Platform as a Cop Out

It’s fascinating how the Microsoft glory isn’t letting people sleep well at night. Most entrepreneurs I talk to these days understand that the way to create a lasting advantage is to create a platform – something that entrenches you way better than an application.

Quoting Mr. Ballmer of Microsoft, “Developers! DEVELOPERS!! DEVELOPERS!!!

The reason, of course, is that every application that gets built on your platform creates a sunk cost and deeper entrenchment. When a developer decides to take on your platform – when another company essentially BETS THEIR LIFE SUPPLY on your platform, you have an ally. That ally is selling their product to end customers. Every time they make a sale, you win tremendously – even if you didn’t make a penny from that transaction. The entrenchment of your platform – and thus, your lasting advantage – has just gone up, because it’s now more difficult to switch – all that money spent on the existing application is already gone. Why reinvent the wheel? We already have a VB-based Access 97 application that solves our problem..

You’ll laugh and point fingers at IT departments of companies stuck in 1997, but this logic very much makes sense. I’m Johnson & Johnson. IT is very much a SERVICE, not the core of my business. IT Department built applications that do the job. Fine, they aren’t great – they don’t scale or deploy easily, and there’s recurring cost to maintaining them that keeps going up – but compare that cost to switching to “free” Linux or super-user-friendly-and-sexy Mac OS, and the choice is clear. They’re sticking with Windows. Joel Spolsky describes this phenomenon well in his “API War” article.

Here’s a problem, though: everyone understands how great the platform advantage is, but few know what it takes to get a platform to win. They think “we have a sexy product; let’s now open up our product for various partners to build on top of! Come on, biz dev people! GET US SOME PARTNERS ALREADY!”

Ummm. How do I say this politely. Your platform story is a cop-out. A platform is viable only if it comes with several MAGICAL applications built on top of it. Applications that INSPIRE developers to play around and experiment. Applications that demonstrate the power and desirability of the platform.

Let’s look back at what Microsoft did when pushing Windows. The key to that victorywas MS OFFICE. Office is the flagship demo application that has always shown developers that OH MY GOD this platform can really be used to build amazing shit. When MS was pushing Windows over DOS, nobody really knew what this Graphical User Interface thing was about. Nobody trusted it. And KABOOM, here comes a fantastic suite that everybody wants. The application DRAGS THE PLATFORM by its ears towards success. Suddenly everybody wants to get Office – but to run it, you need Windows. More users have Windows -> more developers feel like creating software for it.

Another example: Apple and its iPhone development platform. Look back at iPhone v1. It had NO custom applications. Why? Because it made no sense to invest into the platform before there was a flagship set of products to demonstrate its power. As soon as end-users LOVED the mail app, developers took that app as a paradigm for stacked panel interfaces. Customers ENJOYED the tabbed music player interface – and developers started imitating it in their apps, too. If Apple took the Microsoft mobile phone road with its software back then – clunky built-in apps, no real flagship end-to-end scenarios to imitate – iPhone would have been a flop just like Windows Mobile 6.

Here’s the rub: nobody knows your platform better than you do. If YOU can’t ship a few amazing end-to-end solutions on top of your platform, how do you expect others to do it? External partners will start with a little tinkering – replace the MySQL adapter in your sample app with a SQL Server adapter. Maybe change the reporting engine from the sample MS Excel to Tableau. Oh wow, it still worked. I guess I’ll be brave and try a bolder modification of the sample app now.

If you’re building a platform – or even harder, a platform company – make sure that you have some SHINY end-to-end solutions built on top of it the day you ship.


What Are People Paying for This Today?

So, your brilliant idea is shaping up, and you’re ready to go all steam ahead – get some funding, quit your day job, and move into your mom’s garage. One key question you kept asking yourself was “what is the potential of this business?”

Your typical market sizing goes like this: “20 million target customers; with target penetration of just 1%, we should have 200K clients, each bringing in $50, so our target sales for us are $50*200K = $10M.”

This is all nice and great, except that this model is just full of crap. You have no idea whether clients will pay $50 for your service. You have no idea whether 1% penetration will be even remotely achievable.

Let me offer an alternate model – a model summarized by “what are your prospective clients paying for this today?” It’s based on a fundamental idea that if you have to convince your clients that they have a need, you’ve lost already.

Here’s how it works:

  1. Pose the problem that your business solves.
  2. Find the ways that customers are solving that problem today. If they aren’t solving it today – through some clunky or inefficient means, hopefully – go back 3 spaces and come up with a better idea.
  3. Find out what the customers are paying for this problem. This will be the cap of what you’ll be able to charge for your improved solution.
  4. Find out how many customers are paying to solve this problem. This will be your target market size, the one you’ll multiply by the imaginary “market penetration target.”

