Discover more from Memos from Hawk Hill Ventures
🪤 Dark Patterns for Defensibility
Because nice guys finish last
In a perfect world, everyone plays fair. However, the harsh reality is that very few businesses in the S&P 500 actually do. In free markets, all players will seize every opportunity to gain an edge and capture more market share. Oftentimes, these advantages can create flywheels (or monopolies) that make competition fruitless. The role of healthy competition and antitrust regulation in economics can be endlessly debated, but that’s beside the point of this memo. The fact is, startups competing against large incumbents shouldn’t rely on the DOJ to bail them out. By avoiding competitors who use these dark patterns for defensibility, founders dodge prolonged battles that they might not be able to win.
The most American way to build a great company is to work with the government to create an unfair advantage. Just look at the pharmaceutical, telecommunication, energy, or agriculture industries. Ironically, the very system established to prevent unfair business practices has become a primary agent of anti-competitive behavior.
Microsoft has recently taken up residence up on Capitol Hill to push forward regulation around AI. This makes sense, as they are one of the largest investors in OpenAI and would like to maintain their market dominance by any means possible. Their framework (below) suggests competition-limiting tactics such as approval processes for new AI use cases, enhanced KYC requirements required for AI companies, and restrictions on access to more powerful models. These are major hurdles for any new player in the foundational AI model space.
Moreover, regulatory capture isn't just about direct legislation; it's also about shaping the narrative and controlling the dialogue around regulation. Large companies have the resources to influence public opinion, lobby policymakers, and shape regulatory outcomes in their favor. They can flood regulatory bodies with comments and testimony, drowning out the voices of smaller competitors and public interest groups. By doing so, they ensure that the regulatory environment evolves in a way that entrenches their market power and keeps potential challengers at bay. While legal and often overlooked, this dark pattern has profound implications for competition, innovation, and the health of the broader industry.
While drug dealers such as Purdue Pharma have an attractive business model, it is unethical to hook your customers on products against their will. However, product managers at consumer software companies spend every day inventing new ways to get their users to open their app again. Even the common measurement of “daily active user” (aka DAU) sounds more akin to a victim than a customer.
The use of algorithms to maximize user engagement has created a feedback loop of addiction. These algorithms are designed to show users content that will keep them hooked, regardless of the impact on their mental health.
This week, California (along with 32 other states) filed suit against Meta for violating consumer protection laws. The prosecutor was quoted saying, “It seems to be part of a corporate playbook where there is knowledge about harms to the public and it is hidden and lied about.”
Sounds like a dark pattern to me.
Arguably, economic globalization has more pros than cons. Reduced cost to produce goods as well as more jobs (and choice) for a global workforce. However, sometimes employers in developing nations can’t compete with large companies capturing much of their workforce, and perverse power dynamics can appear. Cheap labor has knock-on effects.
The dawn of the AI Age has been built on the backs of low-cost data labelers in developing nations around the world. Companies like Scale AI and Appen employ hundreds of thousands of Venezuelans to label data for training AI models. Annotators in Kenya make $1-$3 an hour labeling objects in a photo.
The reality is, this reliance on cheap labor creates a structural imbalance, where developed nations extract value at a rapid rate, leaving developing nations struggling to keep up. Leveraging economic disparities to create competitive moats is a dark pattern.
By relying on this kind of global workforce, companies are essentially betting on the continuation of these economic imbalances. They're profiting off the lack of opportunity in developing nations, rather than contributing to a more equitable global economy. It’s a precarious position, both ethically and strategically. Changes in global economic policies or shifts in labor rights could unravel these advantages quickly.
Intellectual Property (IP) protection is a legitimate way to incentivize innovation. However, it becomes a dark pattern when used aggressively to stifle competition and maintain a stranglehold on a market.
George shared a great example of this from the prop-tech world: the ongoing legal battles between Yardi and Entrata, two giants in the property management software space. Yardi, the incumbent, has a long history of defending its turf through IP litigation. It’s taken Entrata to court multiple times, accusing them of patent infringement and other IP violations.
These legal battles can be seen as an attempt to defend their market position, using their extensive IP portfolio as a weapon. For startups and smaller players in the market, the message is clear: compete with us, and you’ll need deep pockets to survive the inevitable lawsuit. It's a classic case of using legal muscle to maintain market dominance, a dark pattern that stifles innovation and competition.
There’s Still Hope
Despite these dark patterns, there is still room for optimism. Not all competitive advantages are created through unethical tactics. Hamilton Helmer’s 7 Powers (shown above) provides a solid framework for building lasting, positive defensibility.
By focusing on these positive forces, startups can carve out their own space in the market, without relying on the dark patterns of the incumbents. It’s about building a moat through genuine value creation, not exploitation. Creating a sustainable competitive advantage means fostering innovation and serving customers better.
While dark patterns of defensibility are prevalent and can create daunting challenges for startups, they are not the only path to success. By understanding these patterns, founders can identify them and navigate around them, choosing a path of integrity and innovation. The future belongs to those who build it right, and there’s still plenty of hope for those who choose to play fair.