Alex Moazed is the Founder & CEO of Applico, the trusted advisor to disruptive tech companies with clients like Google & Highland Capital's portfolio companies.
Six years and 300 clients after founding our company Applico with credit cards, we are now the trusted advisor to some of the world's leading platform companies, including Google, Auctionata and Glamsquad.
In the process of working with these companies (and growing our own), we learned a lot about what it takes to scale a platform business from seed stage to maturity. I share some of these key insights below.
Pick the Right Business Model
As Tony Hsieh, CEO of Zappos, said, picking the right business to be in is the most important decision when starting a company. The WSJ recently released its Billion Dollar Startup Club. Thirty-nine of these companies are platform businesses. The other 39 are linear. Investor confidence was 25 percent higher in the platform ones than the linear.
At Applico we also analyzed over 700 Series A startups that received funding in the past 18 months. Only about 25 percent of them were platform businesses. Another 10-15 percent had the potential to become a platform business if they modified their business model.
Pick the business model with higher potential and less competition: the platform business model. (For more on platform businesses, read our blog post on the model.)
Solve the Chicken and Egg Problem at Launch
The hardest problem of platform businesses is that you need to grow two user bases that are dependent upon one another. If Uber wants to grow, it needs more drivers to get customers and more customers to get drivers. You can solve the chicken-and-egg problem by subsidizing value until your ecosystem reaches critical mass. If you can hit critical mass first in a given market, you have an order of magnitude advantage over your competition.
There are two ways to subsidize value: monetary subsidies and product feature subsidies. You need to figure out which user groups to target and in what order. This is called user sequencing.
Go Mobile First
Mobile is the key to capturing seamless engagement between your user bases. You may want to start with a website to test your initial markets, but perfecting your engagement model on mobile should be your absolute first priority.
You don't need to launch with both iOS and Android apps. There are countless examples of platforms only leveraging one operating system at launch and becoming successful. Prove that you can get strong recurring usage on one operating system and then replicate that model.
If you don't have a technical co-founder, that's OK! However, make sure to pick the right mobile app developer. If you don't get this right the first time around, you could lose your window of opportunity.
You can raise seed financing without a full founding team from friends and family. The better the team you have, the easier it'll be for you to raise funds.
If you launch your app with friends and family financing and don't have a technical co-founder, you'll need to onboard a head of engineering to bring that core competency in house. If you picked the right mobile app developer, they should be more than happy to assist you in this process.
In order to raise institutional capital, you will need a strong team. Friends and family will be investing in you and the pre-existing relationship you have with them. Institutional investors will be betting on your business model, positioning/timing, and your team. A caveat with your fundraising efforts--don't let your competitors outpace you. If you fall behind, it can be very difficult to play catch-up.
Secure Your Supply
After showing initial traction with your platform's user groups, the key to your ability to scale will be to capture great supply. You need to secure a growing and loyal base of producers. These are people who are producing value on top of your platform. It is only because of your producers that your consumers have interest in using your product. Without a strong, growing population of producers, your business won't be able to scale to the billion-dollar club.
Raising your Series B will be heavily dependent on showing investors that you can take your initial user base and make them "power users." This term means something different to each platform. To eBay, it was power sellers. To Uber, it's drivers spending 30+ hours per week on the platform. To Instagram, it's creating celebrities from nothing like Dan Bilzerian. To iOS, it's Angry Birds. Get the idea?
If you make it through these steps and you got the timing right, you should be in front of your competition. Coming out of a Series B with a total of $50+ million in financing and a head start gives you good odds of your exponential growth continuing. Raising your Series C provides you more capital to expand into more markets and burn cash subsidizing value for user acquisition.
There is still a lot of risk at this stage in the business, but you shouldn't necessarily be reinventing the wheel at this point. Make slight tweaks and modifications depending upon the new markets you're expanding into. On paper, you might be worth eight or nine figures. Pat yourself on the back and keep chugging! You're doing society a favor by progressing its evolution with a new business model that reduces search and transaction costs and enables others to innovate.