Software Moats with Astasia Myers

Investors often use the term “moat” to describe the durable competitive advantage of a company.

When an investor puts money into a company, they are making that investment based on a valuation. That valuation is subjective–it is how much the investor thinks the company is worth. A valuation is determined by the present value of future cash flows. What are the future cash flows of a company? In order to figure that out, the investor needs to know how the business will look in the future.

This is why moats are so important. If an investor looks at how much money a business made this year, it does not tell the investor very much information about how much money the business will make in the future. If the business has a durable competitive advantage, then that means that the cash flows of the company are also durable. It also means that any compounding of those cash flows will be durable growth.

It is easy to understand durability for some businesses. Why do we keep using Google? Because there is no substitute search engine that is so integrated with our daily lives. Why do we keep using Facebook? Because there is no other social networking company that has all of our friends and family.

But what about companies with substitutes? There are lots of cloud providers, log management companies, and analytics providers. These are crowded markets, and yet in each of the crowded markets there seems to be a dominant player who captures the most market share. Why is that? How do software companies in competitive markets develop a moat?

Astasia Myers is a venture investor with Redpoint, a software investment firm that makes large bets on technology companies. Astasia joins the show to discuss how software companies form competitive advantages, as well as several specific markets such as log management and cloud cost optimization.

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Transcript

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