Is platform risk okay for a young startup?

I recently came across this post. Here is the gist

• This founder set up a custom domain & analytics that sat on Substack
• It was a niche with no competitors, with users willing to pay
• Substack started offering the same services that killed this startup

This is a major worry for many startups. And this is called Platform risk.

What is Platform Risk?

Platform risk is the risk of debt associated with adopting a platform. Platform risk gains momentum when the following happens:

1. Platform becomes critical to company operations

2. Company is unaware of the risk assumed

3. There is a likelihood of adverse platform change

This is a major source of worry for founders. For an e-commerce company in our portfolio, Facebook is the single major source of customer acquisition. For a habit-building startup we have invested in, LinkedIn referrals are free, but the only source of customer acquisition. As investors, we also worry that if something were to happen to that channel, the company might face an existential crisis!

However, is platform risk really that big a deal for a young startup?

As a young startup, often the only thing that a company does is to be exceptionally well at one thing. Do one thing consistently, repeatedly, exceptionally better than the competition and make your customers fall in love with you! This also means for an e-commerce company - they focus on making the best product and let the acquisition channel do its work for the time being. Only then can the company become an efficient, and scalable business model.

Any e-commerce company by default runs platform risk because Facebook owns almost all of the customer acquisition channel. During times of flash sales by behemoths like Amazon & Flipkart, we have seen the ROI on Facebook ads fall significantly because of flooding by these e-commerce giants. During such times, startups in our portfolio have faced revenues falling off a cliff, falling efficiencies in customer acquisition, and also at times halted business.

But this does not mean you stop using such channels. As a young startup trying its best to attain product-market fit in a highly competitive world, the focus should, and has to remain on perfecting the product. It is hard to get one thing right for hyper-growth, let alone build an acquisition strategy from scratch without the help of these platforms. And that invariably means when founders find a platform that works, they will want to milk that cow!

Once startups have established their presence, and are looking to scale their business, it can be an opportune time to diversify the acquisition channels. But the groundwork needs to start early. Building and nurturing an acquisition channel without throwing truckloads of cash takes considerable effort and time. But when you find a channel that works for you, milk it while you can. As an early-stage company, you do not need to diversify yet.