Trust as a Moat
Trust is an unstudied moat, but it can be powerful (if you get a window of trust)
When you think of a moat, you usually don’t think of trust. Morningstar’s Five Sources of Moats do not include trust. Hamilton Helmer’s classic Seven Powers include brand, but not trust.1 If you were to say that “trust” would be one of your moats to a venture capitalist, they probably would conclude that there is no moat to be had and pass on your company. But this is a mistake. Trust is in fact a powerful moat. It is just poorly understood and industry-specific.
Trust seems similar to brand, but it has a subtle difference. Brand is always an advantage for incumbents—it reduces acquisition cost, improves competitive positioning for risk-averse prospects, and so on. In low-trust markets, you may have powerful incumbents, but oftentimes they will be chosen for reasons of better-priced bundles or numerous features. But trust creates a market where there is an acceptable set of vendors, regardless of whether they offer the product, and companies outside the competitive set are not considered at all regardless of the offering. High-trust industries lead to a “nobody got fired for hiring IBM” situation on steroids. The key sign of a high-trust industry is a small number of vendors who offer a large number of products where your product is not even compared unfavorably but not even considered at all; once you start to get through the door, you will encounter the same names every time. Though this difference is subtle, it feels very different.
The key factors for trust are:
How high stakes are mistakes? Is a mistake potentially catastrophic, or just part of doing business? Sometimes, there is a probabilisitic aspect, where normally something doesn’t matter, but a few times matters a lot.
How irreversible are mistakes? Even a very high-stakes error suddenly becomes less scary if you can undo it, but even small mistakes can be fatal if they are irreversible and numerous.
How verifiable are mistakes? Sometimes you can tell just by using a product how good it is; verifiability is much harder if the use case involves counterfactuals, high expertise, or long feedback cycles.
How accountable is the mistake-maker? A lawyer or doctor could go to jail. A cybersecurity loss is often insured.2 A scientist might be rewarded for conducting a failed, but hard, experiment.
Trust is ultimately a spectrum. On the absolute low-end are businesses that require essentially no trust to operate at all. On the absolute high-end are businesses that no one will use without validation and broad market acceptance. Most businesses fall somewhere in between or have different aspects of the business with different trust levels. It is branding meets network effects where the network is the visibility of the customer base.
Low trust example: CRM tools. While modern CRM software can be complex, it falls into the category of “CRUD database with a nice interface and business logic.” This is not to demean the quality of those products and the work required to build them—simply to point out that you can assess the quality of the product quickly by using it, and that the cost of a single failure (such as a lost record) is low because of its high volume of use. The decision to use Hubspot, Salesforce, or Zoho is not about whether you trust it but rather which segment you fall into.
Medium trust example: payment processors. Even though payment processing deals with the most fundamental part of business (accepting money) and thus requires some trust, it requires less trust than most other financial infrastructure because of the high frequency and low stakes of most transactions. Unless your business is failing, your payment processor will be accepting a credit card several times a week, if not several times a minute. There is a tight, closed loop, making the immediate value easier to verify and the blast radius of a mistake limited. Companies will generally want to use a well-known payment processor, but there will always be a market for a new player because there will always be some people willing to try something new to save a buck. The limiting factor is that payment processing is hard.3
High trust example: e-discovery tools for lawyers.4 E-discovery is a form of search where the great fear is that you would miss something. While you can verify the quality of the results (at great cost),5 you cannot by definition verify the quality of the counterfactual. For example, in a recent copyright lawsuit against Meta, their e-discovery tool failed to produce 18,000 relevant documents. This one mistake exposed the lawyers to a lot of liability, including sanctions and malpractice suits, and jeopardized their entire client relationship through bad publicity. This one failure more than nets out any time savings of even 99.9% accuracy.
When lots of trust is involved, buyers will certainly shop around, but they will typically only consider vendors from a small list of well-known players in an industry. For this reason, a portfolio of products is ultimately the winning strategy in trust-based industries. The reason is not distribution; it is that someone is always looking to buy something, but if they are only willing to consider a small number of vendors, they will reach out to those vendors to see if they have something at all. If there is a small universe of acceptable vendors, if you are the only one with a certain offering, you then win by default.
High-trust products are always mission-critical. They are currently in use and people will keep using them because, no matter how ugly or inefficient or buggy it is, that solution is working. The job is getting done. So “better, faster, cheaper” isn’t enough to get the buyer to move over because of the counterfactual risk. This is not to say that trusted vendors are perfect, but their error rate is perceived as accurate and their ability to withstand mistakes is viewed as believable.
Thus, trust-based buyers will only consider investing time in even trying vendors where they believe there is some chance of success (and low downside). The proof of your competence is being widely used, so the obvious question becomes, how do you get your first reference customers?
What you need is a platform shift. A platform shift creates the potential for a totally new experience that is either insanely better or introduces a new dimension of quality altogether. Incumbents in trust-based industries are usually slower because the competition is less. While you will likely not eliminate them, if you act quickly, you will become one of the trusted vendors.6 While platform shifts usually come from new technologies, they may also come from sudden changes like a dramatic, unexpected regulatory change.
The early sign of success is getting key logos who simply cannot get the default vendors to offer something to them. Like a doctor in residency, the customers become the startup’s tutor and lend their institution’s reputation to the next prospects. The next sign of success is them asking you to offer them more products. This is a sign that they trust you. Trusted vendors offer lots of services, and if they treat you that way, they believe you will be around for the long run. If they are telling other people in their space—and in high-trust industries, the community is usually small—that is proof that you’re really on to something.
Breaking into a high-trust industry is, to some extent, out of your control because you need a window that causes several customers to be open to you at once. While there will always be some Crossing the Chasm-type early adopters, being an innovator is generally a personality type, not a profile, so your likelihood of finding those people is vanishingly small without the platform shift. If you can, it is better to launch with several design partners out of nowhere, ideally in a coordinated fashion, to establish dominance.
The nice thing about breaking into a high-trust industry, however, is that once you’re in, you’re in. These windows tend to be short, so it will be difficult for other startups to compete with you unless they also broke through during the same window. Trust-based industries also tend towards consolidation, so if you make it through the window, expect to receive acquisition offers. Pay attention to everything your customers ask you for because you will likely offer it as a product in the future.
No one ever got fired for buying IBM, but if IBM isn’t even selling the new thing, you aren’t even competing with them, so high-trust customers will be willing to try you out. By the time IBM decides to compete with you, if you’ve successfully established yourself, you’ll at least be one of the viable vendors buyers will consider. Though it is easier for IBM to just buy you.
To add to this, Helmer himself considers brand to be the weakest power.
Even if insured, there may be great reputational risk. Accountability for mistakes also leads to principal-agent problems and institutional design, but that is a discussion for GTM motions and another day.
At the enterprise level, system-level features like superior fraud detection and enterprise support are harder to verify, so reputation becomes more important.
One other example that is stranger is ERP.
Even the cost of verification, though, possible, may be quite high. In a lawsuit, for example, there are tens of thousands of documents and it takes high skill to verify whether a document was privileged or not. Therefore, a lawyer will have to spend meaningful effort even to try an e-discovery tool. In high-trust industries, every vendor goes through these trials, but because you can only test the result and not the counterfactual, you can only show that a tool did well on the test. You may encounter a lawsuit a year down the road where the system fails catastrophically, even if it succeeded every time before that. This is why industries and product categories become high trust in the first place.
In legaltech, you see this quite a lot: the trusted vendors in a category all tend to have emerged around the same time when there was a platform shift. New generations of competitors tend to emerge in clusters around new platform shifts and often end up competing against each other as their services inevitably expand.