Why starting small is the only way to grow big.
The problem with platform businesses and services that run entirely on UGC is that there is really no value proposition for the user in the standalone service. Users need to start producing on the system for there to be any value for consumers. Wikipedia, eBay, Twitter are all services where producers on the system create products that consumers use.
While getting massive amounts of users is difficult to begin with, getting users who produce and users who consume those products/content simultaneously is even more difficult.
In such scenarios, it helps to scale down the problem and…
Focus on a micro-universe
Why not go for a land grab? Why is starting small so effective when it sounds counter-intuitive? After all, if you were starting a traditional one-sided business, land grab would make a lot of sense.
That’s where platform businesses are different from traditional businesses which provide goods or service to the end consumer. The business interactions in a one-sided traditional business are owned and managed by the business owner (at least one side of it). In case of the platform, the interactions are owned by the end users and the platform’s goal is to increase the likelihood and efficiency of such interactions.
The two obvious reasons for starting small:
Fail with a few
Most online platforms are launched in Beta and are not very stable. Working with a micro-universe of savvy users can help get the right feedback and fine-tune the product. A lot of valley-based tech products start out with early adopters in the valley, While that risks the prospect of falling prey to developing a hive mindset, it provides the advantage of harvesting rich feedback from savvy users.
Focus stretches your dollar
A smaller targeted user base helps keep the burn rate under control while keeping the likelihood of interaction high. The key factor is to stay targeted and not waste resources catering to a diverse group where interactions are unlikely.
That’s great advice for startups in general. BUT, in the case of platforms, starting small is much more important than in the case of a one-sided business.
Critical mass is reached faster with a smaller sample
Platform businesses start working only when a critical mass is reached. eBay is useless until there is a minimum selection of products for sale. When targeting a more diverse audience, it might take that much longer to reach critical mass (You could have a million Spanish writers1 and a million English readers. Good luck with critical mass!). When focusing on a micro-universe, the critical mass required to start transactions is that much smaller. Match-making is that much more likely, i.e. a buyer wanting what a seller is offering. Moreover, it is easier to attract and target like-minded users, typically the case in a niche.
Large companies, especially those that have traditionally been one-sided, often fail at launching new platforms. This is largely because they do not see economical justification in targeting a micro-universe. They either end up burning resources early on going for a land grab or reject the idea altogether because the wisdom of targeting a micro-universe doesn’t make sense.
This is what brings us back to this point. Targeting a micro-universe as a platform business IS NOT about staying lean or being cash strapped.
Irrespective of the resources one has, it is almost impossible to seed a platform without targeting a micro-universe. Targeting a micro-universe is quite possibly the most effective way to hack your way to critical mass. Large companies (or VC-funded smaller ones) that feel “burning is earning” may succeed with a one-sided business that gets traffic all over the place but will end up with “all traffic and no interactions” when it comes to a platform business.
From micro-universe to universe
Platform companies, which have rapidly grown to multi-billion valuations, started out by targeting a micro-universe. Facebook is probably the best example of success with this strategy. It targeted Harvard, gradually moved on to other schools in the US, then on to schools abroad and finally opened up to the world. At a time when Myspace was big in the US and Friendster in other parts of the world, Facebook may not have got a critical mass going all out.
Quora and LinkedIn targeted entrepreneurs and investors in the valley where their respective founders had great influence and are global brands today.
This strategy is a lot more intuitive for local commerce companies which typically start in one geography (Yelp in SFO, Foursquare in NYC and Groupon in Chicago) and gradually expand once they’ve got the model working. Of course, with online-offline models like these, geography creates an inevitable micro-universe and focusing on multiple geographies is infeasible for a cash-strapped startup.
Pinterest offers an object lesson on succeeding as a follower by targeting a micro-universe. Pinterest started at a time when Facebook was already huge; users were developing ‘social’ or Web 2.0 fatigue and all the pundits of user experience were advocating real-time text feeds. An image-based social network wasn’t exactly a VC’s dream. Pinterest grew slowly, but then it started gaining traction among designers, especially designer-bloggers, who started using the Pin-It-Forward functionality to promote themselves. Gradually, the design-centric community and culture that was created on the site attracted other creative types, and the platform grew at an astonishing pace.
Essentially, the key is to focus on a micro-universe that is representative of your ultimate target audience, and that has enough users to allow your product to attain critical mass and spark transactions.
What do you think? Have you succeeded in dominating a micro-universe? What should one be watching out for?
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