Often the easiest choice is to make no choice at all, but you might kill your startup that way
Picture this… we were raising our Series A for my startup Posterous. My co-founders and I were at Benchmark Capital on Sand Hill Road, meeting with Peter Fenton, legendary investor in Twitter and Yelp. We think it’s going fine until Peter asks this question. So, are you a platform or a network? The three of us looked at each other and we said both. And the meeting might as well have ended at that moment, in Peter’s mind at least.
Sometimes the worst thing you can do as a founder is say “both”.
The Periodic Table
Investors are interesting because they get to see so many different things all the time. At Initialized, I feel like we learned new things that are basically secrets about how the world works and it’s the founders that teach us by telling us what they’re excited about and what they’re focusing their entire life’s work on.
Each startup is a vector. It’s a direction with a certain momentum, and once you see enough vectors, you kind of see the matrix. At least done right, that’s how it is.
I was always kind of skeptical of this, but one thing was clear after working with 1000s of companies at Y Combinator. Paul Graham used to talk about this a lot…
Every future great startup, something like an Airbnb or an Instacart, is like a new element on the Periodic Table. If you’re an engineer, designer or product person overall, you’re like the physicist. You understand how the atom works. So you of all people in society have the clearest idea as to what the next spot on the Periodic Table will be.
So that’s why Peter’s question, “Are you a platform or a network?”, was so important for us to nail. It was THE question to answer at that moment in 2010. All of the companies in social media from that time were either a network or a platform.
Twitter was clearly a network. It was free and the value came out of the network being as large as possible. The users themselves were the product. Once you own the network, then you can charge rent through ads.
In contrast, a platform looks more like Squarespace Inc. or our friends at Weebly. The customers paid for it, the value was a direct transfer from the company to the customer. As software builders, you are working for your customer and because you charge, you have money to go and acquire new users. As long as long-term value is higher than customer acquisition cost, you have a viable business. If your long-term value is way above your customer acquisition cost, well, that’s a money machine.
Why didn’t we get this right? It’s a simple question, but what I realize now is that when we are asked that question, we didn’t understand the question to begin with.
Investors have seen a lot of startups so they’re trying to ask you questions based on their lived experience. Often, it’s because they’ve already lost money on something similar. So, when you hear a question you don’t understand in a pitch meeting, you should stop and ask, what do you mean by that and why? It’s okay not to know the answer to things sometimes, especially when you’re quite early.
Well, obviously Benchmark didn’t fund us. Peter Fenton remains one of the best investors out there and I learned a lot from him about what it means to be a good investor from that one pitch meeting.
Posterous did end up selling to Twitter for about $20 million as basically a talent acquisition. They ended up shutting down the platform. Meanwhile, our friends at Weebly kept charging their users. They became a world class platform and not a network and it’s still in operation today. Squarespace has become one of the most profitable platforms on the web.
What I realized is we actually had a chance at being a network. The network that ended up winning the mobile social media battle was Instagram. And when Instagram launched, Posterous was one of the checkmark destinations on the network’s post page. It was us, Twitter, Facebook, and Foursquare on that page.
I realize now that the moment Instagram launched was the moment that Posterous stopped growing. There was a better alternative to posting by email.
When we couldn’t be a network, it was clear we needed to become a platform. We needed to choose to become a platform. Saying “both” was the wrong option.
I think that’s one of the bigger regrets I have in my life. Before we changed ideas, before we chose to pivot, we didn’t try to become a platform. We tried instead to become a private sharing network for families that could neither grow virally nor be a service that people paid for.
We were maybe 15 people at the time with a burn of under $200,000 a month. We had 20 million uniques and about 2 million active bloggers. Even if 5% converted to paid at $5 a month, that would’ve been more than $500,000 a month in revenue. We clearly could’ve been a platform and maybe we would’ve been a different company in the end.
The hard part is, this question may not be relevant to you at all, but when you’re pitching, pay attention to the questions investors ask. If you don’t understand something, don’t pretend that you know the answer.
The other thing I’ve learned the hard way–the answer is probably not both.
Good luck to you as founders and future founders. I hope you’ve learned this lesson from me so you don’t have to learn the hard way.
Thanks for reading! To watch my full episodes that go into detail about these ideas — and more — head over to my YouTube channel.