Paul Graham, Co-founder of Y Combinator: A Company's True Moat Is Moving Up One Layer
Graham argues that the fundamental path for a startup to become stronger is not to earn more money, but to move up one layer—by controlling customer relationships, becoming the conduit for funds or tokens, or defining industry standards. He specifically notes that in the AI era, allowing tokens to flow through the company can theoretically place it in a dominant position.
Paul Graham, co-founder of Y Combinator, poses a question in his latest startup advisory article that differs from common inquiries. He frequently asks entrepreneurs: How do you make your company stronger? He acknowledges that one could also ask how a company can earn more money, but this question typically yields only incremental improvements; whereas thinking about how to make the company stronger can sometimes increase its value by several orders of magnitude.
Graham summarizes the core operation of 'becoming stronger' as 'moving up one layer.' Depending on the type of company, this question takes many specific forms: Can you transition from being a mere parts supplier to the party that controls customer relationships? Can you become the channel through which funds flow? Can you create a platform akin to an app store, allowing other companies to build upon your product, so that the valuable things they create, in turn, make your platform more valuable? If you cannot create a platform, at least can you define the standards for how different companies' products interact? He specifically raises a new variable for the AI era in a footnote: In addition to letting funds flow, you can also let tokens flow through the company, because someone always has to pay for the tokens; theoretically, this places the company in a strong position.
Going full-stack is the strategy with the strongest physical sense of 'moving up one layer'—rather than selling technology to companies that perform certain tasks, you use the technology yourself to do the same thing and compete head-on. Another operational method for a full-stack strategy is to complete the most difficult part of the work for the client; in extreme cases, the startup handles all the intellectual labor, while the client merely runs errands. Graham also mentions a more direct path: helping users make money. He states that among the most successful companies he has invested in, most are helping users make money, and the rapid growth of PayPal was due to this reason.