One of the fastest ways for a startup to grow has always been to ride on the shoulders of a successful platform: from Microsoft/OSS in software to AWS in cloud computing to iOS/Android in mobile to Facebook/Twitter/Pinterest in social to IAB/Google in advertising and the many SaaS players. Betting on a platform focuses product development both because of technology/API choices and because of the automatic reduction in the customer/user pool. Also, platforms that satisfy the ecosystem test help the startups that bet on them make money. That is, until they don’t.
I’ve been involved with three startups that have been significantly helped by platforms initially and then hurt by them. Two cases involved Microsoft. One case involved Twitter. The first time it happened, our eyes were closed and it hurt. It prompted me to learn more about how platform companies operate and how they use and abuse partners—companies small and large—to help them compete with other platforms. The basic reality is that platform companies will do whatever it takes to win and they typically don’t care much about the collateral damage they cause.
Just like hacking fast & loose, which accumulates technical debt, accelerating the growth of a startup by leveraging a platform may come with substantial platform risk.
Note: links to undocumented anti-patterns will take you to the main list.
Startup Anti-Pattern: Platform Risk
What it is
Platform risk is the debt associated with adopting a platform. Platform risk becomes an anti-pattern when three conditions are met:
- The platform dependency becomes critical to company operations.
- The company is unaware of the extent of the risk it has assumed.
- There is increased likelihood of adverse platform change.
Platform risk tends to appear with other situational awareness anti-patterns such as ignorance and unrealistic expectations.
Why it matters
Here are the top 10 sub-patterns of platform risk hurting startups that I’ve seen:
- Lock-in. Startups that adopt a closed platform can be locked into their choice typically for the duration of the company’s life. This is not a problem until the need arises to support another platform. At that point the time & cost associated with the work could be substantial, especially if the core architecture was not designed with this in mind. In many cases, it is cheaper to start from scratch.
- Forced upgrades. When software came in boxes, if you didn’t like the new version or if it was incompatible with your own software, you and your customers did not need to upgrade. You could take the time to make things work and upgrade on your own schedule. In the platform-as-a-service world, you do not have this option. Instead, forced upgrades are the norm. You have to deal with them on the platform vendor’s schedule, which may be quite inconvenient and costly. You do not have the option to ignore the update. Vendors vary widely in how they manage their partner ecosystems with respect to forced upgrades. Google has been pretty good when it comes to its APIs and has acted like a not-so-benevolent dictator when it comes to non-API-related behaviors of services such as search and advertising. Facebook and Google have both been accused of manipulating the behavior of their systems to force businesses to spend more money in their advertising platforms. In the case of Facebook, the issue has been pay-to-play for likes. Google has come repeatedly under fire for manipulating the search user experience to (a) shape traffic away from large publishers it competes with and (b) reduce advertiser choices and drive more ad dollars to AdWords. If your business depends on SEO or SEM, these changes can be very significant. The former CEO of a large advertising agency once summarized this as “Google giveth and Google taketh away.”
- Forced platform switch. A forced platform switch usually comes as a side effect of platform vendors playing turf wars. For example, Apple severely hurt Adobe’s Flash platform as a way to limit write once, run anywhere options in mobile, thus also slowing Android’s adoption a bit. Thousands of small game & other types of content developers in the Web & Flash ecosystem were affected and had to either abandon iOS development or find new costly talent.
- The partner dance. The partner dance is most commonly seen in enterprise software. It was popularized by Microsoft. As one former MS exec described it to me: “first you design your partners in and then you design you partners out.” During the design-in phase, a platform vendor partners with and, in some cases, spends meaningful resources helping an innovative startup company with solutions that compete with the solutions of another platform vendor. As the platform company’s own product roadmap matures, it designs its partners out starts directly competing with them.
- Swinging. Swinging is a variation of the partner dance where rather than competing directly with a startup, the platform vendor partners with one of the startup’s competitors. Some years ago I was on the board of a European company that was Microsoft’s preferred partner in a fast-growing market. After winning against much bigger players such as EMC and IBM, the startup convinced MS that there was a big business to be built in this market. At that point MS promptly terminated the startup’s preferred status and partnered with a much bigger competitor. We were expecting the move: Microsoft now wanted to move hundreds of millions of dollars of its platform products in this space and the startup, despite closing significant business, could not operate at this scale. The Facebook/Zynga saga is an example from the online world.
- Hundred flowers. The name of this sub-pattern comes from the famous Chairman Mao quote “Let a hundred flowers blossom.” Mao fostered “innovation” in Chinese socialist culture—open dissent—and then promptly executed many of the innovators. It seems that Twitter, Facebook and other social platforms have studied the Chairman quite well, judging by how efficiently they have moved from relying on the adopters of their APIs for growth and traffic to restricting their access and hurting their businesses. The prototypical example is Twitter driving much of its traffic from third party clients and then moving against them.
- Failure to deliver. Startups pick platforms not just because of their current capabilities and distribution but also because of their expected future capabilities and distribution power. If the platform does not deliver, the startup’s ability to execute can be significantly hampered. One of the most common use cases of this sub-pattern relates to open-source platforms where the frequent lack of a single driving force behind a product or service could lead to substantial delays. At various points, teams I’ve been involved with have had to dedicate significant resources to accelerate development of OSS, e.g., Apache Axis, which turned out to be the most popular Web services engine, and Merb, whose adoption turned out to be a bad platform decision for my startup. It’s rewarding work but it also usually is plumbing work that generated little business value.
