Software Moats are Gone!
Is it the end of SaaS? What types of companies will survive?
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Is Software a Commodity?
What happens to the software industry when anyone can create an app in a weekend?
Software is rapidly becoming a commodity by enabling literally anyone to create an app. And complex software will be 100x easier to build and maintain.
As the barrier to entry and time required to build applications goes to zero, we will have an explosion of software available to us. Not only will we have LOTS more options, but the “build vs buy” debate will continue to tip towards build internally (at least for more simple applications).
All of this means that if a software company doesn’t have some other real moat then the competition is going to eat their lunch.
Strong Moat = Durable Revenue
Durable Revenue = Higher Growth & Profits = High Valuation
Durable revenue is one of the most important metrics for companies that want to IPO or get acquired for a high valuation. So make sure your company has strong, durable moats.
What Moats are Left?
Let’s turn to the great wisdom of the G.O.A.T. of finding moats…Warren Buffet:
No formula in finance tells you that the moat is 28 feet wide and 16 feet deep. That’s what drives the academics crazy. They can compute standard deviations and betas, but they can’t understand moats. — Warren Buffet
What many people don’t understand though is that a moat’s effectiveness is a factor of both its depth and its width.
Moat depth: How easily can the competition copy and catch up?
Moat width: How important is the barrier? If customers don’t really care about the difference, then it’s not a very wide moat.
The ability to build complex code is no longer the moat it used to be. Software is rapidly becoming a commodity due to AI, but that doesn’t mean there are no moats left in software.
Below are 5 moats that I am thinking about in 2025:
Trust
Distribution & network effects
Data
Regulatory
Multi-product
1. Trust
Trust is the most durable moat. The other moats can fade in importance, but trust will always be important to customers. This moat is unique because all other moats help build it. The trust moat takes a long time to earn and can’t be taken away, but it can be quickly lost.
As a buyer, the most important thing when evaluating vendors is trust (especially for critical tools like security and finance stuff).
Trust that the vendor will take care of my data, has high security, will continue to develop the best products, etc.
2. Distribution & network effects
Being able to get your product in front of your target audience has never been harder:
Explosion of available content (particularly from AI). Really hard to get your content to stick out.
Major shift on how people use the internet (SEO is losing its importance)
Number of competing software companies is soaring
All of these factors are making it REALLY hard to break through the noise and get the attention of a company’s target audience. Those with an existing audience and distribution have a significant advantage.
3. Data
“Data is the new oil” has been a popular theme in the world of AI.
Unique data that is valuable can be a powerful moat. If everyone has access to the same AI models then the ability to provide unique value from the data you have is one of the last big differentiators.
4. Regulatory
Successfully navigating a complex regulatory environment can certainly be a moat. While software can in theory be spun up overnight, navigating regulatory environments can take both expertise and more importantly TIME.
A good example of this is from my newsletter interview with Brex’s CEO, Pedro Franceschi.
Brex has spent 7 years building out the financial services aspect. Navigating the regulations, compliance, and building the expertise required to create/maintain these programs is REALLY hard. Unlike software, this is not easily copied and it is certainly a moat for Brex.
5. Multi-Product Companies
This is related to the distribution and data-related moats but deserves its own moat spot.
Companies that are lucky enough to reach significant revenue scale eventually have to go multi-product, but I believe we will see more companies go multi-product earlier and more companies will expand their number of products even more than before.
Companies that can do this well have a moat — their data is more enriched from the different products, stronger distribution from existing customers, can create a better customer experience through owning multiple points.
It’s another reason why I am bullish on vertical software.
AI is NOT a Moat!
I need to shout at everyone reading this: AI IS NOT A MOAT!
At least in 95%+ of cases AI is not a moat….
Many people (operators and investors) are getting this wrong and assuming they have a moat from how they are using AI. You may be early to leveraging AI or how you are using AI in your product, but that perceived moat will be extremely temporary.
With the proliferation of open-source AI models and “AI-as-a-service” APIs, simply having an AI model is not a moat – unless that model is truly proprietary and superior for a specific use case.
AI by itself is not a sustainable advantage (since competitors can get similar AI), but AI combined with unique human judgment, creativity, and customer understanding can be a moat.
Final Thoughts
Moats are not static.
They are either shrinking or growing. MANY software companies are seeing their moats rapidly shrink as a result of AI. Complex code is no longer a moat.
Understand where your more durable moats are and double down on them. In order to win long-term you need durable moats.
Footnotes:
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How about speed and quality of execution as a moat? Nvidia for example broke through in part because of their ability to design and ship new chips 2x faster than the competition. As a result, they were impossible to catch or keep up with in the price/performance/cost equation. This seems to be still true today - perhaps even more so.
This includes some really strong critical considerations of this current dynamic. Perhaps this is ignorantly optimistic of me as someone in software, I agree with the idea that complex code will cease to offer the depth of moat it once did, but I am not so sure that software solving meaningful problems will truly become a commodity.
The professional services industry isn't a commodity, yet there is no technological moat to providing their managerial and consulting services. To your points, they rely on expertise, distribution, etc. to differentiate.
This isn't so much a comment for OnlyCFOs, but for the people that think breaking down the development barrier will kill the software industry. That might be true if the only thing propping up the industry was the barrier to entry of highly skilled technical expertise, but it isn't. Any meaningfully complex problem that a company solves with software requires a deep understanding, attention to detail, and consulting towards an outcome.
For many software companies, there unique ability to do that has always been the real moat.