When Moats Migrate: Recognizing New Sources of Advantage

The strongest Commercial Due Diligence doesn't just test whether old moats persist—it identifies where new moats are forming.

Sometimes the original moat weakens, but a new structural advantage emerges:

• Regulatory moats—compliance, certification, or data privacy requirements raise barriers
• Talent moats—specialized expertise becomes non-replicable
• Capital moats—infrastructure investment creates cost-of-replication barriers
• Behavioral moats—habitual usage creates inertia even without contractual lock-in

Test for moat migration through VoC:

• "What would a well-funded new entrant need to replicate to reach parity with [TargetCo]?"
• "Has that list changed in the past three years—and in which direction?"

If the cost and time to replicate have increased, the moat is compounding. If they've decreased, it's decaying—regardless of current performance.

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The Moat Multiplier: When Advantage Stacks

The most defensible businesses layer complementary advantages that reinforce each other:

• Data + Network Effects → more users → better models → more users (e.g., LinkedIn, Waze)
• Brand + Switching Costs → trust enables upsell → multi-product stickiness → brand strengthens (e.g., Salesforce, Adobe)
• Ecosystem + Data → integrations generate behavioral data → insights improve product → integrations deepen (e.g., Stripe, Plaid)
• Cost Advantage + Distribution → scale lowers costs → enables better pricing → attracts customers → further scale (e.g., Sysco, Costco)

Pressure test during Commercial Due Diligence:

• Map how each moat feeds or weakens others
• Identify which moat is load-bearing—if removed, does the structure collapse?
• Stress-test whether moat stacking is accelerating or decelerating

If moats are mutually reinforcing and accelerating, TargetCo has a compounding system. If they're independent or substitutive, they're hedges—not multipliers.

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The Anti-Moat: Sources of Hidden Vulnerability

Just as moats compound, so do vulnerabilities. Commercial due diligence must uncover anti-moats—structural weaknesses eroding advantage over time.

Five common anti-moats:

1. Founder dependency—advantage tied to individuals, not institutions
2. Monopsony risk—concentrated customer base with pricing power over TargetCo
3. Regulatory exposure—competitive advantage exists only due to policy gaps
4. Technology debt—legacy infrastructure prevents competitive response
5. Commoditization drift—category maturation reduces differentiation faster than TargetCo can innovate

Test for anti-moats:

• "What would weaken TargetCo's position without any competitor action?"
• "Is TargetCo defending against competitive threats—or structural market shifts?"

If TargetCo spends more maintaining position than expanding it, anti-moats are compounding faster than moats.

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Evaluating Investment Committee Memos: Is There Sufficient Moat Evidence?

Many investment committee memos claim competitive advantages without sufficient evidence. Use this checklist to evaluate whether a memo has genuinely validated moat claims during Commercial Due Diligence:

Six Red Flags Indicating Insufficient Moat Evidence:

1. Management-sourced claims without customer validation
2. Static moat descriptions without directional analysis
3. Missing VoC on competitive alternatives
4. Conflation of category growth with moat strength
5. Single-source moat claims
6. Absence of anti-moat analysis

Questions to Ask When Reviewing Investment Committee Memos:

• "How many customers and prospects were interviewed to validate this moat claim?"
• "What did churned customers say about switching costs?"
• "Is this moat widening or narrowing vs. three years ago? What's the evidence?"
• "What would a well-funded competitor need to replicate this position? How long would it take?"
• "Which moat is load-bearing? What happens if it erodes?"
• "What are the anti-moats? How are they being addressed?"

If the memo cannot answer these questions with customer-validated evidence, the moat claims are unsubstantiated assertions—not investment-grade analysis.

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Investment-Grade Moat Checklist for Commercial Due Diligence

Before underwriting a deal as a private equity investor or strategic acquirer, apply this Moat Compounding Scorecard:

[ ] Switching costs are asymmetric and lengthening (validated through customer interviews)

[ ] Brand Equity drives pricing power and lowers CAC (confirmed through prospect and customer VoC)

[ ] Network effects show increasing returns to scale (tested across customer cohorts)

[ ] Data advantage is visible to customers and nonlinear (customers articulate unique insights)

[ ] Ecosystem lock-in creates structural dependencies (architectural integrations quantified)

[ ] Cost advantage is structural and widening (rooted in scale, process, or input access)

[ ] Distribution advantage creates barriers competitors cannot easily replicate (channel density and exclusivity confirmed)

[ ] New moats are forming as old ones mature (migration identified through VoC)

[ ] Moats stack and reinforce each other (interdependencies mapped)

[ ] Anti-moats are identified and mitigated (vulnerabilities pressure-tested)

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Conclusion: Moats Are Investment Hypotheses, Not Facts

The central mistake in moat analysis during Commercial Due Diligence is treating advantage as a fact rather than a forecast.

Moats don't show up in balance sheets. They exhibit themselves in customer behavior, competitor response time, and pricing power. And all three are dynamic.

Great commercial diligence for private equity and strategic acquirers asks:

• "Is TargetCo's moat still deepening—or just defending?"
• "Would we bet on this advantage in three years—or would we be hedging against its erosion?"

If the answer is deepening, TargetCo is compounding.

If the answer is defending, TargetCo is harvesting.

If the answer is eroding, the investor is hoping.

Moats are not about what TargetCo has. They're about what TargetCo is still building—and whether competitive advantage is an accelerating asset or a decaying memory.

For private equity investors and strategic acquirers, effective Commercial Due Diligence means testing moats through rigorous Voice of Customer research rather than accepting Management's claims. The moat TargetCo describes is less important than the moat customers experience.

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