Build vs Buy: Choosing a Platform for Your Startup

The Perceived Risks of Platform Dependence

A common caution given to entrepreneurs is to avoid constructing their businesses upon the infrastructure of existing platforms.

Early in my venture capital career, over a decade ago, a key piece of advice was to refrain from investing in companies reliant on another company’s platform. This dependence introduces vulnerabilities and potentially limits investment returns due to a lack of control over crucial elements like API access, pricing structures, and customer data.

Historical Examples of Platform Shifts

Many will remember Facebook’s restriction of API access in 2015, or the significant controversy sparked by Apple’s alterations to its app developer commission rates in 2020.

Essentially, the question of platform dependency is now unavoidable for many founders.

The Rise of Dominant Platforms

Salesforce arguably pioneered the modern enterprise platform model, becoming the first dedicated SaaS company to exceed $10 billion in annual revenue, bolstered by its accessible application development marketplace.

The success achieved by Salesforce has facilitated the emergence of leading platforms across various industries, making the platform decision a critical one for new companies.

Illustrative Cases of Platform Reliance

Consider these examples:

• Over 4,000 fintech companies, including numerous highly valued startups, have established their operations utilizing Plaid.
• Despite concerns regarding expense, approximately 95% of recruiters continue to leverage LinkedIn.
• More than 20,000 businesses rely on Segment as their central repository for customer data.
• Shopify currently supports over 1 million businesses worldwide.
• Epic maintains the medical records for nearly half of the population of the United States.

Implications for Founders

What are the consequences for founders who choose to build upon an existing platform?

Accelerating Time to Market

PostScript, a platform specializing in SMS and MMS marketing solutions for commerce businesses, strategically developed its infrastructure on Shopify. This decision provided instant connectivity to more than one million brands and a streamlined pathway for customer acquisition.

Consequently, PostScript has been able to onboard 3,500 customers and secure $35 million in Series B funding, finalized in March of 2021.

Strategic Platform Choice

Leveraging the Shopify ecosystem was a key factor in PostScript’s rapid growth. It enabled the company to bypass extensive development timelines and focus on core marketing functionalities.

Key Achievements

• Customer Acquisition: Successfully gained 3,500 customers.
• Funding: Closed a $35 million Series B funding round.
• Timing: Secured funding in March 2021.

The platform’s foundation on Shopify demonstrably accelerated its market entry and facilitated substantial financial gains.

This approach highlights the benefits of integrating with established e-commerce platforms for swift expansion and customer reach.

Concentrating on Essential Operations

Founded in 2015, Varo, a rapidly expanding neobank, was built on the belief that a financial institution could prioritize customer needs while maintaining profitability.

However, realizing this objective necessitated a clear understanding of customer spending habits.

Through a collaboration with Plaid, Varo empowered over 176,000 customers to link their Varo accounts to various external applications and services.

This integration allowed Varo to dedicate its resources to its primary goal: the development of more pertinent financial offerings.

The Power of Integration

By leveraging the capabilities of Plaid’s network, Varo gained valuable insights into how its user base managed their finances.

This data-driven approach facilitated the creation of tailored products and services designed to address specific customer requirements.

Plaid effectively acted as a conduit, enabling a seamless flow of financial information.

Consequently, Varo could refine its offerings and strengthen its commitment to customer-centric banking.

Benefits of the Partnership

• Enhanced understanding of customer spending patterns.
• Development of more relevant financial products.
• Improved customer experience through personalized services.
• Focus on core banking functionalities.

The partnership with Plaid proved instrumental in allowing Varo to concentrate on its core competencies.

Instead of diverting resources to building and maintaining complex data aggregation infrastructure, Varo could rely on Plaid’s expertise.

This strategic decision ultimately contributed to Varo’s accelerated growth and success within the competitive neobank landscape.

Establishing Trust Through Partnerships

Introducing a new communication solution within a large organization frequently raises questions regarding security, compliance, and user adoption. A strategy to circumvent these initial hurdles involves establishing credibility through association by becoming a platform partner.

Successful companies, such as Lattice – a performance management system recently valued at over $1 billion – and Troops, focused on sales productivity, both built upon the Slack platform, demonstrate the potential of leveraging established, trusted partners to gain access to enterprise-level clients and facilitate business expansion.

Platform Dependence: Benefits and Limitations

While building upon an existing platform can accelerate initial growth, it's crucial to acknowledge potential limitations regarding future exit strategies.

Recently, we analyzed two companies operating in distinct sectors that effectively utilized existing platforms to achieve rapid scaling.

Case Study 1: Network-Based Recruiting

The first example was a recruiting platform that integrated data from LinkedIn and other talent sources to provide candidate recommendations and suggest appropriate outreach within organizations. By utilizing these established platforms, they successfully compiled and enhanced over 100,000 candidate profiles.

This resulted in delivering 20 to 30 qualified leads weekly to their 40 satisfied customers. However, a significant dependency exists.

The majority of their candidate data originates from LinkedIn, and lead enrichment relies, in part, on LinkedIn’s updates. Consequently, restricted access from LinkedIn could hinder growth or potentially position LinkedIn as the sole logical acquirer.

Case Study 2: Restaurant Customer Data

Delivery platforms have undoubtedly broadened the customer base for restaurants, but a concern arises regarding the potential erosion of direct customer relationships. We identified a company aiming to create a centralized customer database specifically for restaurants.

