[A version of this article first appeared in The Quint.]
As a seed-stage investor at OperatorVC, I see at least 50 startups a month that are looking to raise a seed round. Most pitches aren’t perfect. That’s usually OK – a founder’s core competency should be building, not pitching.
But one of the most egregious mistakes is calling yourself the “Uber of X”, or the “Airbnb of Y”.
The moment you say this, the pitch ceases to remain credible.
This is such a common refrain – and such a rookie mistake – that I can’t help but point it out.
Startups ain’t Star Trek, but I feel Picard’s pain.
I think the “X of Y” epidemic started with Y Combinator’s application process. The How to Apply page mentions that YC likes hearing “X of Y”. It helps them place the startup into the pantheon of successful companies they’ve seen.
It makes sense for YC. When they have to scour thousands of startups in a short time to select a few, a metaphor helps. “Hi, I’m the Uber of bicycles.” Enough, let’s move on.
But most fundraising pitches are not YC applications or Demo Days. Yet, Paul Graham’s words are gospel. So everyone and their next-door founder has adopted this with great gusto.
Even in situations where it doesn’t make sense.
And it’s gotten to a point where it’s almost ludicrous! I’ve heard a startup describe itself as “the BikeBob of X”. Have you heard of BikeBob? Neither have I! [Note: I’ve disguised the real name of “BikeBob”, but trust me, you haven’t heard of it.]
Let’s be clear – this is not a “done thing”. It’s not a “best practice”. It’s a mistake, in most pitching situations. Even if it’s Uber you’re comparing yourself to, and not BikeBob or MotorcycleMary.
Before digging into why it’s a mistake, there’s an even more basic question. Why do we do it? Fierce individualists that we are, why do we willingly attach our identities to something else?
Why do we do it?
Three reasons:
Helps explain the product. This is why it’s recommended for YC Demo Day.
Shows a pattern. We all know that VCs are in the pattern recognition business. This just makes it easy for them to realize that you’re the next Uber. They better chase you with their money!
An attractive narrative. Starting up is hard. It’s difficult to justify to your family – and yourself – why you’re abandoning a stable ship. In such a scenario, who wouldn’t like a little ego boost?
Saying you’re Uber of X is awesome. Wouldn’t you love to equate your startup to a unicorn?
But the moment I hear it in a startup pitch, it’s hard not to cringe. Why?
Why is it a mistake?
1. Gives the impression that you’re not solving a real problem.
It sounds like you just read about a successful startup’s business model, and applied it to the first sector you could think of.
“AirBnb for cars: rent other people’s cars when they aren’t using them.”
It’s like you went to the neighborhood workshop and bought yourself a hammer. Now everything looks like a nail!
Unless an idea has formed organically from a real problem, it’s probably a bad startup idea.
[Side note: this is just one characteristic of a startup idea that sounds good, but is probably bad. Click here for a full list of such characteristics.]
“Do you want a bicycle at this very moment?” “Not really, but your speakers look awesome!”
Sometimes, it’s a real problem all right. But the solution doesn’t make sense.
An “Uber of intercity B2B logistics” is OK from a problem perspective. Manufacturing companies do need intercity logistics.
But do they need it on-demand? No! A huge majority of customers transport loads often, on predictable timelines. They’d prefer negotiating longer-term contracts.
I once thought of applying the Airbnb model to books.
Once I finish a book, it’s lying on my bookshelf. Wouldn’t it make sense to lend it out to others who may want to read it?
The problem is real – I need to buy a book to read it. But is this the best solution at scale? No. Not in a world where book prices are falling, e-retailers offer one-day delivery, and you can download a Kindle book in an instant.
Do I know the problem exists? In some cases, yes. In most cases, no. All I know is that the solution has worked. In another, unrelated sector.
2. It can constrain your imagination.
The moment you start calling yourself “Uber of X”, you constrain your thinking. You fool yourself into believing you have a foolproof playbook. When in fact there are important nuances and differences that are critical to consider.
