Building a moat around your startup castle

One the great things for Livemocha is the level of user growth and interaction we have had since we started. But it's always good to evaluate - how easy or hard is it for another startup to catchup quickly?

Which one of the two businesses is more at risk?

1. You spend $30 per customer through SEM marketing campaigns to acquire and sell them a CD product.

2. You don't spend any money acquiring customers, everything is word of mouth. You get a ton of people to your site.

If you are spending a lot of money to acquire customers that's not defensible. While you can do some SEM optimization and fair number of folks probably tell you its an art, its not defensible.
Another company that can spend that $40/customer can beat you. Usually people think of defensible barriers as some patented technology in the product that someone else cannot copy. E.g. PageRank. Acquiring customers really quickly and easily is a strong barrier esp. on the internet where distribution is hard.

Whatever your moat is, focus on that until you have wide enough lead. Google's initial barrier was PageRank and they focused on improving it. Amazon's initial barrier was ease of ordering books online and they made sure that was a compelling service. If your barrier is the user growth then make sure you are focused on doing everything to scale it quickly. Don't get distracted trying to do other things. If you only have 500,000 users and you get distracted focusing on other things, someone else can grow quickly.

Over time you should figure out other things to add to your defenses. While it may be the case PageRank helped Google initially, Google's defensible barrier now is its huge infrastructure that can crawl billions of pages and process results of users clicks to improve results. Its going to be hard for another search engine to be good without these two. Even Microsoft which has thrown enough money at the problem cannot improve Bing unless its gets the search queries from Yahoo search.

If you were a typical internet site and getting lots of visitors -can your users help create a bigger moat for your castle.

Going back to the Google example - Most users don't click on paid ads, but the free users help improve the search engine because their clicks and queries help refine the search engine. Can you apply the same model to your site?