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Beyond Uber: How the Platform Business Model Connects the World
- 1. BEYOND UBER NICK JOHNSON,HEAD OF PLATFORM
- 2. “Software alone isa commodity. There is nothing stopping anyone from copying the feature set, making it better, cheaper and faster.” FRED WILSON, FOUNDER OF USV
- 3. a multi-sided businessmodel focused on creating value by facilitating transactions between two or more interdependent groups (usually consumers and producers). PLATFORM: (n)
- 5. OTHER USES OF”PLATFORM” COMPUTING PLATFORMS PRODUCT FAMILY PLATFORMS INDUSTRY PLATFORMS PLATFORM AS A SERVICE
- 6. Linear Business • Sellsa product or service to a consumer • Owns one side of the transaction • Products have inherent value “I derive value from my use of a product.” Platform Businesses • Facilitates a transaction between multiple parties • Owns infrastructure that facilitates the transaction • Platforms add network value “I derive value from other people’s use of the platform.”
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- 10. PLATFORMS IN THES&P 500
- 11. PLATFORMS TOTAL %PLATFORMS United States 35 79 44.3% China 17 21 80.9% India 8 9 88.8% UNICORN ($1BN+) STARTUPS
- 12. PLATFORM LINEAR Average Valuation$4.51B $2.49B Average Funding $46,240M $21,962M Total Funding $642.22M $406.07M % of Valuation / Funding 14.23% 16.34% UNICORN ($1BN+) STARTUPS Source: CB Insights, Crunchbase, Applico, August 2015
- 13. WHERE NEXT? EDUCATION FINANCE HEALTHCAREINTERNET OF THINGS
- 14. IDENTIFYING PLATFORM OPPORTUNITIES Reducehigh transaction costs or remove gatekeepers ZocDoc Underserved groups that need each other GrubHub Potential Complements iOS Latent supply Airbnb Large, fragmented supply Rubicon
- 15. C H EC K O U T MODERN MONOPOLIES May, 2016 (Macmillan) http://amzn.to/1PpXgGz Applico: http://www.applicoinc.com
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Editor's Notes
- #2 Good afternoon everyone. I’m here today to talk to you about platforms. Now when I say that, most of you probably think I’m full of it. Or at best, you aren’t really sure what I mean. But if you give me a few minutes of your time, I think I can change your mind. So the legendary Venture capitalist Fred Wilson has a story he likes to tell to explain his investment thesis. For those who aren’t familiar, Fred is the founder of Union Square Ventures, which has invested in many successful businesses, including Twitter, Etsy, Lending Club, Tumblr, Foursquare, Soundcloud and Kickstarter. He tells what he calls the “dentist office software story.” When the story begins, an entrepreneur comes up with the idea for a brand new category of enterprise software. He’s tired of long waits at the dentist’s office, so he designs and builds a dentist office management system. He goes out and invests in a salesforce to build the market and sell hissoftware for 25,000 a year. It’s expensive, but dentists realize significant cost savings after deploying the system. The company, called Dentasoft, grows quickly to $200 million in revenue and goes public at a billion dollar valuation. A few years later two young college kids get funded Y Combinator. They believe they can make a more modern version of Dentasoft and sell it as a software as a service solution and charge $100 a month. They go out and do that and the big company now has a low end competitor, Dent.io, that’s undercutting its pricing. Dentasoft stock crashes as Dent.io raises a growth round. However, the story doesn’t end there. Around this time, an open source community crops put to build an open source version of dental office software. This project is called DentOps. One user creates a hosted version called DentHub and offers it free. Dentasoft is forced to file for bankruptcy and restructure its debt. Dent.io’s board fires its CEO and tries to pivot. The point of this story is that software alone is a commodity.
