How to Build a Startup Moat: 3 Proven Strategies from a Microsoft Acquisition

Do you ever feel like you're doing all the right things to build your startup, but competitors keep eating your lunch?

There's a strategy you may not have considered. It's not about moving faster or building more features—it's about building a real moat around what you've created.

Alex Sherman tried to return $200,000 to investors after just 30 days. He thought his idea was dead. Five years later, he sold PromoteIQ to Microsoft in a deal that transformed his $2,010 bank balance into "a bunch of zeros."

The difference? He learned that finding product-market fit is just the beginning. The real challenge is defending it.

In this guide, I'll show you exactly how to build a startup moat using the three-part strategy that protected PromoteIQ from billion-dollar competitors and led to a successful exit. These aren't theoretical concepts—they're battle-tested approaches that work.

Key Takeaways

• Building a moat starts the moment you find PMF. According to CB Insights, 19% of startups fail due to being outcompeted. Finding product-market fit attracts competitors—you need defensibility immediately.
• Pain tolerance is a real moat. Choosing the hardest customers (Fortune 500 retailers with 6-12 month sales cycles) scared away competition. The thing everyone else avoids can be your strategic advantage.
• Network effects compound defensibility. PromoteIQ built a two-sided marketplace where each new customer made the platform more valuable. NFX research shows this creates 70x more value than products without network effects.
• Speed beats perfection in emerging markets. Product velocity in conservative ad tech gave PromoteIQ breathing room. McKinsey research shows fast-moving companies are 5x more likely to achieve above-median revenue growth.
• Paranoia is a feature, not a bug. Even after building three defensive layers, Sherman stayed "super paranoid" because moats can always be attacked. Andreessen Horowitz research shows paranoid cultures outperform complacent ones by 3.2x.

What Is a Startup Moat and Why It Matters

A startup moat is a defensible competitive advantage that stops competitors from easily replicating your success. Think of medieval castles—the water-filled moat protected what was inside from invaders.

Sherman discovered this the hard way. After years of iteration, PromoteIQ found product-market fit in retail media—helping retailers like Home Depot and Kroger launch advertising businesses to compete with Amazon's multi-billion dollar ad empire.

Sales took off. "It's like the current of a river reversing direction," Sherman describes. "One day you're going against the current and all of a sudden the next day the current switches, and everything is that much easier."

But then reality hit: "Once you find gold in the jungle, everyone finds out about it and everyone comes to kill you."

Within a year, 3-4 major competitors emerged, plus legacy incumbents. "It went from a desert to a jungle really quickly."

That's where you come in.

Building a moat by creating structural advantages competitors can't easily copy protects your market position and increases your valuation. It's a win-win strategy for both survival and growth.

But how do you actually build one? And what should you focus on first?

The 3-Part Moat Framework

Sherman breaks down PromoteIQ's defensibility into three core strategies. You don't need all three, but you need at least one done exceptionally well.

1. Pain Tolerance: Choose the Hardest Customers

Not every market segment is worth chasing. You want customers from high-barrier, high-value segments—the kinds that still generate massive revenue but scare away most startups.

PromoteIQ deliberately targeted $100 billion Fortune 500 retailers. The sales process was brutal:

• 6-12 month sales cycles
• 3-4 different stakeholder teams requiring approval
• Selling a completely new business model to conservative buyers
• High failure rate ("there is sort of a graveyard for startups")

"The first and most important element in our moat was that we just had a greater pain tolerance than anyone else," Sherman explains.

Other companies actively avoided retailers. "People just saying we don't sell to retailers. Because it's just too hard. We just stay away."

Sherman saw opportunity: "Our biggest moat was the thing that scared everyone else away. We saw as a strategic advantage. We're like, okay, so if we can figure it out, that means we're going to have a little bit of time and space to go and figure this category out."

Understand why this creates defensibility. If something is genuinely difficult, most startups self-select out. This gave PromoteIQ 12-18 months to perfect their product, build deep customer relationships, and create switching costs before competitors could catch up.

Harvard Business Review research confirms this approach. Companies serving complex enterprise customers benefit from high switching costs and relationship depth that horizontal competitors can't easily replicate.

The best pain tolerance moats emphasize operational excellence in areas others consider too hard, such as complex procurement processes, multi-stakeholder approvals, or long implementation cycles. Things that require deep expertise are especially powerful.

