TechSparks 2019: Dr. Ajay Sethi of Accel Partners explains why a startup needs to build moats around the castle
An entrepreneur may be raring to build the ‘castle’—their startup’s main value proposition—but what is equally important is also laying down the groundwork for the ‘moat’—which makes up the defensive capabilities that the firm can make use of.
Expanding on the need for moats, Dr. Sethi explained how to build value for the short- and long-term growth aspects of a startup. He was addressing a workshop at TechSparks, YourStory’s annual flagship tech conference.
“A company has access to multiple moats and can make use of all of them,” Dr. Sethi said, calling to mind some of the common moats seen for non-digital companies, namely intangible assets, switching costs, economies of scale and network effects.
“What we have observed, especially in software companies, is that the differentiation between castles and moats is getting a bit blurred. If you are able to build product-led moats that the product itself reinforces, then you can visualise how it will improve with usage.”
He explained further on the types of moats: “There are passive and active moats. Passive moats are where time and money have to be invested continuously. If building a brand, then the company has to keep investing in branding. Only then people will remember. Active moats are where product itself will be reinforcing them. Therefore, they automatically become stronger.”
Dr. Sethi used the example of Vedantu, one of Accel’s fast-growing portfolio startups, to support his argument. Accel had been involved with the edtech firm for the past six years.
“The first few years are the toughest years for startups. This is the time when they try to find the product-market fit. Like any other startup, Vedantu too had to continuously experiment and iterate in the first few years,” Dr. Sethi added.
Vedantu is an online tuition company that targets students from Classes VI to XII. Despite witnessing slow growth in the first five years of its existence, Vedantu was able to dramatically improve its performance over the course of one year. Its CAC went down by 1/5th and the LTV grew 10x. At the same time, traffic grew 10x, making Vedantu the largest education website in India.
Dr. Sethi explained why a long-term overview helps. After establishing product-market fit, Vedantu focused on exploring ways to get users to adopt a new concept and to build emotional connect with them.
To increase scale, Vedantu introduced NCERT solutions as a free service. They also introduced a masterclass series to explain various topics and concepts to the students.
“Their aim was to make students aware of Vedantu and help them derive value from Vedantu without putting in too much effort,” Dr. Sethi explained. A startup is able to scale by building products with high frequency and those that require low effort to derive value. Such products help create awareness amongst the potential user base much more efficiently and effectively than that provided by paid marketing and brand marketing activities.
Further, Vedantu established emotional connect with the users by introducing team-based competitions with category-specific and highly sought-after prizes.
“From Accel’s point of view, we work with the companies and help them by providing frameworks and mental models that can help them unblock value. Vedantu’s journey captures three types of active moats or boosters that can be leveraged by any startup, ” Dr. Sethi noted.
How can you build active moats and boosters?
According to Dr. Sethi, a startup can build active moats (or boosters) by looking at the frequency and importance of various activities. Specifically, scale boosters can be built by building products/features with high frequency and low importance (and low effort); habit boosters can be built by building products or features with medium frequency and medium importance characteristics; and brand boosters can be built by incorporating activities with high importance into the product (which helps establish emotional connect with their users).
Dr. Sethi signed off by highlighting that the network effects are another form of active moats. If a company can get their users involved directly in Invite, Engage, or Connect phases of the customer journey, it is possible for any startup to build ever-growing and improving moats around their castles.
Watch the video of the masterclass here
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