When Taxi for Sure started, one initial focus area was inter-city cabs. Do you think they’d have discovered the lucrative on-demand taxi market if they called themselves the “Redbus of taxis”?
Oyo Rooms, a successful startup in its own right, could have called itself “Airbnb of hotels”. But would that have worked? Would the founder have made the same decisions? It’s possible. But not probable.
3. It’s another stake in the ground you must defend.
VCs are in the business of pattern recognition. They’ve internalized the patterns of successful startups to a level you never will.
They’ll point out nuances of those playbooks that don’t apply in your case.
I once saw a startup that was building the “Oyo of manufacturing”. Just like Oyo helps hotels use their idle capacity, this founder would help manufacturers deploy theirs. Only two tiny chinks in his plan:
Hotels have average capacity utilizations of around 60%. Manufacturers have much higher utilizations. And moreover, they don’t want to be at 100% – flexibility is important. If a plant has 80% utilization, there’s no idle capacity.
Unlike hotels, production is stable. A plant owner doesn’t want one-off users. He’d prefer someone who promises orders for at least 6 months.
Pattern recognition has a flipside too. An average VC sees 500 pitches every year, to select 3-4. So, they’re far more well-versed in the patterns of bad startups than good ones. Be ready for sweeping statements!
VCs are far better at identifying bad startups than good ones.
Fundraising 101. Explain the problem you’re solving. Explain why it’s an important problem to solve. Then show your traction.
Or flip the order, if your traction is more compelling than your problem description.
These are the two most important things, for your investors to make money. They’ll be listening hard.
Not only does this avoid the pitfalls above, it also serves your original reasons better:
1. It’s much easier to explain.
The problem is now self-evident, and there’s a clear line-of-sight from problem to solution.
2. VCs would prefer identifying the patterns themselves.
Let’s say you’re trying to solve a particularly hard logical puzzle. Would you prefer it if your friend told you the answer, or would you rather figure it out yourself?
So it is with investors as well (at least with me). It’s my job to predict the future, and I’ll feel more fulfilled if I detect the pattern myself.
This may not be flamboyant. But it’ll be a better ego boost when a VC tells you that you’re the Uber of X!
TL:DR
Calling your startup “X of Y” while pitching to investors is a mistake.
It sounds like you’re replicating an existing model, rather than making an original attempt to solve a real problem.
It can also constrain your thinking.
Instead, simply state the problem you’re solving and how you’re solving it.
Leave the pattern-recognition to the investors.
PS. A far more insidious version of the “X of Y” template is “X of India”. I’ve written about it in this article.
PPS. I’m calling this “fundraising mistake #7” because (a) there are several other mistakes; and (b) I want to goad myself to put the rest of them down. So watch this space.
Multi-sided business models are a unique phenomenon – unlike standard businesses which offer a product / service to a particular type of consumer, multi-sided businesses don’t offer any product / service. Rather, they provide a platform that connects buyers andsellers.
Think of Uber – it connects cab drivers and passengers, who benefit each other. E-commerce marketplaces are also examples – they connect buyers with sellers.
Such businesses face a natural chicken and egg problem. For the platform to be useful, both sides have to be present. Sellers won’t come on to your platform without buyers, and buyers won’t come either, unless there’s enough choice (i.e., sellers).
For example, people buy video game consoles only if there are games they can play. But game designers make games for a console only if there are enough people who own it. The proverbial chicken and egg problem. How do one solve this impasse?
The above article discussed a few ways in which businesses can break this deadlock. Many readers wrote in after the article, asking if I could create a framework / checklist that they could use to brainstorm ways to scale their own multi-sided businesses.
Towards that end, I recently published this presentation on SlideShare. Check it out, download it, and let me know what you think!
What comes first, the chicken or the egg? An idle question on which children (and sometimes adults) can spend hours shooting the breeze. The question is, however, not so innocuous when it comes to businesses.