Instead of duplicating existing efforts, this company leverages the rich user data already held by delivery platforms like DoorDash, ChowNow, and Grubhub.

They collect transaction data from these platforms and then collaborate with restaurants to implement targeted marketing initiatives originating directly from the restaurant. This provides immediate value and enables restaurant owners to re-establish direct communication with their customers.

Currently operating at a modest scale, the success of this approach could attract acquisition interest from existing delivery platform incumbents or prompt them to develop a similar solution internally.

Leveraging Existing Platforms for Startup Success

Startups often accept the inherent risks of developing on established platforms to accelerate customer acquisition. A sustainable business model necessitates careful platform selection, prioritizing leading platforms initially and expanding to multiple platforms over time.

The core function of a platform is to attract developers who will enhance its features for existing users. In return, startups gain access to a pre-existing customer base. However, this arrangement requires constant vigilance, as platforms evolve and necessitate continuous adaptation.

Given the dynamic nature of platforms and their potential for rapid shifts in focus, it's crucial to immediately establish direct relationships with your customers. Building a proprietary database and fostering customer loyalty are paramount.

Becoming an essential resource for end-users provides a degree of protection against platform-level disruptions. The greater the value you deliver to customers, the more significant your contribution to the platform’s revenue and growth becomes.

Consequently, increased organizational independence positions your company as a vital partner, one that the platform will find increasingly difficult to operate without. This dynamic shifts the power balance over time.

Key Strategies for Platform Dependence Mitigation

• Direct Customer Relationships: Prioritize building your own communication channels.
• Data Ownership: Develop and maintain your own customer database.
• Value Proposition: Focus on delivering exceptional value to end-users.
• Platform Diversification: Expand to multiple platforms to reduce reliance on any single entity.

Successfully navigating the platform ecosystem requires a proactive approach. It’s about recognizing the benefits while actively mitigating the risks associated with dependence.

Prioritize Value Creation Over Mere Success

Veeva Systems, a provider of cloud-based software solutions for the life sciences industry, serves as a prime illustration of rapid success achieved through strategic platform utilization. Specifically, Veeva initially constructed its operations entirely upon the Salesforce infrastructure.

The company engineered a customer relationship management (CRM) system tailored for biotechnology, pharmaceutical, and life sciences organizations, entities subject to stringent regulatory compliance and detailed tracking protocols.

Leveraging Salesforce’s existing framework enabled Veeva to accelerate its market entry significantly, bypassing the extensive development timeline associated with building a new platform independently. Furthermore, it furnished Salesforce with the capabilities needed to effectively serve a broader clientele within the life sciences sector.

This mutually beneficial exchange has fostered a symbiotic relationship, with Salesforce publicly committing to the partnership until 2025, with potential for further extension. The demonstrable value provided by Veeva is now integral to Salesforce’s operations, supporting over 600 enterprise-level clients.

Veeva launched its initial public offering (IPO) in 2013 and currently boasts a market capitalization of $41 billion.

Calendly represents a more contemporary example of a company successfully implementing a build-on strategy. Calendly is a scheduling application designed to streamline event coordination, eliminating the need for protracted email exchanges.

A key factor in its success lies in its extensive integration capabilities. From its inception, Calendly prioritized seamless connectivity with Google Calendar, Outlook, and iCloud, rather than attempting to develop a proprietary calendar system.

Within a mere six months, Calendly’s product was operational, delivering tangible benefits to millions of users of established email and calendar platforms. This approach minimized development time for Calendly itself.

It also accelerated the time to value for new customers and enhanced the overall utility of the underlying platforms – Google, Microsoft, and Apple.

By strategically diversifying across multiple calendar and email platforms, Calendly proactively mitigated dependency risks. The company continues to expand its feature set, integrating with CRMs, video conferencing applications, and marketing tools to further amplify its value proposition for all stakeholders.

Recently achieving unicorn status, Calendly secured $350 million in Series B funding in January.

Digital Platforms: The Foundation of Modern Innovation

Today's most highly valued corporations function as digital platforms. For a new business, operating effectively necessitates acknowledging the influence of major players like Apple, Microsoft, Google, Amazon, Facebook, Alibaba, and others.

Although this reliance isn't diminishing, these platforms offer substantial benefits to developers, acting as environments that foster rapid innovation. Access to AI and ML tools is now available at minimal or no cost.

Launching a tech company is more attainable than ever before, yet this accessibility also empowers established businesses to evolve at an accelerated pace. Sustained value creation is therefore crucial for maintaining a competitive edge.

The Expanding Platform Ecosystem

The proliferation of platforms will inevitably lead to increased interdependencies. However, strong and persuasive value propositions will benefit all stakeholders.

Dominant platform businesses, spanning all sectors, will continue to consolidate market share through strategic development and acquisitions of value-generating entities. This creates potential exit strategies for both founders and investors.

Founders should not view reliance on existing platforms as a deterrent to launching new ventures. These platforms are designed to accelerate user and customer acquisition, and should be leveraged strategically. However, securing a beneficial position within the ecosystem is essential.

Navigating Platform Dependency

Success hinges on a clear understanding of the value exchange and a commitment to consistently delivering increased value to all parties involved.

Similarly, venture capitalists shouldn't hesitate to invest, but portfolio companies must develop a strategy for capitalizing on the advantages of building on a larger platform while simultaneously working towards long-term self-sufficiency.

Continuous innovation and a focus on delivering exceptional value are key to thriving in this dynamic landscape.