- #3 There’s nothing to stop a competitor from coming along and copying your features and doing it better cheaper or faster. However, Wilson has an addendum to his story. Finally, a young Dentist called Hoff Reidman decides to create a network where he can connect with other dentists. He builds a site and calls its Dentristy.com. After some hustling, he builds a large network of dentists and raises a $1 million seed round. His platform also includes a mobile app that connects doctors with patients. Dentistry.com ultimately grows into a $1bn revenue company and goes public with a market cap of $7.5 billion. Wall Street analysts love the company, citing its market power and defensible network effects. This is Wilson’s point. Software gets commoditized. Networks don’t. Features are easy to copy. Networks aren’t. If you want to chase a big opportunity, look for networks.There has to be something other than the software that the enterprise is buying. They’re not just buying the functionality and workflow, they’re buying something they couldnt get anywhere else. Wilson’s story is fictional, a morality play of sorts. But it actually mirrors the evolution of enterprise software markets quite well. If you look at the healthcare market, in the early 2000’s a number of backend software solutions for doctors started to emerge. A half decade later, more modern SaaS solutions began replacing them. Today market penetration for these systems is about 80%, With this installed base in place, you’re starting to see networks emerge. Networks that bring patients into the equation are the low hanging fruit. ZocDoc, a booking platform for doctor appointments is one example. Another is been the explosion of telemedicine platforms like doctor on demand or teladoc. They let you get advice from a doctor over the Internet. The evolution of CRM software has followed a similar trajectory. It started with complicated enterprise software systems hosted on large local servers. Then Salesforce came along and offered it as cloud software. However, it wasn’t long before its big competitors replicated its offering. So what did salesforce do? It built a development platform, connecting its customers with a network of third party software developers. (Other examples: Opentable, AWS) As Wilson’s story and these examples suggest, networks represent both the largest and most defensible opportunity. However, growing and maintaining a network is no simple task. In fact, it requires an entirely different business model to get it right.
- #4 That biz model is the platform. It is the business model of the 21st century. A platform is a business model that facilitates transactions between two or more interdependent groups. Usually consumers and producers. Been around for thousands of years, all the way back to the roman auction house or the bazaar. But today because of connected technology platforms can grow and support networks that are unprecedented in size. Think of Facebook’s 1.4 billion users or Alibaba’s tens of millions of small businesses. To be clear, A platform is a business model, the way that a company generates and captures value. It’s not just a piece of technology. As we’ll see in a minute, this is an important distinction.
- #5 Here are a few examples of platform companies that you’ve probably heard of.
- #6 The most common use, or I would suggest misuse, of the term platform is to describe what’s actually an integrated suite of software products. This is really just the use of the word platform as a marketing term. However, there are four other uses that are common, especially in a technology context. Computing platform: underlying system on which computer programs can run Product family platforms: Core product or component around which other products are built, such as car body Industry platform: core piece of technology around which other companies in the industry build, e.,g Intel’s chipset in the personal computing industry Platform as a service: essentially a computing platform available through the cloud All of these uses of the term platform describe just a piece of technology, not a business model. They don’t have the same advantages and structure as platform businesses do. They’re products, not networks.
- #7 So if platforms are the business model of the 21st century, then what was the business model of the last century? Linear business Linear business owns one side of the transaction. It controls the supply. They create a good or service and push it out to consumers. Platforms facilitate transactions. And create infrastructure that allows transactions to happen. Platforms add network value. I derive value from other people’s use of platform Examples: *Uber drivers and passengers *iOS developers and consumers
- #8 Example : ABC vs. YouTube. ABC creates, acquires or develops content. It owns the supply of content on its channel. In contrast, YouTube is a network that allows anyone to upload a video for you to watch. Everything from cat videos and clips of justin bieber to educational videos and presidential debates. But here the users provide the supply, so YouTube doesn’t control it directly. It simply provides the infrastructure and the network to allow those interactions to happen.
- #9 Now, linear businesses have long had an established blueprint for how to succeed. Chief among these tools is the value chain, created by Michael porter, competitive advantage 1985. Value chain used to assess a business holistically and understand where it could create and advantage versus its competitors. However, this template doesn’t work very well for platforms. For one thing, a chain isn’t a very good metaphor for described how value flows in a network. Additionally, a platform requires coordination and facilitation of a decentralized network, not ownership, management or control.