- Divergence. Divergence is a form of failure to deliver rooted in a change of strategic direction of the platform. Divergence can be very costly over time and difficult to diagnose correctly because it happens very slowly. The analogy that comes to mind is of a frog in a pot of water on the stove. I knew a startup with a neat idea on how to provide significant value on top on the Salesforce platform APIs. They just needed one improvement that was “on the roadmap.” The improvement remained on the Salesforce roadmap for more than two years as the startup ran out of money. The hidden reason was that Salesforce had grown less interested in the use case. Another Salesforce-related example is the recent hoopla about the unannounced changes in Heroku’s routing mechanism, which cost RapGenius a lot of money. In this case, the reason was Heroku moving from being a great place to host Ruby apps to being a great place to host any apps and in the process becoming a less great place to host Ruby apps.
- Poison pill. A platform choice made years ago could turn out to be a poison pill when it comes to selling your company to another larger platform vendor. As an example, consider the case of Google buying a company whose products are built on Microsoft’s .NET platform or Microsoft buying a SaaS collaboration solution that runs on Google Apps. Alas, most startups do not think about the exit implications as they make platform decisions early on.
- Exit pressure. Platform companies may sometimes exert substantial pressure on partners when they want to acquire them. When Photobucket did not want to sell to MySpace they somehow experienced “integration problems” with MySpace, which affected their traffic. The sale soon completed. This goes to show that talking softly while controlling the source of traffic tends to deliver results. This week we learned that Twitter’s acquisition of social measurement service Bluefin Labs involved some threats, which must have been perceived as credible since 90% of Bluefin’s data came from Twitter.
Good diagnosis of the platform risk anti-pattern is exceptionally difficult because it requires predicting the future path of a platform as well as those of the platforms it competes with. The basic strategy for diagnosing this anti-pattern involves three parts:
- Investment in ongoing deep learning about the platform and its key competitors. This should cover the gamut from history to technology to business model to the personalities involved.
- Developing relationships with industry experts with a deep perspective of the platform, whose businesses, like telltales on a sailboat, in some way provide leading indicators of platform change. You don’t want just smart people. You want people with proprietary access and data. For enterprise software try preferred channel partners. For open-source software try high-end OSS consultants. For advertising, find the right type of agency.
- Network into the group(s) responsible for the platform, both involving people currently on the job as well as senior people who’ve recently left. This latter group has been the most helpful in my experience.
Ignorance is the most common anti-pattern that makes the diagnosis of platform risk difficult.
A common misdiagnosis stems from failure to consider the effects of competitive platforms on the platform a startup has adopted. Sometimes it is these competitors’ actions that trigger the negative consequences, as was the case of Apple’s decisions hurting the Adobe Flash developer ecosystem.
Once diagnosed, the key question regarding the platform risk anti-pattern is whether anything at all should be done about it. Most companies choose to live with the risk, though very few fully use the diagnosis strategies to get an accurate handle of the net present value of the risk.
The refactoring of platform risk is typically very, very expensive as well as very distracting. For example, some would argue that Zynga’s fight on two fronts (a) trying to refactor its platform risk related to Facebook and (b) ship new games is what hurt the company’s ability to execute.
In the case of platform risk, prevention is far better than any cure. In the words of Fred Wilson (an investor in Twitter): “Don’t be a Google Bitch, don’t be a Facebook Bitch, and don’t be a Twitter Bitch. Be your own Bitch.” Being your own bitch doesn’t mean not leveraging platforms. It means getting in the habit of doing the following three things in a lightweight, continuous process:
- Explicitly evaluate platform adoption decisions, once you have sufficient information. Having sufficient information usually involves more than reading a few blogs. For example, at Swoop we recently had to make a search platform choice. We decided to go with Elastic Search but not before I had talked to the company, not before Benchmark invested significantly in ES, and not before I’d talked to friends who ran some of the largest ES deployments to get the lowdown on what it was operate ES at scale.
- Invest the time to learn about the platform and develop the relationships that would help you have special access to information about the platform. Here is my simple rule of thumb with respect to any platform critical to your business: someone on your team should be able to contact one of the platform’s leaders and get a response relatively quickly. This is especially important if you are dealing with new or not super-popular open-source projects. The best way to achieve this is to think about how you and your business can help the platform.
- Every now and then spend a few minutes to honestly evaluate your company’s level of platform risk and think about how you’d mitigate it and when you’d have to put mitigation in action.
Remember, the goal is not to eliminate platform risk. You cannot do this while at the same time taking advantage of a platform. The goal is to efficiently reduce the likelihood of Black Swan-like events related to the platform hurting your business. If you understand the mechanics of how platforms operate and how platform risk accrues, you will be able to predict and prepare for events that take others by surprise. These are sometimes the best times to scale fast and leapfrog competitors.
When it could help
Betting on a platform can be hugely helpful to a startup, despite some level of platform risk. There is never a benefit from platform risk increasing to the anti-pattern level.
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Great write up, Simeon. I agree with the risks and have experienced them myself. I think great businesses are those that build their own data, user base and platform without relying on 3rd parties, such as FB, LinkedIn, Twitter.
Scott, it’s awesome to see someone build a great business this way but I also love seeing startups that know how to use platforms to grow fast without taking on unreasonable risk.
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Amazing to go into so much depth on the subject. I just say to myself: platforms are a double-edged sword, so stay away from both edges!
Newcomers are always taking the bait, however, from developing apps to doing pinterest boards or Squidoo pages (Mahalo lenses anyone?).
Unless you have a solid plan B, betting the farm on a platform is just poor business sense. If you are a service business, you don’t want a single customer to account for more than 50% (or even better – 20%). Why would you want your entire business to be dependent on a platform?
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