Technological advantage has long acted as a moat for tech companies. Build the best engine, and you can become a category leader. But in light of today’s advances in AI, that moat is eroding fast. Anyone with a prompt and a good idea can replicate features, create apps and reach users in record time. The company building script has been flipped, so where does the ground for differentiation now lie?
According to Google Cloud’s Future of AI: Perspectives for Startups report, investors are seeking out AI platforms that deliver tangible value to users through seamless, intuitive experiences. As an investor in early-stage AI companies, I can attest to that. AI-native startups are challenging legacy incumbents across a wide range of industries by competing with, and even exceeding, their tech and leaving them in the dust when it comes to community building and user experience.
The Crumbling Tech Moat
Enterprise software companies have historically built their dominant market positions despite selling average software by prioritising tactics to ensure customer lock-in. Their products haven’t needed to be good—just painful to leave. Cracks in this model are starting to show.
Startups born in today’s AI-native era are simply proving too nimble. Deep automation is in their DNA from day one, creating huge cost and time savings and enabling timescales for customer migration and onboarding to be slashed from several months to a matter of days. On the product side, AI-native software makes complex workflows simpler than ever to run and manage, which leads to huge gains in practical impact compared to incumbent solutions.
Developments like vibe coding are also redefining who can build software. Non-technical would-be founders with killer ideas can now build early products without requiring access to a seasoned developer. This removes a key barrier to getting a tech startup off the ground and adds further pressure to incumbent players.
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All of this isn’t to say that there’s been a dramatic closing of the gap between good and great tech companies. The space to make product differentiation has just shifted. In the era of AI-native disruption, user experience is where moats will be built.
Where Differentiation Now Lives: Three UX Advantages
Building a great user experience isn’t a new concept, and there are table stakes that every software company should be meeting, like serving experiences that are tailored to user preferences and context and delivering cross-platform journeys.
There are plenty of ways to go beyond these table stakes. As alluded to, AI-native solutions can solve acutely felt problems in industries that the incumbents simply can’t solve with piecemeal integration of AI into their products. As well as driving a superior user experience through better outcomes, AI-native startups can beat the competition by offering more accessible solutions. Their solutions don’t require familiarity with Python. Natural language prompting is enough for non-technical users and teams to dramatically improve their workflows with AI-native software that’s built for their industry.
Why Community-Led Growth Matters More Than Ever
And UX is also bigger than software design. Community-led growth is becoming a defining trait of successful AI startups. Building ecosystems around products with a philosophy for building something that a community actually wants and needs makes users feel heard and involved. Unmatched user retention is the result.
End users, be it consumers or enterprise stakeholders, will be the overall winners of this shift. The days of clunky, unintuitive software are over. For incumbents where that’s not the case, AI-native companies still threaten to do what they can’t: whether that’s by offering superior process speeds, cost optimisation or reimagining legacy tools and infrastructure.
What This Means for Founders and Investors
AI-native platforms that become mission-critical infrastructure in their verticals and drive much needed innovation in exciting sectors are the next generation of unicorn and decacorn companies.
For entrepreneurs with hopes to build such companies, the strength of the user community around the products will be the metric that VC investors prioritise. Take Lovable as an example of an early winner in the AI-native era. Its success story may look like it happened overnight, but it’s really down to the hard work that went into building and iterating the product, and connecting with users every step of the way to understand their needs. Lovable has a brilliant product, but its growth has also been rooted in its relentless focus on user experience, community engagement and offering solutions to real problems. That’s the new benchmark.
AI is levelling the playing field for technical innovation. The founders who win won’t be those with the best algorithms—they’ll be those who build products users love, communities that engage, and experiences that incumbents can’t match.
That’s the new moat. And it’s more defensible than technology ever was.
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