Canny entrepreneurs are starting successful businesses by linking their products and services to a new big name in an innovative industry. Called derivative startups or piggybackers, these companies identify unmet needs in the niche and offer essential support services.

A Long History

The practice of piggybacking is an old one. Many businesses pegged their products to Microsoft in the 1970s and 1980s when it achieved massive success with DOS and later Windows. In the process, these smaller companies created a computer and software ecosystem. Without these derivative startups, Microsoft would never have become the biggest thing in computers. A good argument could be made that, without them, the personal computer age would have been delayed by years.

Tony Tian, the CEO of Cue-Ball, a venture-capital firm, compares today's piggyback marketplace to the California Gold Rush in 1848. He relates this story: After the original rich claim was found at Sutter's Mill, a small number of other miners got rich panning for gold. But a greater number of miners got rich by switching to supplying others in the gold fields with mining supplies, food, clothing and everyday essentials. For example, Levi Strauss started out as a dry goods wholesaler in San Francisco during the Gold Rush, later selling clothes and creating Levi jeans. Samuel Brannan became a millionaire by selling picks, shovels, and pans to miners. These are just two suppliers, never miners themselves, who made a fortune from the gold fields.

So the practice has a long history, but in today's sharing economy they pop up much faster due to instant communication, the internet, and social media.

Jumping on the Airbnb Gold Rush

One of the hottest names in the marketplace is short-term rental sensation Airbnb, which has spawned piggybackers Guesty, Keycafe, and Proprly. All these companies help hosts find tenants and manage their properties.

In addition, a number of other firms jumped in, taking advantage of the favorable marketplace to offer necessary support services. Sagri Obregon, Director of Operations for Streamline Vacation Rental Software, points out that their product fills an important need because it is useful not just for large rental agencies, but also for small- and medium-size firms. This opens up the market to a much larger base of operators, increasing use and profits for everyone.

Adding Value

These smaller support businesses are a critical part of the bigger success story. Without pickaxes, the miners couldn't get the gold. Without software to manage rentals, hosts and rental agencies couldn't handle the boom in overnight visitors that Airbnb started. When a company like Airbnb is so successful, so quickly, it often opens up gaps in service, called a pain point. The piggybackers are providing the necessary support services that remove the pain and let the system flow smoothly. This in turn allows the big success story, like innovative Airbnb, to continue growing. The same thing can be seen with Uber, the ride-sharing giant. It brought a revolution to the way people met their transportation needs. But without derivative startups, it would have been limited in its growth.

Uber needed piggybackers like Breeze and HyreCar to lease cars. Without them, thousands of drivers across the country would be unable to take advantage of the income that Uber made possible. The car leasers ended a potentially stifling bottleneck.

Team Members, Not Challengers

In practice, these derivative startups are part of the team for major innovators like Airbnb and Uber today, and Microsoft a generation ago. Without them, the big companies could not meet the needs of their customer base and their growth would be stymied.

That's why the smartest and most successful big success stories encourage piggybackers. They make it easy for savvy entrepreneurs to enter the marketplace, nurturing them and treating them like part of the team, not like challengers trying to take away business. Indeed, many invest in their derivatives as a way to keep the industry they've created thriving.

Published on: Sep 25, 2015