Dynamics of multi-sided marketplaces and the case for the slow startup

Silicon Valley folklore is replete with stories of companies that grow like wildfire in their early days and achieve billion dollar valuations within a few years. Not only do examples of this phenomenon dominate the popular imagination, but the drive towards early growth finds expression in many of the institutions surrounding entrepreneurship. Investors, employees and founders all want to be riding the back of a “unicorn.” Accelerators like Y-combinator and venture capital firms like Sequoia and Andreessen Horowitz are there to accelerate that ride.

Despite this trend, history gives many examples of companies that grew slowly in the early days but eventually dominated their industry. A poignant example is Lego. Founded by carpenter Ole Kirk Christiansen in 1932, Christiansen started by simply making and selling wooden toys. It was not until 26 years later in 1958, the year of Ole Kirk’s death, that the first modern Lego brick was released, leading to what many people regard today as the world’s best toy company.

Why did it take so long to create something so simple as a Lego brick? At first glance the Lego brick system looks like what today we would call a one-sided marketplace, where the side is simply the number of Lego bricks in circulation. The more that are out there, the more you can do with…