Durable Growth Moats: The New Shield for Disruptive Tech
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Introduction
In May 2023, Chegg’s stock plunged 48% in a single day. The company had built what seemed to be an impregnable position in online education through years of content development and network effects. Yet a single technological shift threatened to undermine these traditional defenses. Just weeks later, Pluralsight, valued at $3.5 billion with 1,700+ enterprise customers, faced similar questions about its moat’s durability.
This wasn’t just about AI — it revealed a deeper truth about how competitive advantages must be rethought in an era of rapid change. The strongest moats today require both rock-solid fundamentals and resilience to technological disruption. Our analysis of over 650 deals in disruptive technology companies has revealed a stark reality: traditional competitive advantages are increasingly vulnerable to technological shifts. Yet the most resilient companies manage to maintain strong growth trajectories even during periods of disruption by building what we call a Durable Growth Moat.
Understanding Discontinuity
Today’s investment landscape is experiencing Discontinuity. The traditional playbook for evaluating and protecting high-growth technology companies is being rewritten as rapid technological advancement, particularly generative AI, reshapes competitive dynamics at an unprecedented pace. When investors encounter Discontinuities — unexpected changes or complexities that disrupt traditional growth paths — it can derail their investment strategies. But with the right insights, Discontinuity also can become a powerful driver of higher returns.
Decoding Discontinuity is our firm’s mission. In today’s rapidly evolving business landscape, Discontinuity has emerged as the defining challenge of our time. It represents more than mere change or disruption — it marks fundamental breaks in established patterns of competition, growth, and value creation. These breaks occur when technological advances, particularly in generative AI, create non-linear shifts in business capabilities and market dynamics.
Our firm’s mission centers on decoding these discontinuities because they represent both the greatest threat and the greatest opportunity in modern business. When Discontinuity strikes, it doesn’t merely alter business conditions — it rewrites the rules of competition entirely. Traditional metrics become unreliable indicators, historical patterns lose their predictive power, and conventional strategic frameworks prove inadequate.
Consider how generative AI has transformed the economics of content creation and knowledge work. Companies built on traditional content moats, like Chegg, discovered that their vast libraries of carefully curated content — accumulated over years and protected by network effects — could be replicated or bypassed almost instantly. This isn’t merely disruption; it’s Discontinuity. The fundamental assumptions about value creation and capture in their business model became invalid virtually overnight.
Decoding Discontinuity requires a sophisticated understanding of three interconnected domains: business model architecture, technological capability frontiers, and a clear understanding of the fundamentals that matter. We analyze these domains through multiple lenses to identify the hidden signals that precede major shifts. These signals might manifest as subtle changes in customer behavior, emerging technological capabilities, or early signs of business model stress.
The introduction of generative AI represents perhaps the most significant Discontinuity of our era, fundamentally altering the relationship between scale and capability, cost and quality, expertise and execution. In this context, understanding a company’s Durable Growth Moat becomes critical not just for protecting current positions but for capitalizing on new opportunities.
The New Reality of Competition
Picture a medieval castle surrounded by its protective moat. For centuries, this image has defined how investors think about competitive advantages. The concept of an economic moat, popularized by Warren Buffett, has long served as a framework for understanding sustainable competitive advantages. However, while still relevant, traditional moats — such as network effects, switching costs, or brand value — are no longer sufficient in isolation.
Today’s technology companies face threats that don’t just come from across the water — they come from aerial assaults like generative AI breakthroughs, require deep underground fortification through robust fundamentals, and emerge from dimensions we’re still discovering. Discontinuity can rapidly erode seemingly impregnable market positions.
Defining the Durable Growth Moat
Enter the “Durable Growth Moat” — a modern evolution of competitive advantage that specifically addresses the challenges high-growth technology companies face in an era of constant disruption. A company’s quality of growth and its capacity to withstand shocks — from infrastructure dependencies to pricing power to data advantages — are the sum of its intrinsic strengths and resilience factors.
The priority for investors in a high-growth tech company — i.e. a company growing north of 15% organically — is balancing growth potential with sustainability and risk mitigation. The core investment thesis is the potential to grow massively. But it’s not enough. Investors need to know: Will the economic engine allow for the required velocity? Will it be profitable one day? Will I achieve significant operating leverage? Can I achieve a robust exit?
