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Commentary » PYMNTS Voice
Not long is the short answer. A completely unscientific but reasonably educated guess is a couple of years. Here I explain why.
To some degree all new firms face an hourglass. Most firms fail and do so, mercifully, quickly. That happens because the firms aren’t nearly as good as they thought they were. Their products can’t attract customers or the firm can’t make those products efficiently. They lose to the competition as a result. Only a handful of the automobile companies that were around at the turn of the 20th century survived. Many died young. Maybe entrepreneurs have a new great idea but the market doesn’t agree. For every Pet Rock that’s a success, there are a thousand more Bob’s (Microsoft failed user interface for Windows 3.1) that are duds. Competition is the survival of the fittest, and that show doesn’t last long.
New platform businesses face all those problems, too. But there’s something else going on that should scare the living daylights out of entrepreneurs as they hear the tick, tock counting out in the background.
Remember the secret of platform businesses. They need to reach critical mass to grow explosively. A two-sided platform has to get to the point where it has so many mutually attractive customers that more of each type of customers wants to join. Positive feedback effects then drive it forward. That’s what we saw M-PESA and Discover do. And it is what PayPal did with eBay by getting enough merchants and shoppers on board. You might think that platforms could just keep slogging along, adding members of each of the critical type of customers, year in and year out, until it launches.
That might work if customers tried the platform and stayed. Here’s the problem. Members of one type of customer try the platform. If some of those members don’t find that they are meeting enough of the other type of customer, they won’t come back. Maybe they will give it a try for a while. But if the platform doesn’t grow quickly enough, eventually more customers will decide that they aren’t getting enough value than new customers that decide to give it a shot. Once that happens, that platform goes into a death spiral. If fewer customers of one type patronize the platform, then fewer customers of the other type will, and so forth. Consider starting nightclub. It has a good opening night with lots of men and women having a pretty good time. Many of them will come back and tell their friends. But if it doesn’t get enough momentum, men will come one night and wonder why there aren’t enough women, or vice versa, and then both groups will stop coming.
When customers need to make an investment to join a platform, securing momentum is even more important. One type of customer won’t be willing to make investments unless it is confident that the other type of customer will show up. Microsoft ran into this problem in launching its Xbox game console as Schmalensee and I described in Catalyst Code. Game makers wouldn’t produce games until they were confident Microsoft would have console users. Microsoft had to produce its own games in part to seed the other side of the market. The expectation issue was one of the reasons contactless fizzled in the U.S. Merchants didn’t have enough confidence that contactless would succeed to invest in new terminals and the card networks and issuers were unable to convince them.
As the clock counts down, the typical race for new catalysts—new multi-sided platforms—often involves increasing the numbers of both types of customers quickly. That’s what YouTube did and one reason it did so much better than Google (and everyone else) that Google ended up closing down its own video site and buying YouTube. It managed to get enough people downloading videos that it was able to get enough people watching videos to encourage people to keep downloading videos and so forth. Getting momentum behind this is absolutely critical. Once that momentum stops, like the train that can’t quite get enough steam going up the mountain, the platform stalls and eventually spirals down. In my experience platform, entrepreneurs have about 18-24 months to make this happen—that’s totally subjective, and I’d love to hear counterexamples.
The fact that new platforms have a deadline—with the constant beat of the tick, tock in the background counting down the time to success or failure—means that it is essential to have an ignition plan and to execute successfully against that plan. Plans can be revised on the fly. But every new platform needs to give serious thought—as do their investors—into how that platform is going to win the race to reach critical mass.
The movie promo for "The Social Network" screams "You Don't Get to 500 Million Friends without Making a Few Enemies." I haven't seen it yet but I've heard that the film suggests that Mark Zuckerberg stole the idea for Facebook. That's hardly a novel charge against innovators. The tech press couldn't get over Bill Gates' success either. He was regularly portrayed as just making money off of other people's ideas.
Remember the kid’s story “The Little Engine That Could.” That describes what goes on with a lot of startups in two-sided markets. The train is trying to get up the mountain, but it needs to accelerate to offset the force of gravity that’s pushing it down. If it picks up enough momentum it can make it. But if not it stalls, and worse, slides back down the mountain. Unfortunately, saying “I think I can, I think I can” won’t get a two-sided business off the ground.
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