Piggybacking, Acquisition Arbitrage, and Platform Risk

At its 2020 Partner Summit, Snap confirmed what many had been witnessing over the last two years. Its developer tools (“Snap Kit”) have allowed a number of startups to skyrocket through the charts. As of May 2020, over 20 of the top 100 iOS and Google Play Stores apps use Snap Kit.

This reminded me of a good number of startups that have scaled by piggybacking existing platforms or using other forms of user acquisition arbitrage. These strategies clearly involve a potentially fatal risk — what happens if someone turns off the tap?

However, I ask myself if early-stage venture-backed startups should embrace that if it means building and scaling faster and more efficiently than the competition, at least initially.

Let’s start with definitions.

Piggybacking and Acquisition Arbitrage 📈

Piggybacking describes the situation where a startup leverages the infrastructure or network of an existing platform to either: (a.) build components of its own offering; or (b.) acquire users, customers or viewers. In simple terms, it’s the entrepreneurial equivalent of climbing a mountain on someone’s back:

For example, Snap Kit allows entrepreneurs to both access Snap’s technology to build product features (e.g., with LoginKit, BitmojiKit or CameraKit) and also share their products via Snap’s userbase (e.g., with stickers through CreativeKit).

Piggybacking is also possible when a platform doesn’t release developer tools. Remember how Airbnb hacked its way into piggybacking CraigsList?

Importantly, using another platform’s tools to build some core aspects of the product (vs. specifically acquisition tools) may have significant effects on acquisitions too. For example, using Snap’s LoginKit simplifies building the onboarding flows of your app, but it also lowers friction with Snap users and therefore facilitates acquisitions of these users.

Acquisition Arbitrage is a related but different concept. It describes taking advantage of a temporary event in the market to buy an asset at a lower price than would otherwise be possible and making a profit from it. My favorite example of this has to be the Pizza Arbitrage on Doordash. The idea here is that spending money prints more money:

In the startup context, acquisition arbitrage means leveraging a market inefficiency/mis-pricing in a particular channel to acquire customers efficiently and therefore scale faster. Acquisition arbitrage can happen by piggybacking an existing platform (as described above), by leaning into an under-priced paid channel or by a combination of both. Note that some arbitrage opportunities exist within channels (e.g., by identifying an under-served keyword or leveraging specific rules within a channel — a la Musical.ly in its early days).

In efficient markets, arbitrage opportunities are inherently temporary windows of opportunity. Over time, the invisible hand corrects the inefficiency/mis-pricing and the opportunity disappears. As such, arbitrage rewards first entrants into an emerging/growing channel. Jason Crawford said it best:

There is a first-mover advantage. But it’s not what everyone thinks. It isn’t being the first product in a market. It’s being the first in a new distribution channel.

There are countless examples of successful companies that have jet-packed their way to scale precisely because they have mastered piggybacking and/or acquisition arbitrage. To name a couple interesting ones:

In the piggybacking category:

• Zynga on Facebook Platform: in Facebook’s early days, Zynga leveraged the Facebook Platform to incredible success. It grew Farmville’s user base to 43 million within 100 days and Cityville’s to 61 million within 50 days. In one of Zynga’s early investors’ words: “[t]he Facebook Platform was free distribution [and] Zynga rode that free distribution to millions of users, profits, and additional games. Only then did they start marketing”.
• YOLO on SnapKit: as mentioned above, Snap Kit has powered a number of early successes. The most spectacular one is probably YOLO. In May 2019, only weeks after launch, YOLO was downloaded 10M times and topped the US AppStore — since then it has aggregated 26M downloads and over 10M MAUs (as of February 2020).
• E-comm Merchants with FBA: in e-commerce, I’d argue that the success of a great number of Amazon-only merchants/brands is a good example of piggybacking; specifically in this instance of Amazon’s discovery functionality, massive user base, and incredible logistics provided by Fulfilled by Amazon.

In the acquisition arbitrage category:

• Casper and Paid Ads on Mobile: Casper reportedly reached $1M in sales in its first month of operation, $20M in sales in less than 10 months, and $100M within two years. While Casper’s team was brilliant at growth hacks (e.g., the blog series on “everything that happens…in bed” on MTV’s Real World featuring Casper mattresses ) and UX throughout, it’s at least arguable that they heavily leveraged initial mispricing of Facebook’s mobile ad product.
• Cash App and Influencer Marketing: after a slow two year crawl, Cash App heavily leaned into influencer marketing with major give-aways. The results have been unbelievable, catapulting the app as a key revenue and profit driver for Square ($530M in Q1 2020 revenue generating $183M of gross profit) and a key competitor of Venmo.

Platform Risk ⚡

In spite of convincing successes, these strategies have a bad reputation. Many entrepreneurs and investors are reluctant to lean too heavily into a single platform or channel for fear of introducing a critical vulnerability in the system— what happens if the platform turns off the tap or the arbitrage disappears?

The risks are indeed very real and can potentially be fatal:

• A platform can shut down or restrict third party tools: in 2015, Facebook restricted the ability of developers to access data relating a user’s friend. For a number of startups that had built their products on this API, that meant closing shop or revamping their products. Similarly, in 2018, Twitter removed access to APIs needed to give access to push notifications and an auto-refreshing timeline.
• A platform can change its terms of service: in 2010, Facebook started to require that all in-app purchases be made with Facebook Credits, taking a 30% cut in the process. For a number of gaming studios and other developers, this weakened unit economics drastically and, combined with the point below (increased paid acquisitions), was a quasi-death sentence.
• Generally, platforms mature: while Facebook was initially an under-explored, and therefore cheap channel, it eventually matured and costs of acquisition increased dramatically. At that point, most arbitrage opportunities disappeared.

