TX Zhuo
Everyone warns you not to build on top of someone else’s platform.
When I first started in VC more than 10 years ago, I was told never to invest in a company building on top of another company’s platform. Dependence on a platform makes you susceptible to failure and caps the return on your investment because you have no control over API access, pricing changes and end-customer data, among other legitimate concerns.
I am sure many of you recall Facebook shutting down its API access back in 2015, or the uproar Apple caused when it decided to change the commission it was charging app developers in 2020.
Put simply, founders can no longer avoid the decision around platform dependency.
Salesforce in many ways paved the way for large enterprise platform companies, being the first dedicated SaaS company to surpass $10 billion in annual revenue supported by its open application development marketplace. Salesforce’s success has given rise to dominant platforms in other verticals, and for founders starting companies, there is no avoiding that platform decision these days.
Some points to consider:
- Over 4,000 fintech companies, including several unicorns, have built their platforms on top of Plaid.
- Recruiters may complain about the cost, but 95% still utilize LinkedIn.
- More than 20,000 companies trust Segment to be their system of record for customer data.
- Shopify powers over 1 million businesses across the globe.
- Epic has the medical records of nearly 50% of the U.S. population.
What does this mean for founders who decide to build on top of another platform?
Increase speed to market
PostScript, an SMS/MMS marketing platform for commerce brands, built its platform on Shopify, giving it immediate access to over 1 million brands and a direct customer acquisition funnel. That has allowed PostScript to capture 3,500 of its own customers and successfully close a $35 million Series B in March 2021.
Ability to focus on core functionality
Varo, one of the fastest-growing neobanks, started in 2015 with the principle that a bank could put customers’ interests first and be profitable. But in order to deliver on its mission, it needed to understand where its customers were spending their money. By partnering with Plaid, Varo enabled more than 176,000 of its users to connect their Varo account to outside apps and services, allowing Varo to focus on its core mission to provide more relevant financial products and services.
Gain credibility by association
Whenever you try to introduce a new communication tool to a large organization, the words security, compliance and adoption usually come up. One way to bypass these concerns is to gain credibility by association by being a platform partner. Companies like Lattice (performance management that just closed a funding round at over $1 billion valuation) and Troops (sales productivity), which are built on top of Slack, have proven that you can leverage trusted platform partners to access seemingly impenetrable enterprise customers and scale a business that way.
Building off a platform can get you going — but it can also limit exit outcomes.
We recently spent time with two companies in very different industries that leveraged existing platforms to get to scale quickly.
The first was a network-based recruiting platform that ingested data from LinkedIn and other talent platforms to make recommendations on candidates that might be a good fit and who within your organization should reach out to them. By leveraging these existing platforms, they managed to extract and enrich more than 100,000 of their own candidate profiles and send 20 to 30 weekly leads to their 40 happy customers. What’s the catch?
Well, the majority of their candidate database is sourced off LinkedIn, and their lead enrichment is partially dependent on LinkedIn updates. So what happens if LinkedIn decides to block access? Will that risk impact growth once they get to scale, or make LinkedIn the only natural acquirer for this business?
Delivery platforms have definitely expanded the reach for restaurants, but we worry that most restaurants have lost that one-on-one relationship with the end customer. We were excited when we came across a company that was trying to build a central customer database for restaurants. Why recreate the wheel when delivery platforms like DoorDash, ChowNow and Grubhub have rich user data?
This company was able to collect transaction data from the existing delivery platforms then work with each restaurant to run targeted marketing campaigns coming from the restaurant, providing clear value from Day 1 and allowing restaurant owners to regain a direct line of communication to the end customer. Right now, this company has been able to fly under the radar because of its scale, but if this idea works, would one of the incumbents try to buy them or build it out themselves?
How to build off an existing platform — and be successful
Startups take on the risks of building off existing platforms in exchange for the growth shortcut to customers. To build a long-lasting business, companies need to choose platforms wisely, typically focusing on top-tier platforms first and diversifying across platforms whenever possible.
Platforms are built to entice developers to build and expand features for their current user base. In exchange, startups get access to customers and users. You can never get comfortable with this tradeoff because as platforms grow and change, you will constantly have to adapt.
Platforms are agile and can shift focus overnight, so it’s important to immediately forge your own relationships with your customer base, build out your own database, and win their hearts and minds. Becoming indispensable to end users further ensures the larger platforms won’t shut you off. The more value you provide to the customers, the larger a source of revenue and growth you become for the platform. In turn, the more independent your organization becomes, the more your early partners soon won’t be able to live without you.
Don’t become a company of success. Become a company of value
Veeva Systems, a cloud-based life sciences software solution, was one of the earliest examples of runaway success built entirely on top of Salesforce. Veeva developed a customer relationship management (CRM) solution for biotech, pharma and life sciences companies that are required to comply with many specific regulations and tracking requirements.
By building on Salesforce, Veeva was able to get to market much faster than if it had built out a new platform from scratch, and it provided Salesforce with the features necessary to host more life science customers. The value exchange has made for a symbiotic partnership that Salesfroce has committed to until 2025 and is likely to be extended. By proving Veeva’s value, Salesforce is unable to live without this partnership empowering over 600 enterprise customers. Veeva IPO’d in 2013 and is now worth $41 billion.
Calendly is a more recent example of a company executing well by building on top of other platforms. Calendly is a scheduling tool that helps schedule events with others without having to email back and forth. One of the things that makes it so successful is its various integrations. Early on, Calendly prioritized building smooth integrations with Google Calendar, Outlook and iCloud rather than build a new calendar.
In less than six months, Calendly’s product was up and running and able to provide real value for millions of email and calendar users across the large platforms. This reduced development time for Calendly, reduced time to value for new customers and provided new value for the continued use of the platforms (Google, Microsoft and Apple).
By diversifying across calendar and email platforms, Calendly reduced dependency risks from the get-go. Calendly smartly continues to build out more features and now integrates into CRMs, video conferencing apps and marketing tools to increase its value proposition further for all parties. A newly crowned unicorn, Calendly in January raised a Series B fundraising round for $350 million.
Platforms are the gateway to digital innovation
The world’s most valuable companies are digital platforms. As a startup, you cannot operate without paying your dues to Apple, Microsoft, Google, Amazon, Facebook, Alibaba, etc.
While this dependency is not going anywhere, they provide immense value to developers by providing the sandbox for supercharged innovation. Anyone can now use AI and ML tools at little to no cost. Starting a technology company has never been more accessible, but this also enables existing businesses to adapt more quickly. To compete in this environment, continuous value creation is paramount.
As more platforms emerge, more dependencies will be necessary, but compelling value propositions will elevate all parties involved. Leading platform business across every vertical will continue to concentrate market share by building and acquiring value creators, presenting exit opportunities for founders and investors alike.
Founders shouldn’t be worried about starting companies that rely on other platforms. Platforms exist to help startups get to users and customers faster and should be used as a means to an end, but everyone must get their piece.
By staying conscious of the value being exchanged and continuing to provide more value to all parties involved, company success will follow. In turn, VCs should not be worried about investing, but companies need to ensure they have a game plan to reap the benefits of building on top of a larger platform and become self-sufficient over time.
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