all-hands, the moat slide gets the applause and the questions get whatever time is left. The hard one, what exactly a rival couldn’t copy, gets taken offline. The side chat running during the talk has its own answer: customers stay because moving their data out is a pain. That’s a switching cost, and it’s on the list.

Moats that aren’t

“We move faster than them” describes a head start. “Our moat is our data” holds only if a rival can’t buy or collect the same data. If the moat slide reads like the output of a corporate bullshit generator, treat the moat as missing.

An investor email about a moat

Subject: Follow-up from Thursday

Thanks for the demo. Before the partner meeting we need one slide on the moat why nobody can copy you: what stops a company ten times your size shipping this in a quarter? Switching costs and data count. Culture doesn’t.