I admit I haven’t kept track of all the startups I’ve mentored over the past nine or ten years, but a sizable percentage of them aspired to become platforms. And when you look at the success of Amazon, eBay, Netflix et al, why not?
But it surprised me to read the ZDNet article by Joe McKendrick entitled Most companies aspire to be platform providers, and APIs will get them there. And the sub-title summarizes the article neatly: A majority of IT managers see their companies evolving into platform providers, and see APIs as critical to making the connections. The basis of the article is a survey of 350 IT managers released by Cloud Elements which finds 62% of organizations aspire to become platform providers to integrate with partners, maintain stickiness with customers, or find new revenue opportunities. Platforms are two-sided marketplaces where buyers meet sellers. Even Apple plays the game with its App Store where independent iOS app developers sell their wares to everyone with an iPhone or iPad and pays 30% of their sale for the privilege. And Google does the exact same thing with Google Play. In fact you can’t turn around in the crowded Internet ecommerce space without bumping into a platform or two.
But as I counsel my mentees, two-sided marketplaces are subject to the dreaded “chicken and egg” problem: buyers won’t come to a platform without [consumer goods] [apps] [movies] [tv shows] [games] [etc.] and developers of all this stuff have no interest in a platform that can’t boast serious traction with buyers of their goods. So how do you prime the pump and supply either chickens or eggs or even both to jumpstart your platform?
The answer I always get from founders is “social media” – the marketing marvel that will drive both sides to meet at the platform. Unfortunately the days when upstarts like Amazon and eBay could go from startup to rocket ship in a two-sided market are probably long past unless you can find a small enough niche, as many founders have done by putting together specialized professionals, like graphic artists, with customers, such as companies too small to have a graphic arts department. Another way of looking at two-sided market is to consider the platform providers as simply brokers, a business model that probably goes back centuries. One that many are familiar with are real estate brokers, who put together landlords with tenants or owners with buyers, taking a commission on their sales.
The problem with this model, as Amazon will attest, is that margins are razor thin. In fact, without the totally counter-intuitive genius move by Jeff Bezos to act as a platform for other sellers of goods who compete directly with Amazon, it’s unlikely he would be the richest man in the world today. He wrote in his recent annual letter to shareholders that Third party sellers are kicking out first party butt. Badly. How?
Why did independent sellers do so much better selling on Amazon than they did on eBay? And why were independent sellers able to grow so much faster than Amazon’s own highly organized first-party sales organization? There isn’t one answer, but we do know one extremely important part of the answer:
We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.
So Jeff has given you founders the secret sauce to running a platform: you must add value beyond simply handling the financial transaction. Though as eBay found, even handling the financial transaction wasn’t easy, which is why they ended up buying PayPal.
In fact, I would highly recommend that founders to aim to create a platform study Mr. Bezos’ annual shareholder letters (and anything else they can find about the success of Amazon).
As quoted so neatly from Alex Moazet of Applico: Platform businesses don’t, to use a common phrase, own the means of production- instead, they create the means of connection. In fact if you look at Facebook they too can be considered a platform business as they are the broker between consumers who swap their personal data for free access to friends and family in exchange for being subjected to a barrage of advertising based on that personal data. Google and Facebook both make money by pairing user-generated content and personal information with advertising.
Going back to the title article this post is based upon, APIs can act as the means of connection. Those IT managers who were surveyed saw APIs as critical to making the connections needed to attain this new business model, opening up online assets to partners, and vice-versa.
The key success factor for platform providers is adding value to both sides of the business connection: demand and supply. Once you start thinking about platforms you realize you probably are a customer of many of them, such as Uber, which connects drivers with riders by supplying both with state of the art location-based apps and a frictionless means of payment.
So if you want to grow up to become a platform provider my best advice to you is to find a crusty old marketplace with lots of friction, where you can successfully enter by providing value to both sides of the economic transaction. While I won’t go so far as to say bootstrapping a platform is impossible, gobs of VC money can help you spin up the two-sided marketplace. But what investors will be looking for will be what is your sustainable competitive advantage? What tools or APIs or whatever will you be providing to attract, engage, and retain not just one set of customers – the buyers, but two sets, buyers and sellers? A lot of VC-backed marketplaces attempting to be the “eBay of lab equipment” or ‘eBay or X” are buried in the startup graveyard because simply facilitating a sale isn’t enough, which is why you see Uber re-engineering itself as a logistics company and its competitor Lyft attempting to go deep as a consumer transportation company by getting into bikes, motor scooters, and probably soon, skateboards.