Ask @StartupCFO: How do I solve for ‘platform conflict’?

smb saas

One of the biggest challenges in building SMB SaaS companies is distribution. There are so many small businesses out there. How do you reach them? And how do you reach them profitably?

There are several SMB platforms that serve up a large audience of small businesses to their ecosystem. Whether it’s GoDaddy, serving 17 million global small businesses, Intuit with its 7 million business owners, or Shopify with over 600,000 merchants, these platforms offer up large, homogeneous customer bases.

It can be tempting to focus your efforts on these platforms in order to efficiently grow. But doing so has big implications on your ultimate exit strategy. If your business is bootstapped, this is less of an issue. But if you have raised venture or private equity capital, then there are some issues to consider.

Issue 1: Platform conflict

Platforms become platforms not only because they have a large customer base but because they have created and enabled a robust ecosystem of app and service partners around them in order to deliver the full solution to their customers. Whether it’s Intuit’s network of Proadvisors, developers of the 2,300 apps and counting on top of Shopify, or the many agencies that customize a Shopify or Squarespace site for you, there are rich ecosystems on top of the underlying software.

Become so core to the platform experience that the platform absolutely needs to bring you in house.

These platforms face a delicate balancing act between continuing to advance their core platform while leaving enough room for 3rd parties to build on top of that core. While it can often be tempting for platforms to want to buy the most popular add-on apps and bring them in-house, that might discourage others from building. It also alienates competitive apps.

So, it’s not a given to assume that if you build a popular app on top of Intuit or Shopify that they will buy you.

Issue 2: Buying non-strategic revenue

Let’s say you wisely don’t put all your eggs in one basket. You don’t just build for Shopify, but also for Big Commerce and Magento. Let’s say one of these platforms can get past the platform conflict issue. How will they value your business if you have a bunch of revenue that will go away as soon as they own you?

Let’s say 60% of your revenue comes from the Shopify ecosystem. Magento then wants to buy you. They will likely only value the business that you’re building on top of Magento. That can create a huge gap in valuation expectations.

Strategies to consider

So, if you build on top of one of these platforms today, what should you do? Here are some suggestions:

Go beyond the platform: By all means start with a focused piece of functionality that enhances the platform and mine the platform audience for your initial customers. But, continue expanding your offering so that you can go beyond the platform and be a stand alone offering.

Connect more than one platform category: As an example, can your solution connect Shopify and Squarespace in some way? Can you enhance the user experience not just in the commerce store but across the site? Platforms often overlap each other. Squarespace offers e-commerce functionality and competes with Shopify. Connecting these two worlds might motivate one platform to buy you in order to help it compete with the other platform.

Become essential: Become so core to the platform experience that the platform absolutely needs to bring you in house. We see this a lot with payments. Payments used to be just a partnering category for SaaS vendors. Increasingly, payments is being brought in house. “Merchant solutions”, which includes payments is now over half of Shopify’s revenue.

Disrupt/threaten the platform: This is very closely tied to being essential, just taken a step too far from the platform’s perspective. You look like a friendly add-on to start, but your product vision ultimately overlaps and threatens part of the platform.

Build unique data: Data is the oxygen of platforms. If you build a rich, new data set that they don’t have today, that might motivate them to bring you in to the family.

Syndicated with permission from Mark MacLeod’s Real Exits blog

Mark MacLeod

Mark MacLeod

Since 1999, Mark MacLeod has been helping fund, grow and exit venture-backed startups. Mark has over 14 years of experience as a CFO for leading companies such as FreshBooks, Shopify, Tungle, and many others. In addition, Mark spent three years as a General Partner for Real Ventures. Mark now runs SurePath Capital Partners the leading investment bank advising the SMB software and commerce markets.