I’m assuming here that piggybacking and acquisition arbitrage are short or medium term strategies — i.e., that, after a certain scale, the startup diversifies away from the platform and channel that provided the initial leg-up. In the alternative, one might want to consider a whole range of other risks associated with over-relying on a single platform.

Are the Risks Worth Taking? ⚖️

Instinctively, I’d be one of the first to say that nobody should stake all of its fortunes on a third party. It’s a terribly uncomfortable position and one that hurts common sense.

That said, and upon reflection, the truth is that established acquisition strategies — paid on Google/Facebook/Instagram and to some extent SEO/ASO — don’t provide competitive advantages and currently only afford linear scale. Fred Wilson summarized it well when he recently said:

[T]he Google/Facebook/Instagram well has not exactly ‘gone dry’. But it sure feels like steady-state to me now. It is must-do but you can’t beat the competition there anymore because everyone is there.

For an early-stage venture-backed startup, “beating the competition” — a short-hand for scaling as fast as possible and acquiring a category-defining position — is priority number one. Without that, it’s “death by a thousand shrugs”. Of course, building a sustainable company matters just as much in the long term but in the first 18 months of a venture-backed business, the priority should be to build a business in the first place.

In addition, given the scarcity of resources at the earliest stages, “startups can usually only do one thing well at a time”. If that one thing turns out to be an unfair advantage vs. your competition, that is probably what you should be focusing on.

In this context, I find Jeremy Liew’s advice (in the context of what I’ve called here acquisition arbitrage) persuasive:

At an early stage, if you find a scalable, repeatable vector of growth, embrace it and ride it for as long as you can. And if anyone warns you about the platform risk when you’re early and growing fast, ignore them.

I’m on board with his argument as long as you can:

• Lean into a true arbitrage opportunity; i.e., really focusing on the channel or platform that is acquiring the most users the most efficiently. For the biggest arbitrages, this is primarily a temporal question — are you first to the underlying platform/channel? But identifying this type of opportunity arguably requires a systematic and thoughtful analysis of a variety of acquisition channels.
• Retain acquired users: the importance of retention deserves a post of its own. For now, it’s probably sufficient to observe that taking platform risk probably doesn’t make sense if the reward is only momentary because users churn to a great extent.
• Aim for symbiosis: when piggybacking, it’s probably important that the product bring value to the piggybacked platform. A true platform (i.e., something that creates more value for its participants than for the company that created it) is far more likely to be a good long term bet for piggybacking than non-platform products (compare Snap’s approach today to that of most gaming studios) because interests are aligned. Focusing on platforms, and then offering a product that adds value or solves for a paint point of that very platform is one of the most promising ways to build a symbiotic relationship protecting against platform risk. A few good examples here.

Today’s Arbitrage Opportunities 🚀

Where do we see the next piggybacking and arbitrage opportunities for early-stage startups?

• TikTok: as one of the fastest growing social network of all times where startups can find significantly lower customer acquisition costs, TikTok is a clear-cut example of user acquisition arbitrage opportunity at the very least as a paid channel.
• Snap: while Snap is no longer growing as fast as TikTok, I see it as a great source of piggybacking and user acquisition arbitrage opportunities. The expansion of SnapKit, the launch of SnapMinis, and several other Snap initiatives strongly suggest that the Company sees its future as a platform that will happily welcome startups. In terms of user acquisition arbitrage, the channel is still under-penetrated, so customer acquisition costs are lower than on Facebook, at least for some advertisers.
• Podcasts: for years podcasts have captured an increasing share of our attention and should have become a great acquisition arbitrage opportunity. I haven’t seen it play out just yet (have I missed something?) but ad products and analytics in audio are evolving fast. We could see an acquisition arbitrage opportunity emerge soon.
• Games: with games growing as they are, these environments should be fantastic piggybacking or arbitrage opportunities. On the former, I’ve noted my hesitation above but it’s at least arguable that studios that want to create Metaverses should increasingly be taking a platform approach and be friendly to developers who intended to piggyback on them. On the latter, I haven’t seen many in-game paid opportunities available to resource-constrained startups (cf. the paid integrations sponsored by large brand advertisers, mostly on YouTube). However, gaming communities — often living on Discord — have already become very fertile grounds for organic or pseudo-organic user acquisition for a range of products (not just gaming-related). I haven’t heard of a lot of success stories with Twitch but would love to be convinced otherwise.
• Shopify’s Partnerships: in e-commerce, the lack of acquisition arbitrage opportunities (“Facebook has become too expensive”) has been on everyone’s mind for a while. Most have experimented but few have found alternative channels to lean heavily into. But recently, Shopify announced major partnerships with Walmart and Facebook, allowing merchants to plug into these players’ user/customer base. I find these pretty exciting, but the next arbitrage opportunity could also come from Pinterest’s Shops.

If you have other ideas or disagree with those, let me know!

Wrap-up 🏁

A long-winded post to say something simple: I’m a big believer in the idea that fast growing companies are built on piggybacking and acquisition arbitrage opportunities.

It’s definitely not the only path towards growth and it’s arguably a riskier one. But if you’re in the business of building a rocket ship, shouldn’t you be looking for rocket fuel?

As always, keep the feedback coming 🙏🏻