- #10 Through our research and work with lots of platform companies, we created the value ecosystem. This is the blueprint for how to build a platform business. Like the value chain, it breaks down into two segments. The first segment is the core transaction. You can think of this as the primary activity. It’s the set of actions you need users to take in order for transactions to happen. Create: you need a producer to create inventory and put it into the platform Connect: You need a consumer to connect to that inventory Consume: So that they can consume that value. This can be as simple making a purchase on a listing or downloading an app. Compensate. Finally, the consumer creates value that they give to the producer in exchange for what they consumed. This doesn’t have to be money. There are many other kinds of value. Can include Shares, likes, reputation, attention. These four steps are actions that you need users to take. The platform doesn’t control each step, but it builds the infrastructure to support and incentivize these actions. The old saying that you can drag a horse to the water but you can’t make him drink applies well here. You can’t make the horse drink but you can bring it to water. And you can set up the trough so that it can easily satisfy the horse’s thirst. The platform does this through its four core functions. These are the ‘secondary activities that support and frame the actions you need users to take in the core transaction. These four functions are: Audience building, matchmaking, creating rules and standards, providing key tools and services Audience building: getting users into the platform and creating a large enough network that supply and demand will overlap and transactions will start to happen Matchmaking: Once you get those users in the door, you need matchmaking to match the right consumer with the right producer, otherwise your users will be searching for a needle in a haystack. Rules and standards: You need to create the rules that lay out what is explicitly allowed or forbidden as well as the standards that establish what kind of behavior is encouraged or discouraged. This takes two primary forms: curating access and usage. Access is about who gets to join, who doesn’t and why. Usage is about maintaining the quality of transactions over time using data and user feedback, If you don’t do this right, quality will diminish as the network grows. Last but not least, you have providing key tools and services. You need to provide the technology that supports each step of the core transaction. Tools are self-service and plug and play for users. Services are things the platform centralizes and handles itself. Common examples include insurance, for marketplaces, or customer support. Combined, this gives you a holistic sense of how a platform works. And if you’re looking to build a platform, this gives you a blueprint of the specific things you need to do in order to be successful.
- #11 At this point, you might be wondering why you should care so much about platforms. Well, to put it simply, they make more money. Platforms have better profit margins, offer better return on investment and are valued more highly by investors. If you look at the S&P 500, platforms are valued at a revenue multiple of about 8.5. In contrast, linear businesses fall between 2-6x depending on the industry. And Platforms are growing much faster than other businesses, even other technology businesses. Platform businesses have been joining the S&P 500 index at an increasing rate in the last decade, with even more to come. At the same time, within the S&P 500, platforms as a category have experienced net income growth of about 330%, compared to a 16% increase for the overall S&P 500. If you draw this out as a trendline for 25 years – an admittedly dangerous exercise – platforms will make up 50% of the S&P 500’s net revenue by 2040. However, if you look at what’s happening in the startup world, this prediction doesn’t look so crazy.
- #12 The advantages of platforms are even more pronounced when you consider the next wave of billion dollar public companies. If you look at today’s unicorn companies, startups with $1 billion or more valuations, platform make up a a much higher percentage of them. This is even more true in china and india, where the infrastructure of commerce isn’t as well established as it is in the U.S. (cite numbers: 44% US, above 80% in china and india)
- #13 However, quantity doesn’t tell the whole story. Here too, platforms get better valuations from investors. Their average valuation is nearly 2x that of linear businesses, and they raise more than 2x the funding on average. They also get better terms from investors, as reflected in the % of valuation they’ve received in funding. On average, platforms give away less equity to get more money.
