Anyone who is counting on your business to succeed should run away if you don’t have a plan. Companies shouldn’t fund initiatives that don’t have plans, boards of directors should demand to see one for any material platform investment, and CEOs and other organizational leaders should dismiss underlings that haven’t prepared one. Venture capitalists and other investors in startups should react with great suspicion to entrepreneurs that haven’t carefully planned how they are going to get a catalytic reaction.
Here’s what an ignition plan needs to have:
1. A clear description of the value that the platform is creating by coordinating multiple customer groups. That value determines how much value the platform can use to subsidize one side if necessary and how much value the platform can have left over as profit.
2. An analysis of the importance of each group of customers in generating this value and the difficulty of getting each group on board that platform. This analysis will determine how much of the cost of the platform each group should bear and how much profit should be generated from each group. In many cases it will determine which is the money side and which is the subsidy side of the platform.
3. Strategies for getting members of these multiple groups of customers on board the platform in sufficient numbers, probably over an 18-24 month time period. These strategies need to solve the coordination problem which is particularly difficult when, as for most payments platforms, the two groups need to belong to the platform in sufficient numbers almost from the start.
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4. Operational tactics for implementing these strategies. Given the short time period available to get to critical mass, it is essential that entrepreneurs think through the tactics they are going to use to get ignited. Who are the anchor tenants they could and how are they going to get many members of the different groups to appear at launch?
5. Some notion of the critical mass that would be needed to secure ignition. There are no formulas for this at the moment and the critical mass will vary depending on the platform. Although this is guesswork, the entrepreneur should think through how much will be enough. If it isn’t possible to get critical mass in the necessary time period then the entrepreneur and her investors should look into something else.
Of course, as the oft-quoted poem of Robert Burns says, “The best-laid schemes of mice and men go often askew, and leave us nothing but grief and pain, for promised joy!” That’s particularly true for launching multi-sided platforms because there are so many interdependent variables that will ultimately determine whether the platform will secure ignition. Most entrepreneurs, when they start one of these businesses, are making guesses about this complex system. As they start, they get more information, and oftentimes that information will lead them to modify strategies and tactics. The successful entrepreneur must not only have a plan, she must be able to quickly modify the plan, as she learns more.
There are no guarantees when it comes to new products. An ignition plan can’t guarantee takeoff. Achieving critical mass can’t even ensure profitability. What is for sure is that starting a multi-sided platform business is one of the most difficult tasks facing any entrepreneur. Understanding the obstacles to a catalytic reaction is important. Thinking through how to achieve launch before the forces of gravity bring you back to earth is essential.
Many entrepreneurs are working on starting new payment systems these days especially ones based on mobile. Unfortunately, most of the ones I have encountered, whether they are startups or sponsored by incumbents haven’t understood the seriousness of the coordination problem in payments. Hundreds and hundreds of millions of dollars, perhaps many billion, will be squandered over the rest of this decade by companies large and small who still, in the face of decades of experience to the contrary, think that if they build it customers will come, that if they offer a shiny new toy people will flock to it.
The ones who succeed will be those who have identified a way to provide significant additional value to groups of customers who need each other and have devised ignition plans that enable them to quickly achieve critical mass.
I. Why Every Payments Product Needs an Ignition Strategy
An ignition plan won’t guarantee success. But it does force entrepreneurs and investors to think carefully about how they are going to get both buyers and sellers on board, in sufficient numbers, and quickly enough, to ignite. In doing so they may realize that ignition is too difficult and save their money.
II. What the Little Engine that Could and Nuclear Physics Have to Do With Ignition Strategies
The basic problem for a two-sided business is that it needs “critical mass” to get ignited. That’s a concept from nuclear physics and a pretty good analogy to what goes on with two-sided platforms.
III. Blast Off! How Two-Sided Platforms Ignited
Facebook wunderkind Mark Zuckerberg and his partners made it look easy. The social networking platform ignited almost immediately after it was introduced at Harvard College.
IV. Why Even Great Payments Ideas Crash and Burn
This brings me to a stark point: There are lots of great ideas out there, but precious few entrepreneurs who can turn great ideas into successful businesses.
V. How Long Does a New Platform Have to Ignite or Fizzle
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.
VI. Ignition Strategies: How to Launch a Platform Business
Getting a new product off the ground is one of the great challenges in business. That’s well documented for entrepreneurs. VCs don’t get any return from more than 40 percent of their first-round investments and get back less than they put in for two-thirds.
