Platform (or Route-to-Market) startups

Welcome to the series on how to become an entrepreneur.

You may recall from our earlier blogs in the series that there are three broad categories of startups.

1. Platform startup
2. Pain startup
3. Technology startup

This blog will cover platform startups.

Platform startups have certain characteristics. They are most often the startups that people talk and know about. They are the ones that create billionaires. You’ve probably heard of them in passing. They include Youtube, Facebook and Twitter.

However, one of the major limitations of platform startups is that there’s only one winner in a segment.

Let’s take fax machines. One fax machine is useless. However, two fax machines can talk to each other, if they’re on the same platform. If there are 100 fax machines, the 101st machine has to be on the same platform, so that it can talk to the first 100 fax machines.

So although there are many entrants in any given sector, only the one that gets to the threshold customers first and continues to scale from there, wins and ends up with a large majority of the market, effectively going towards 100%. All the others simply don’t survive. A few who are able to capture small sub-segments of the market get acquired (that’s a good exit strategy for the founders), if their timing is right.

Uber is a good example of a platform startup. They scaled up really fast, and at last count, were still bleeding massive buckets of money. But their competitor Lyft couldn’t scale fast enough and build market share. They are now shopping for someone to acquire them and it is likely that as the window shortens with Uber getting ever more market share, the Lyft sale is likely to happen at a more modest valuation than $5B, which they were once offered.

Uber is likely to be upstaged, not by a superior technology or a more efficient solution. It’s likely to be outcompeted by an entirely superior business model. This could be one where cars don’t need drivers but are self-driven or autonomous. Imagine millions of privately owned cars entering the market for as taxis, given that a majority of cars are used only 5 to 10 % of the time. Makes sense for the car owners, since it would give them a revenue stream for an asset that just sits there for over 90% of the time. And unlike airbnb, a car is less personal than your house.

If you’re selecting the kind of startup you’d like to start or get involved in, the platform startup seems perhaps the most tempting. However, it has the greatest risk, since there’s only one winner. Your chance of betting on that winner is as much down to strategy as it is to luck.

Often, startups that are in a platform space focus on technology, since tech seems to be more under their control. The question to ask is whether the customers care. Tech is only useful if it provides you with a competitive advantage. But if the only competitive advantage is getting more customers, well, improving tech is like looking for your keys where the light is best, rather than where you lost them.

Send your questions on your challenges in your own entrepreneurial journey and I’ll try and answer them.

I wish you the very best for your own entrepreneurial journey.

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