Let’s try going through this on some of the businesses / ideas that are close to my heart.

  1. Motto: find drinks you can make from ingredients in your bar. Do customers have this pain? Yes. Do they PAY for somebody/something to solve it? Nope. Result: complete fail as a  business.
  2. Motto: help create quick job connections in the Health and Beauty industry. Do customers have this pain? Yes. Do they PAY for it now? Yes. What are the existing solutions? Use Craigslist. How much are they paying? $25 per job posting. How many are there? A hundred postings per month per metropolitan area.  Result: sales potential of $25 * 100 * number of major cities. Much lower than you’d get through other forecasting approaches, and MUCH more realistic in hindsight.
  3. kCura, a company built by a talented gentleman I met recently. Motto: help companies save money on the e-discovery part of litigation. Do customers have this pain today? Yes. Do they PAY for it now? Yes, $400/hour to lawyers reviewing thousands of documents. WOW, now we’re talking. Give them a 20% efficiency gain over existing methods, and you’ll save them a TON of cash. Result: fantastic growth and a very promising business.
  4. Cloud computing. Motto: help ride the usage curve without investing into infrastructure. Do customers have this pain? Heck yes. Do they pay for it now? Of course, through all of that hardware that just sits there most of the time. You get the drill.

Apply that same model to your business before leaping forward.

Slaying the Network Effect Dragon

You have a brilliant idea. There’s just one problem: there’s someone doing something similar, and they’re really entrenched. They command 80% of the market. They have much more capital than you, and a stronger brand. Yet, you believe that you can take them – because the way you solve the problem is better.

A famous venture capitalist, Paul Graham once said that a 10% better solution is not enough; for people to switch, your solution needs to be 10 times better. Lesser known, but absolutely brilliant Steven Sinofsky suggested that “10% better is 100% different” – a small delta is not good enough to change the behavior.

OK, let’s be honest here. Is your solution *really* 10 times better? You’re building a new photo sharing site. It’s fast, gorgeous, and so much more usable than Flickr. But is it 10 times better? How can you judge?..

Well, create a quantifiable metric or two. How long does it take to upload photos? How long does it take to view a 20-picture album? On a scale of 1 to 10, how would you rate the usability of each option?

I guarantee you, if you’re building a general-purpose photo sharing site, the measurements between you and Flickr are not going to be 10 times different. You’ll be somewhere between 10% and 50% better if you’ve done your job well.

So what now? There’s no way to build a better Flickr? Once someone captures 90% of the market, there’s no more innovation happening? That’s absurd!

Of course it’s absurd. Facebook overtook Myspace. Google ate Overture/Yahoo. Both of these marketplaces – social networking and search advertising – have HUGE network effects: the more clients you have, the better you can serve them, thus creating a barrier to entry for competitors.

What’s the secret, then? How did they do it? Did they create solutions that were 10 times better? I think you can answer this question yourself. Was facebook 10 times more usable than Myspace? Not 10 times, maybe 50% more usable because of a cleaner layout and streamlined workflows. Then HOW? HOW THE HECK DID THEY DO IT? And how do I do the same thing with Craigslist, Monster, Flickr, etc?

I’ve asked that same exact question to a deep thinker named Gary Flake. He gave me the most structured and comprehensive answer I’ve heard to date. There are two ways to break the entrenchment of a competitor in a marketplace with a strong network effect: bite off pieces of the long tail, or funnel an existing community into this new market.

1. Long Tail

Let’s start with the long tail. Craigslist is a general-purpose classified ads platform. Does it serve everyone equally well? Heck no, it serves everyone equally CRAPPY. Why? Because by definition, a general-purpose system does a mediocre job for everyone. How do you eat their lunch? Start with a system that targets a sub-section of their customers – a sub-section that’s heavily under-served.

Find Touch is an example of exactly this kind of business. Take a TINY niche – massage therapy jobs – and create a solution that is SUPER targeted at this exact scenario. Is THAT solution ten times better than craigslist for hiring massage therapists? Yes. Is Find Touch in general better than Craigslist for all other things? Heck no, it doesn’t even compete.

Gary continues to stipulate that once you’ve bitten off one piece of the long tail, you can continue along the same path – in case with Find Touch, jumping at adjacent, highly targeted areas like jobs for nail care techs, estheticians, hair stylists. Through laser focus, you are able to create an experience that’s RADICALLY better – and with a growing customer base, you will at some point find yourself wielding a sizeable chunk of your competitor’s customer base.

