Platform customers: Scale is everything

Platform startups are all about your customers. The perceived (and real) value of the startup depends on the number of customers that are onboard. The assets of the startup are largely the personal data of the users since this is what keeps them coming back and helps you target them more effectively as users (or the product).

Beyond the customers, the true value of the startup is the amount of time that these customers spend on your platform. This is not the most obvious benchmark for investors for two reasons. The first reason is that it it appears non-intuitive, since the basis for most platforms is consistent customer acquisition and usage by customers, which in turn translates to pushing ads through to them and using these ads as a source of revenue. The second and more pertinent reason is that this is not something that startups like to showcase to investors, since they risk providing too much information, which in turn negatively impacts their own valuation.

With customers having ever-more limited time and with ever-greater apps and platforms vying for their time, it is very seldom that a new platform is able to drive ownership of a certain part of the users’ day, on a daily basis. The ones that are able to do this become the billion-dollar companies that we see today. The question is how to get there.

While there is no obvious answer and it is a given that you need a large amount of luck, it pays off to heed certain corner-stones. These are discussed below.

Tiny tiny vertical: Most platform startups aim big. Very big. It’s good to remember that although Facebook today has close to two billion users, it started with one school in the US. Harvard. Once it had traction with the user community there, it went to other schools. Only once it recognised user requirements and how it could make its platform relevant for these users did it open the platform to people beyond this core community.

The risk with going too big too quickly is two-fold. The first risk is that the startup spreads itself too thin over multiple sectors and is unable to get traction or establish key relationships necessary to own the vertical. The second is that it loses control of the narrative. By being everywhere, the startup is already in the public domain. Any failures thus play out in public view, risking opening flanks for competitors and degrading much-needed credibility with users and corporate clients alike. Typical risks include security lapses, due to which user-information is leaked out.

What segment of the users’ time are you addressing? Since the idea behind platforms is to gain traction with the time of the user, it’s important to step back and define what time slice you are addressing.  Is this work-related or related to leisure? In case it is work-related, it is unlikely that you’ll be able to push ads as a key source of revenue. In such case, the revenue needs to be identified early on.

In case of leisure, a definition like a game unfortunately doesn’t cut it anymore. Here, it’s useful to take a step back and recognise that the Apple app store has about a million apps, as does the Android app store. The apps that are successful are a far smaller minority than the universe of apps that exist. A platform that not only addresses all users but owns a tiny segment, as discussed above, by providing value which addresses an existing problem is far likely to gain traction.

What segment are you replacing? Just as important as the users’ time that you’re addressing is to ask the question regarding the users’ existing segment that you’re replacing. This pertains to the users’ time segment, and by implication, to the users’ value segment that the platform plans to replace.

Users have ever limited time, with more and more platforms, both for business and for leisure, vying for their time. For a platform to try and become relevant in this crowded market vying for the users’ mind-space, it is far easier to identify verticals and focus on replacing them than go in blind. The process of vertical identification can be done in two ways. The first is to provide a solution that exists but where you can provide a significantly superior experience. Here, the startup’s challenge is to be given the opportunity to be tried by the user. In a world where users often have app-fatigue, this is a significant barrier. The second can be to identify a problem to which a solution does not exist. Difficult as it sounds, the real opportunities may lie in this direction. The opportunities may be beyond conventional apps and in addressing industrial sectors, which often use technology which is several decades old. Since this area also is much larger by volume, with market sizes in excess of several hundred billion, a tiny market-share can equate to a very healthy revenue opportunity.

Limits: If you studied calculus in school and could never relate to the practical applications for this esoteric subject, you’re part of a significant majority of us. Unless you expect to move into defining the trajectory of space probes, this is the one opportunity to get value from all that work.

The reason that limits are everything for startups that aspire to become platforms is that to be truly successful and to ultimately become the platform, for each set of existing 100 customers, the startups needs to get an additional set tending to just over 100 customers. If the limit veers to just over 100 for every existing 100 customers, whatever the timeframe, the startup will ultimately own the critical mass of users that provide ownership of the entire platform and finally becoming the platform.

If, on the other hand, the startup veers towards getting slightly less than 100 new customers for an existing set of 100 customers including churn, the final number will be a finite one and much smaller than the universe of the total users possible. This implies that there is another entity that owns the larger percentage of users. Ultimately, all users will migrate to the other entity, leaving the first startup bereft of users.

Since platform startups are driven by only one thing, which is to own every possible user in the vertical, or find a sub-vertical within which they own all or a majority of users, inability to do this removes the main reason why advertisers may find them of value. If they are unable to justify why advertisers may find them of value in absence of ownership of a vertical (or sub-vertical) of users, they are unable to gain traction with investors.

The inability to recognise limits for what they are then puts the entire reason for the existence of platform startups into question.

Addressing pain: The first step is to recognise customer groups that have a pain that your platform will mitigate.  Your perception of their pain may be different from their real pain, which is why actual customer feedback is key.  Once you recognise the real pain and can address the platform to own these customers, you’ve taken the first step towards becoming the platform.

There is a continental divide between Europe and the US and an excellent reason why platform startups often come out of the US.  Skype is a notable example, but most other platforms always evolve from the US.  A key reason is the common culture and language across the US.  This facilitates quick replicability across multiple sub-verticals once the first beachhead vertical comes onboard.   The second reason is the level of comfort of successful entrepreneurs to fund ideas which may be seen as high-risk and devoid of technology excellence but capable of disrupting the existing market-place.  Investors in Europe are conservative, focusing on investments in technology that has fool-proof IP and emerges from within research institutions.  While this ensures technology excellence, the process of emergence ensures delay which often strikes the death-knell on wannabe-platforms, where speed-to-market is prized beyond anything else.

Tech platform: When technologies come out of research, they are exactly that: technologies looking out for customers. This does not make them platforms; all they are at this time is technology looking for a market.

Technologies often look at existing markets and try to evolve the status quo. On the other hand, platforms, by their very nature, focus on disrupting this very same status quo. Technologies which have technology excellence attained over decades of effort, combined with conservative investors focussed on seeing IP, are the ideal combination for companies with tech excellence. Platform companies, by their very nature, are technology-agnostic, which enables them to scale rapidly to address fast-evolving customer needs. Technology then becomes a hurdle, or at the very least, something that simply needs to be managed, preferably off-the-shelf, if not fully outsourced.

In the uncertain world of changing customer requirements, tech-driven startups go back to their area of comfort, rather than addressing the user-needs. This results in a natural selection of tech excellence arising from Continental Europe and platforms from the US. If platform startups don’t recognise themselves for what they are or address technology in a platform world, they very quickly get swept away.

If a platform startup does not cover all the elements above, it stands virtually no chance of succeeding. Even if it does, it finally needs that one final ingredient to truly become the platform and own the marketplace. It was, as Cliff Richard first said, Lucky Lips.