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Hacking the chicken-egg platform problem

From LinkedIn

Category: tech

2016-12-06
Platform businesses scale incredibly quickly once a solid foundation is created. This is how Airbnb became the largest hotel chain in the world in 6 years without ever owning a single hotel property. In 2014, Airbnb had over a million rooms available for booking (more than Marriott, Hilton, and IHG) and today, Airbnb has doubled that to 2 million.

That's 50% annual supply-side growth. In the hotel industry.

Dozens of platform businesses like Uber, Shyp, and Facebook have had similar growth results across entirely different industries. More importantly, Facebook in particular has shown the immense profitability that wildly successful platforms can achieve with that growth. For the younger (currently unprofitable) Ubers and Airbnbs of the world, many people in the tech world tend to agree that they'll get there too, once their global expansion costs reduce significantly.
So it might not be a surprise that app developers (like Applico in New York) have pivoted to focus purely on platforms, and entrepreneurs across the world have launched new platforms in spades. In Boston alone, at least 56 notable startups consider themselves an 'Uber for X'.
But here's the thing with platform startups: they're hard. Like insanely hard. Why? Because they tend to have two user groups, and the value to each user is dependent on the other (note: technically, my use of 'platforms' in this post should be MSPs - 'multi-sided platforms'). What's the point of downloading Uber if there aren't any drivers in the app? Airbnb without rooms? There's no supply, so there's no value. The same holds true for demand - Uber without riders and Airbnb without travelers have no value for their supply-side users.

This is the chicken-egg platform problem.

And it sucks. The core value of an MSP is to facilitate exchange between 2 or more user groups, but if the value to those users is circular then where do you start as an entrepreneur? To facilitate exchange across a network, you need to first build a network. But as a startup on a shoestring budget, this is an incredibly difficult hurdle to cross. Most platform startups unsurprisingly fail at this step (step 1). Even the wildly successful example companies I noted above struggled for years before creating a large enough network that could achieve exponential network effects.
So how do you solve the problem (other than scraping by for years until both user groups hopefully scale up enough)? You hack it. Pick one user group, identify a key partner that could fuel near-instantaneous scale, create value for that partner, and then focus all marketing efforts on the other user group.
With my company, SaveOhno, we run a platform for passionate people to take action on social issues, and the first action we present users with is online petitions. We spent months raising money and building our technology, but we ultimately faced the chicken-egg problem first hand.

When we launched the first version of SaveOhno we had 1 online petition in our database. Fast forward 3 months, and we had 7000.

As you might imagine, the initial launch produced low conversion and even lower (<1%) day-7 retention. We only had 1 supply-side user, serving hundreds of demand-side users! So we entered Babson's Summer Venture Program, challenged our assumptions head on, and came out with industry-high supply. Our next launch achieved 400% higher per-user activity, and the one after that achieved 1600% higher activity with 20% higher conversion and 50% higher day-7 retention (disclaimer: by then we'd done a little more than just boost supply).
To get industry-high supply, we simply tapped into the industry leader. Through Change.org's API, we were able to provide our users with thousands of environmental petitions right off the bat. This allowed us to focus on our demand-side users and complementary partners since we had plenty of supply waiting for them. Today, we've organically grown to thousands of demand-side users and over 15 complementors with Change.org's petition supply as a base.
There is an important caveat here though, which I learned from Lyft Boston's GM Tyler George. If you hack the chicken-egg problem and bring in too many of one user group, you could lose that user group really quickly. Tyler has pioneered Lyft's expansion to Boston to a high degree of success, and one of his guiding principles is to manage the growth of both user groups - to scale them proportionally, so each marginal attained user is happy with their experience in the platform. This is necessary for retention.
Barring that caveat as a barrier, here are my high level steps for successfully hacking the platform chicken-egg problem:

  1. Identify a key partner that can kickstart the growth of one user group
  2. Talk to that partner to identify potential value-adds
  3. Create a plan to capture that value, and sell them on it
  4. Create a marketing plan focused on the other user group
  5. Raise the funds you need to build your platform and fulfill your marketing plan
  6. Launch and hustle

The Author

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Dylan Husted
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Founder of SaveOhno, Rails developer and wannabe kickboxer