Gary likes to point out that Google did exactly the same thing with Overture/Yahoo around search advertising. One of the key promises of Yahoo/Overture to their client base was “exact match” – you pay only if the person using the search engine is looking for EXACTLY the thing you’ve bid on. Google said “we’ll go after the fringe – fuzzy matches.” With that new approach, they first got the most desperate of the advertisers (because fuzzy match was completely unproven, risky, and as some argued, a waste of money). Once they proved the idea, they were able to go after the entire marketplace – adding the mainstream (exact match) while popularizing their key competitive advantage to more and more of the clients, thus entrenching themselves even deeper. Fabulous win.

2. Funnel

When you have a successful product, and you’re entering another marketplace that’s in any way related to that product, you might be able to leverage that advantage to gain a head start on an entrenched competitor in that new market. What does this mean? If you’re a Redfin – you command a large audience in the real estate market – and you want to enter the mortgage marketplace game, you can funnel your existing client base towards your new business. You can argue that has a HUGE customer brand in this space – and so do regular banks. But with a loyal audience that very much needs mortgages, Redfin can easily jump into this space and reap immediate returns.

Another example: think about Opera (a FANTASTIC browser that’s been around forever, but never really grew in popularity) versus Chrome. Google commands a tremendous customer base with Search. You might be surprised to hear this, but most non-techies think that a browser and a search engine is THE SAME THING, so the two products are quite complementary. Chrome took off like fire – yes, it was a good product, but the reason it was able to penetrate a market place that took FOREVER for Firefox to crack open was due to the funnel that Google created from their search business towards this new enterprise.

Next time you’re entering a marketplace with an entrenched competitor, think about biting off the long tail – and think about partnerships you can establish that will help you funnel a good-sized customer base into your new offering.

A niche that’s bigger than a green field

I don’t believe in Facebook.

No, let’s try it again – I don’t believe in YOU being able to create another Facebook. Don’t get me wrong, it’s not you – I can’t make one either. And it’s not because we’re dumb – it’s because facebook solves no particular problem at all. Nobody had a need that facebook solved. Nobody was begging for it, crying about millions of wasted dollars that could have been saved if only facebook was there. Since there was no need, the chance of facebook ever succeeding was basically zero.

Yes, this post is about finding your niche.

Let’s start debunking one of the most famous myths in entrepreneurship: the need for a “large enough pie.”

“My product is applicable to every adult on the planet! If we’re even mildly successful, we’ll be able to sell to just ONE PERCENT! And that’s amounts to a billion dollars a minute!..”

Fine, I promise you – no more exaggerations for a couple minutes.

Admit it, though: you’ve heard some version of this pitch, with similar numbers that seemed so believable. A product that aims to serve everyone serves noone. If you are creating something that truly everyone can use, it is by definition so shallow in its usefulness that noone will extract serious value out of it and pay you for it. And don’t bring up the iPhone as a counter-example – it’s not a product created from scratch. It’s a product created by people who’ve been making similar products for a decade, with a multi-billion-dollar investment.

If you’re lucky, you’ll create

Let’s look at Mint and why they’re successful. They chose a TINY niche – personal finance – where people were really struggling. Existing solutions cost money and were incredibly clunky; there was more than enough research suggesting that individuals that track their finances tend to be better off in the long run. The public had a need and a want; creators of Mint didn’t have to make one up for them. Their product took off like fire – a typical seven-year overnight wonder.

Why? It is much easier to sell something that people *already have a need for* than convince them that they have a need, and then sell them your snow in winter. Do people *need* a fart app? Do they have some sort of mental gas that they need to pass?..

Contrast this with a coloring book kids app that my friend makes, Colorama. People have a need to keep their kid busy when they’re in a social setting. That need doesn’t need to be explained – it’s obvious to the parents. The simple app my friend built just capitalizes on that need – a very niche need, that is – and simply delivers on this very narrow promise.

I’ll claim that the narrower the need, the easier it is to satisfy. And the happier the people will be with your product in the end.

I’ll also claim that there are unmet needs – small needs – everywhere you look. From scheduling software in your dentists’ office, to a yield management system for the nearby restaurant, to organic/fair trade coffee shop in your neighborhood.

Moreover, these small needs have another characteristic: the solutions frequently need no capital to start. Your customers are right there, just talk to them. Start your company as a consulting business if you have to. Do you know what most consumer-focused startups would pay for a customer that’s telling them how much they need their product – and is willing to pay for it?..

Who cares that your product doesn’t have a potential to be a billion dollar business? Who cares, seriously? Are you telling me that you won’t be happy with 10 million? 50 million? Because was sold to Intuit for $170 mil. Not too shabby, huh?