I’m advising a young company mulling different acquisition offers.
The company has been courted a few times over the last two years—only now the proposals are sizeable enough to be interesting.
The company sits at the center of its ecosystem. All the main players in the sector feed their data into its platform, which uses the data to build a continuously deeper, smarter repository with extensive benefits for everyone involved. As time progresses, more and more data is fed into the system, it gets smarter, and the company becomes increasingly entrenched as an essential partner.
I just helped another young company raise seed funding—it occupies a similar spot in its own ecosystem. The social commerce platform helps large players boost user-generated content about their brands.
For example, there happens to be a trendy California-based hair salon chain that solely provides blowouts. Before I started working with the young company, one salon location had garnered 160 Yelp reviews over the course of seven years.
After working with the social commerce company, that same location managed to generate over 65 social reviews in just two weeks.
Ultimately, the young company connected a service provider with social media users who needed a direct line of sight to purchase their favorite Instagram-liked hairstyle. Does that make sense?
The secret sauce that drives both companies’ success is that they are independent, neutral hubs in their respective ecosystems. They’ve positioned themselves so that all information flows through them, thereby allowing them to build scale, improve their offering, and become an essential part of their landscape.
Independent Platforms Drive Self-Perpetuating Growth
The beauty of these independent models is that their growth is self-perpetuating. In the case of the social commerce brand, once one company in its sector leverages a solution, it immediately gets a leg up on its competition.
Let’s go back to the chain of hair salons we discussed in the last section. Their competitors will take note of the fact that they are allowing consumers to act on their Pinterest-generated intent.
As such, these same competitors will adopt the new solution as well. More and more companies from adjacent and complementary spaces will jump onboard.
This will help accelerate the young company’s growth. It will also facilitate the arms race in the sector.
For the young social commerce company, it’s a win-win. First, because it gains customers, partners, and revenues as the brand grows and the dollars start flowing. Second, because the more its platform expands, the more the company scales, and the better its offering gets.
Facebook was a decent offering when it covered a single university campus. That said, it changed the world when it starting taking over continents. Only when it reached that scale did Facebook manage to permeate people’s lives on a deeper level, and enjoy guaranteed adoption with new features, offerings, and monetization channels.
Know What’s Coming When You Give Up Your Independence
Young companies should ride the wave of independence for as long as they can. This will only benefit them as they amass more data, entrench themselves with partners, and grow in scope and scale.
Eventually, customers and partners will realize they can’t afford not to own you, and they will pay a hefty premium to get in on your offering.
In the case of the social commerce company, the organization makes itself essential to its ecosystem by giving each competitor a leg up. Competitors keep coming back, and will continue to do so as long as they’re in business.
The problem is that if the social commerce company sells itself to Drybar, for instance, then it will eliminate any chance of doing continued business with Blo, DreamDry, Halo, Haute Air, Pouf, Hairports, etc.
Why would these brands want to support a company that’s now owned by their biggest competitor?
The short answer is that they wouldn’t.
In this same vein, imagine that JUMP Bikes was partnering with Uber, Lyft, Getaround, Zipcar, DiDi, Grab, and others. It would have a broad user funnel from all these platforms, and become a better offering as a result. But by selling itself to Uber, JUMP would close the door on every other competitor that isn’t interested in helping a no-longer independent company—particularly one that has aligned itself with their chief competitor.
Platform Depth & Scale May Eventually Be Worth the Sale
Note that it may be worth giving up your independence if both 1) the price is right and 2) you’re exchanging breadth for depth.
On the former, the offer price has to be meaningful enough that you couldn’t obtain a similar valuation by continuing to run the business yourself. On the latter, by forgoing independence and aligning with a single competitor in the market, you may be sacrificing surface-level leads in exchange for access to a much deeper platform (including new sales opportunities).
Say, for example, that JUMP was only getting casual, peripheral users from Uber and its competitors. By selling to Uber, JUMP would be trading its independence for access to a deeper base of Uber riders and use cases. Instead of remaining a fringe offering, JUMP would be integrated into Uber’s consumer-facing, industrial, commercial, autonomous, etc. areas of expansion. And for this reason, the tradeoff might be worth it.
In summary, independent platforms make the most of network effects. They’re a unique business model innovation that positions a company at the center of its ecosystem and allows it to benefit as a key partner—a partner of all the players in a given sector.
But in the right situations, young companies should remain independent—that is, so long as they can scale and refine their platforms. Competition will fuel their growth as a result, and potential buyers may discover they can’t afford not to own them.