- #14 So It’s clear that platforms offer the largest opportunity if youre building a new business today. However, you can’t just copy what and Uber or Facebook has done and expect to be successful. The time to build a social network was in the mid to late 2000’s. And the time to start building a services marketplace like Uber was 3-4 years ago. The opporuntity is real, but timing matters. So where should you be looking to next? Here I have four big suggestions where you can start to see this shift toward platforms happening. Education First is education. Education hasn’t evolved all that much in the last half century. This is starting to change. Platforms like Udemy, EdX or Coursera are starting to open up higher education to a much larger audience. At the same time, platforms like Skillshare, Udacity and x are opening up learning on a micro scale with classes or lessons oriented around specific skills, such as coding, design, photography or even learning a language. Online platforms are creating new supply by supporting new teachers while also democratizing access to education for consumers. Finance: Next is finance. Finance is an industry that most people associate with large banks or money management firms. However, a host of platform startups have started to open up the industry to new kinds of consumers who haven’t had access to sophisticated investment products before. In the startup realm, you have platforms like AngelList and Funders Club enabling people to invest in startups on a small scale. Many of these investors now have access to deals they never would have gotten in the past. Peer to peer lending is also big. Lending Club was the early success story in this area, but other more industry specific competitors have emerged over the last couple of years. One example is SoFi, which focuses on peer to peer lending for student loans. Healthcare: Third is healthcare, which I touched on earlier. Here you have platforms connecting doctors and patients in new ways, like Doctor on Demand or ZocDoc. But you also have platforms that are strictly focused on the enterprise market, such as Figure1, which is essentially Instagram but for doctors. It connects doctors with other doctors who may have more expertise about a particular issue. IOT: Finally, is the Internet of Things. This is the one that’s furthest out in terms of timeline. The idea of an internet of things is where machines communicate directly with other of machines rather than people. This idea has been hyped but not really solved. Security and privacy remain big issues. There’s a popular Twitter account whose name is unrepeatable in this context. it’s called Internet of “bleep.” It’s tagline is: “Have all of your best appliances ruined by putting the Internet in them!” One tweet jokes “Wait endlessly why your toilet does software updates!” However, assuming these issues get ironed out, the industry has big potential. And wherever the Internet of Things is successful you’ll find platforms at the center of it. You have development platforms moving into the connected car and the connected home. This will have a big impact that spreads beyond just the platforms themselves. You already have insurance companies who are starting to offer better rates based around your ability to drive effectively, or their ability to monitor your home. And the potential in the industrial sector of the economy to improve efficiency is huge. I’m sure you’ve seen some industry report predicting some astronomical number. So I won’t belabor the point here.
- #15 So that’s what’s happening now. But what should you look for to spot future platform opportunities? I’ve got five major suggestions for you here. Some industries will have more than one that apply. The more of them that you can find in one area, the better. Look to where technology can remove gatekeepers or reduce high transaction costs. E.g., ZocDoc making it easy to book with a doctor and see reviews. Look for underserved groups that need each other. The stronger the attraction that your consumers and producers have, the more valuable your network will be. Food delivery platform Grubhub hit the jackpot here by connecting hungry diners who don’t want to get off the couch with restaurants that want more business. Look for potential complements. These may not exist at the time, just as mobile apps on a large scale did not exist before iOS and the App Store. But look to where potential complements can add value around your core business. Look for latent supply. Airbnb did this by allow you to rent out unused home or apartment space – or even just your couch. The more untapped supply you have, the more value you can offer to your users by opening it up. Finally, look for large, fragmented sources of supply. You want it to be large, because small industries often don’t have enough scale to justify building a network. And you want it to be fragmented because the supply in consolidated industries won’t see any need for you. Uber is a great example here, but my personal favorite example is Rubicon Global. When you were growing up, you may dug for treasure in your backyard. If you were like me, this made your parents very angry. But you can now tell them that you weren’t wrong, you were just looking in the wrong place. You should have been looking in your garbage. Rubicon is a platform that connects residents and local businesses with waste collectors. Waste collection in the U.S. is a $100 billion a year industry dominated by 2 major companies. But there are also 20,000 local waste collectors, many of them in urban areas, where the industry is much more fragmented. Rubicon lets these small players bid on portions of national contracts from large chain stores like 7-11. The collectors get new business and the consumers get better rates. Everyone wins.
- #16 If you found my talk interesting, I highly suggest you check out my book Modern Monopolies, where I explore all of these topics in much greater depth. And if you’re interested in Applico, you can find us at the link at the bottom. Thank you!