At its core, a Durable Growth Moat combines foundational strength through core business fundamentals, an adaptive capacity that allows companies to strengthen during periods of disruption, and systemic resilience that protects against single points of failure.
Foundation strength manifests across four critical dimensions that define a company’s competitive position.
The first dimension is revenue quality, encompassing the composition of recurring revenue, the diversification of the customer base, and the technological sophistication of services. These elements are measured through specific financial and operational metrics that indicate the stability and sustainability of revenue streams.
Growth quality forms the second dimension, focusing on customer retention through Gross Revenue Retention (GRR), expansion opportunities measured by Net Revenue Retention (NRR), and the fundamental scalability of growth mechanisms. This dimension examines the efficiency of customer acquisition and the company’s ability to expand within its existing customer base.
The third dimension, margin quality, evaluates cost structure optimization, operational efficiency, and the path to profitability. In the age of generative AI, gross margin has emerged as a particularly critical indicator, as it reflects both current profitability and the potential for AI-driven margin expansion.
Balance sheet strength constitutes the fourth dimension, measuring a company’s capacity for investment, financial flexibility, and ability to weather economic storms. This foundation enables strategic optionality and provides the resources necessary for continuous innovation.
Adaptive capacity reflects whether core business fundamentals will strengthen or erode in the face of genAI adoption. This goes beyond surface-level analysis to understand the deep structural impacts on the business model. Will genAI unlock new growth vectors through product enhancement and market expansion? Can the technology drive operational efficiencies that expand margins, or will competitive pressures and implementation costs compress them? We model multiple scenarios to understand the range and probability of outcomes.
Last, we perform a vulnerability assessment to identify potential genAI-related single points of failure that could fundamentally undermine the business model — similar to identifying an Achilles’ heel. This includes examining dependencies on proprietary data assets or unique technological capabilities that genAI might commoditize or obviate.
This layered approach reveals not just whether a company can survive in the age of genAI, but whether it can transform technological disruption into sustainable competitive advantage.
Why Traditional Protection Isn’t Enough
This moat is critical for high-growth disruptive tech companies, as it protects them more than most other companies.
First, these companies typically invest heavily in future growth, often at the expense of near-term profitability. This strategy, while potentially powerful, creates vulnerability. Without a Durable Growth Moat, companies risk having their growth trajectory interrupted before achieving sustainable economics, potentially leading to a death spiral of declining growth and deteriorating unit economics.
Second, the competitive landscape has intensified dramatically. The democratization of technology and abundant venture capital funding means that competitors can emerge and scale rapidly. This environment is particularly challenging for companies that haven’t established robust protective mechanisms around their growth engines.
Finally, the acceleration of technological change, exemplified by the rapid advancement of generative AI, has compressed innovation cycles and market adaptation timeframes. What once took years now happens in months or even weeks. This acceleration means companies need stronger, more adaptable protective mechanisms than ever before.
But this modern moat isn’t just relevant for traditional technology companies. Whether in manufacturing, healthcare, or retail, every business must now build these dual defenses of fundamental strength and adaptive capacity. The most successful companies use technology to enhance rather than replace their core competitive advantages.
Looking Ahead
The Durable Growth Moat framework represents a fundamental advance in how we conceptualize competitive advantage. Rather than viewing moats as static defenses, it emphasizes dynamic strengthening through periods of disruption. Consider how Salesforce approaches AI threats not merely as challenges to defend against, but as opportunities to deepen their competitive advantages.
This framework also unifies offensive and defensive elements. ServiceTitan exemplifies this approach, using its deep industry-specific knowledge not just to protect its current position but to expand its market as technology evolves. This integration of growth and resilience creates a more robust competitive position than either element could achieve alone.
Perhaps most importantly, the framework recognizes the interconnected nature of fundamental and technological strengths. High margins don’t just indicate current profitability — they provide the resources for continuous innovation. Strong retention isn’t merely about customer satisfaction — it reflects deep workflow integration that allows companies to evolve alongside their customers.
AGI is the tool we have created to unlock the insights needed to understand which metrics matter, which business model levers can be pulled, and how to develop the right growth playbook.
The companies and investors that will thrive in this new era will be those that can identify and maintain these modern moats, ensuring their growth trajectories remain robust even as the ground shifts beneath their feet.