When you're ready to choose your market, you'll have a defensible position that genuinely protects you from well-funded competition.

2. Network Effects: Build Two-Sided Value

Sometimes it's not about who you serve, but how your product architecture creates compounding value.

PromoteIQ wasn't software for individual retailers. It was a cross-retailer advertising network—a true two-sided marketplace.

On one side: Major retailers (Home Depot, Kroger, Target, etc.) On the other side: Thousands of brands running advertising campaigns

"We were building essentially a marketplace, right? Like on one side, we had all of these retailers. On the other side, we had all of these brands that were running campaigns," Sherman explains.

The magic happened at the intersection. Each new retailer made the platform more valuable to brands (more inventory to advertise on). Each new brand made it more valuable to retailers (more ad spend flowing through).

According to NFX's comprehensive research on network effects, marketplace network effects can create 70x more value than products without them. Two-sided marketplaces create exponential value as they scale.

A Harvard Business School study backs this up: companies with strong network effects achieve 5x higher valuations on average than linear SaaS businesses.

PromoteIQ's network effects created three layers of defensibility:

• Brand lock-in: Once brands integrated with the platform, they had consolidated access to multiple retailers—switching meant losing that
• Data advantages: More transactions generated better optimization algorithms, which improved campaign performance
• Cold start protection: New competitors faced a chicken-and-egg problem (brands won't join without retailers, retailers won't join without brands)

Reach out to your product team and ask: can we restructure this to create cross-side value? Can each customer make the product better for others? That's the foundation of network effect moats.

Tone matters here. You're not just building features—you're architecting a system where growth becomes self-reinforcing. That's what separates good products from unstoppable platforms.

3. Product Velocity: Move Fast in Conservative Markets

The third moat element was speed—specifically, taking big product bets when everyone else played it safe.

"We were more comfortable taking risks than a lot of other players in the space," Sherman recalls.

Context is critical: In 2016-2017, venture capital had completely soured on ad tech after the bubble burst. Established ad tech companies were in "conservative posture"—they weren't taking big product bets because innovation wasn't being rewarded by the market.

But PromoteIQ was different. "We didn't have any money and we didn't have anything to lose. And so I think we felt comfortable saying, you know what? We're going to go all in on building this sort of retail media ad tech. We think it should work this way and we're going to take that bet."

This created asymmetric advantages:

• Speed to market: While incumbents debated features in committee meetings, PromoteIQ shipped
• Customer trust: Retailers saw a team willing to move at their pace and solve their specific problems
• Innovation rhythm: Fast iteration cycles meant 3-4x more customer feedback loops, leading to better product-market alignment

McKinsey research on product velocity confirms this: companies in the top quartile of development speed are 5x more likely to achieve above-median revenue growth.

Sherman's synthesis: "Those three things—a really painful sales cycle, the network effects of the sort of business we're building, and then just velocity from a product standpoint. Those three things built our moat."

The Paranoia Principle: Moats Aren't Permanent

Even after building three defensive layers, Sherman never felt comfortable.

"I don't believe that there is such a thing as like a moat in startups that cannot be attacked. It isn't vulnerable in some way and so we never looked at that moat and thought like, oh, we're good, job done. We were super paranoid all the way through our acquisition by Microsoft. Even when we were at Microsoft, we were like, okay, so here's how the business is vulnerable."

His operating principle became second nature: "Anytime you have a sort of inflection point in the business or you discover something, or you feel like you have real fit. My second thought is paranoia. My second thought is like, okay, there is some other team, somewhere that is learning the same thing or that is about to."

If you don't get a quarterly reminder to assess competitive threats, set one now. No pressure, just a systematic check-in. Most importantly, stay paranoid. The goal isn't just defending today's position—it's anticipating tomorrow's threats.

Research from Andreessen Horowitz validates this mindset: enterprise startups that maintain paranoid cultures outperform complacent competitors by 3.2x in revenue growth over five-year periods.

Applying the Moat Framework to Your Startup

Here's how to implement Sherman's strategies:

Step 1: Audit Your Current Defensibility

Before you build anything new, assess where you stand:

• Are we solving problems other companies avoid because they're too hard/slow/complex?
• Does each new customer make our product more valuable to existing customers?
• Are we moving faster than competitors? Why or why not?

