Science of Growth: Drafting Off Platforms to Accelerate Growth
When and how to think about business development
In my last post in this series, I tried to clarify some misconceptions around big launch events. I think many entrepreneurs are similarly confused about where and how to think about partnerships to scale up their startup. In 140 characters, they get sage advice like:
When thinking about business development in the “classic” sense (sitting in conference rooms across the country delivering PowerPoint presentations) it’s hard to argue with Paul’s advice above. However, a great question for entrepreneurs to ask themselves once they’ve achieved product-market fit is:
Where are large groups of engaged potential customers spending time today, but frustrated because they aren’t aware of my solution?
If you can tap into one of these communities you can catalyze rapid growth. Some examples from our Science of Growth research include:
PayPal Drafting Off eBay
Merchants Looking to Accept Online Payments
The first high-growth segment was power buyers and power sellers on eBay. These people bought and sold a ton of stuff. The high velocity of money going through the system was linked to the virality of customer growth. By the time people understood how and why PayPal took off on eBay, it was too late for them to catch up. The eBay segment was locked in. And the virality in every other market segment — e.g. sending money to family overseas — was much lower. Money simply didn’t move as fast in those segments. Capturing segment one and making your would-be competitors scramble to think about second and third-best segments is key.
What is interesting is to hear PayPal founders talk about the pivots the company had to go through to get to this point. Two good vidoes on this include:
- A conversation at Stanford between Peter Thiel & Max Levchin in 2004
(the whole talk is worth watching but this is a direct link to the relevant one minute)
- Reid Hoffman on PayPal’s FIVE Pivots to Success in Fast Company
(the video player is at the top of the article)
YouTube Drafting Off MySpace Authors
Trying to Put Videos on their Pages
The founders of YouTube (who earlier in their career were at PayPal) obviously took this lesson to heart. A lot of their growth from MySpace users embedding videos on their pages. In fact, Peter Chernin (then COO at News Corp) claimed that 60% — 70% of YouTube traffic came from MySpace the month before they were acquired by Google for $1.65 Billion. This statistic was debated and almost certainly inflated, but demonstrates how important they were to YouTube’s early engagement. [Note: if somone has more credible statistics, I’d love to see them — haven’t been able to find good data quantifying MySpace’s impact.]
Keep in mind that YouTube still had to pay infrastructure costs to stream all those videos even when played on a third party website. For context, infrastructure costs were approximately $8M of the $11.5M spent between starting YouTube and selling to Google according to an analysis by Gigaom based on the public filings in the lawsuit between YouTube and Viacom. In that same analysis, they point out the last quarter this infrastructure costs scaled to over $1M per month.
Is this Strategy Defensible?
Interestingly, in both cases above MySpace and eBay launched competing offerings. However, once PayPal/YouTube had activated and engaged these customers it was impossible for them to be pulled back into the core platform for video or payments — arguing this is a very defensible strategy.
What about Twitter?
The obvious counter example / question is what about all the startups built on top of the Twitter API from 2007 to 2012? It’s a fair question.
If you aren’t familiar with the backstory. In an interview I did with Biz Stone in 2007 he talked about the importance of API developers on top of the platform:
The API has been arguably the most important, or maybe even inarguably, the most important thing we’ve done with Twitter. It has allowed us, first of all, to keep the service very simple and create a simple API so that developers can build on top of our infrastructure and come up with ideas that are way better than our ideas, and build things like Twitterrific, which is just a beautiful elegant way to use Twitter that we wouldn’t have been able to get to, being a very small team.So, the API which has easily 10 times more traffic than the website, has been really very important to us…
Entrepreneurial developers and startups continued to leverage the API to build on top of the Twitter platform. However, just a few years later, Twitter changed the terms of their API which drew strong criticism and ultimately caused a lot of these apps to end up in very challenging situations. For example, Mashable described the change as: “squeezing the knot around the neck of third-party Twitter apps…”
Reflecting on the differences between Twitter, MySpace and eBay — I’ve come to believe:
the key to ensuring this platform drafting strategy is defensible requires your service to deliver value even outside the platform you’re drafting off of.
Reinforcing the point, this is an important growth technique only after you are sure you have achieved product-market fit.
B2B Example: HubSpot and Marketing Agencies
It’d be easy to think of this technique as restricted to b2c startups given how many of the examples are consumer networks. However, the concept of finding engage potential customers who are frustrated can work in B2B situations as well.
For example, when you look at marketing agencies trying to deliver Internet marketing campaigns to their clients HubSpot has stepped in and activated this as a channel incredibly effectively.
Co-Founder & CEO of HubSpot Brian Halligan explained to Inc Magazine:
In 2008, one of our sales reps came to me with an idea that he believed could revolutionize HubSpot. At the time, we sold our software directly to consumers. But the rep, Pete Caputa, thought HubSpot should have a reseller channel in order to expand the business model. Basically, he wanted to sell our core product to third parties, who would then turn around and sell the product to their customers.
Pete validated the ideas at first working on it nights and weekends and then ultimately was “fired” from his day job as a sales rep to create a group within HubSpot focused on this channel program. It’s been incredibly successful, in a recent interview Pete explained the program has “produced approximately 42% of our customers as of June 30, 2014 and 33% of our revenue for the six months ended June 30, 2014.”
Business Development 2.0
Coming back to the original question at the top of this post: how should a startup think about business development?
Caterina Fake coined a term a few years ago “Biz Dev 2.0" where she talked about validating synergies (typically through APIs) before striking formal partnerships as opposed to starting with a formal partnership pitch and no data.
Once you’ve come up with hypothesis on where those potential customers may be spending time frustrated they don’t have your solution, this biz dev 2.0 is a great approach to validating or invalidating the scalability of those communities.
I’ve expanded on this thinking in my recent book The Science of Growth: How Facebook Beat Friendster and How Nine Other Startups Left the Rest in the Dust you can pre-order on Amazon now.
I’m a serial entrepreneur turned venture capitalist and professor. If you are interested in getting more content from me, consider subscribing to my twice monthly email newsletter: http://seanammirati.com/email/