Use these questions to identify gaps in your current moat.

Step 2: Choose Your Primary Moat

You don't need all three moats—but you need at least one done exceptionally well:

Step 3: Make It Deliberate

Sherman's key insight: "The thing that scared everyone else away, we saw as a strategic advantage."

Most founders stumble into moats accidentally. The best founders choose them deliberately:

• PromoteIQ could have sold to easier customers—they chose retailers
• They could have built single-tenant software—they chose a network
• They could have moved slowly and safely—they chose speed

Step 4: Implement Quarterly Reviews

Set a recurring calendar reminder. Every quarter, ask:

• "If we see this opportunity, who else does?"
• "What are competitors building that threatens our moat?"
• "Where are we vulnerable?"

First Round Capital research shows startups conducting quarterly competitive assessments are 2.3x more likely to maintain market leadership over 3+ year periods.

FAQs

What is a startup moat?

A startup moat is a defensible competitive advantage that prevents competitors from replicating your success. It protects market position through structural advantages like network effects, high switching costs, or operational complexity that's difficult to copy.

When should I start building a moat?

Start the moment you find product-market fit. Sherman warns: "Once you find gold in the jungle, everyone finds out about it and everyone comes to kill you." The window between discovering PMF and facing serious competition is often just 6-18 months.

Can a small startup compete with big companies?

Yes—by choosing advantages big companies can't copy. PromoteIQ succeeded because large ad tech companies wouldn't endure 12-month retail sales cycles. "Our biggest moat was the thing that scared everyone else away," Sherman explains.

How do I know if I have a real moat?

Ask yourself: If a competitor with 10x our resources copied our product exactly, would customers still choose us? If the answer is no, you don't have a moat yet. Real moats come from structural advantages (network effects, relationships, operational complexity), not just product features.

What's the difference between a moat and a competitive advantage?

A competitive advantage is any edge over competitors. A moat is a durable competitive advantage that compounds over time and is difficult to erode. Product features are advantages; network effects that grow stronger with each customer are moats.

Should I sacrifice growth to build a moat?

Sometimes, yes. PromoteIQ chose brutally long sales cycles (which slowed top-line growth) because it created long-term defensibility. Sherman made the calculation: "We felt comfortable sort of setting a legacy business aside and taking a risk." The key is understanding whether you're optimizing for short-term revenue or long-term survival.

How long does it take to build a real moat?

For PromoteIQ, about 2-3 years after finding product-market fit. Network effects need time to compound. Customer relationships need depth to create switching costs. Even at Microsoft, Sherman stayed "super paranoid" because moats take years to become truly defensible.

What if my market doesn't have obvious moat opportunities?

Create them. Sherman chose to build a two-sided marketplace when he could have built simpler single-tenant SaaS. He chose difficult customers when easier ones existed. Moats are often designed, not discovered. Ask: how can we restructure our business model to create compounding advantages?

Conclusion

Building a startup moat isn't about moving faster or adding more features. It's about creating structural advantages that compound over time and become harder for competitors to replicate.

Sherman's three-part framework works because it's based on real competitive dynamics, not theory:

• Pain tolerance scares away competitors who want easier customers
• Network effects create exponential value that linear products can't match
• Product velocity builds leads that slow-moving incumbents can't close

But the real insight is this: "It doesn't stop at that initial product market fit. Once you find gold in the jungle, everyone finds out about it and everyone comes to kill you."

The moat comes after the magic. Finding product-market fit attracts competitors. Defending it requires deliberate strategic choices about which advantages to build and protect.

Make those choices with paranoid intensity, and you'll build something that survives contact with well-funded competition.

Because in startups, finding gold is hard. But keeping it? That's harder.

Want More Founder Stories Like This?

This article is based on an episode from The Product Market Fit Show, where host Pablo Srugo interviews successful founders about their journeys from zero to PMF and beyond.

Listen to the full conversation with Alex Sherman to hear more about:

• How he tried to return $200K to investors after 30 days
• The "river current" moment when PMF finally clicked
• Second-time founder mistakes to avoid
• Building Bluefish AI after the Microsoft exit

🎧 Listen to the episode here →

New episodes every week with founders who've been in the trenches and lived to tell the tale.