Some of the most exciting ventures today have a unique characteristic – they’re multi-sided businesses. What’s a multi-sided business? It’s one which connects two or more distinct user groups that provide each other with benefits. Think of Uber – it connects cab drivers and passengers, who benefit each other. E-commerce marketplaces are also examples – they connect buyers with sellers.
Such companies, once established, have a high barrier to entry. While that’s wonderful, it also means that they’re incredibly hard to build. Users on one side of the business model find the platform useful only if the other side also exists. For example, people buy video game consoles only if there are games they can play. And game designers make games for a console only if there are enough people who own it. The proverbial chicken and egg problem. How do one solve this impasse?
I face this problem too, in the product that I’m building – connecting advertisers with consumers (launch coming soon – watch this space!). How does one break the deadlock between the two sides? Unlike the philosophical question of which comes first, here the only right answer seems to be both!
There are four ways in which successful multi-sided platforms have overcome this stalemate.
Slow and steady: Build the two sides together in lockstep
Jumpstart: Get one side up quickly, and then build the other
Fake it till you make it: Build one side gradually with a makeshift offering, and then bring in the other
Bait & switch: Start with a single-sided value proposition to build one side, and then introduce the multi-sided offering
1. Slow and steady
In such a model, your offering needs to be valuable to your very first customers on both sides. One way to achieve this is to start small – very small – at a level where it is possible to get both sides onto the platform and provide the necessary cross-network effects. Focusing on a single city, area or even a neighborhood first can help you prove the model to both sides. Once that happens, you can expand gradually, building the two sides in lockstep one neighborhood at a time.
This is what Uber did in San Francisco – getting the model going in one city, and then applying it to other cities one by one. Going small could also mean focusing on one specific customer or product segment before expanding to others. Amazon, and more recently Flipkart, started with selling just books, building a user base and brand recall before expanding to other products.
Tinder, the dating / swiping app, built initial traction in a very creative manner. In its early months, the marketing lead toured several college campuses. At each campus, she first convinced the girls to download the app. After that, when she showed the app to the male fraternities, they quickly jumped on, seeing the number of girls they knew on the app.
2. Jumpstart
Growing both sides of the business slowly in sync is great, but what if you want to speed up growth? Speed is often critical initially – given the high barrier to competing in this space, multiple people with the same idea would try and hustle into pole position. Maybe you don’t need to have both sides up and running from the get-go?
There are many ways one can quickly get one side of the value proposition up, and then build the other gradually.
a. Partner with someone who already has a large user base
One way to break this stalemate is to opportunistically partner with someone who already has a large user base on one side of the platform. This could be another product with mass acceptance in your target user base, or someone who has strong existing relationships that could be leveraged. Once one side is thus engineered into being, you can then build the other.
Google hacked its way to an initial user base using partnerships. It partnered with Netscape to become its default search engine in the late 90s, and also tied up with Yahoo! to power searches on that platform.
b. Make it easy, low-cost and low-risk for one side to come on board
At the same time, you need to make it as easy as possible for one side to say ‘yes’. Drivers are much more open to trying Uber when all they need to do is accept a phone from Uber and keep it on. It’s simple, and it’s low-risk – there’s plenty of upside if any ride requests come on the app, but there’s no downside at all!
Belly, a loyalty program for small businesses, did the same. It gave retailers a very low-risk, easy to install and low-friction loyalty solution. Once a critical mass of retailers had it, localized network effects began to take shape – customers and other retailers, noticing this in some shops, started demanding it of others.
c. Subsidize initial adoption for one side
A subsidy or ‘free’ offer always helps give the initial nudge. This is what video console companies like Xbox or Sony PlayStation do. The console is sold at a subsidized rate to users, and the company takes royalty on the flurry of games that follow. Uber subsidizes both users and cabs initially, to speed up adoption.
3. Fake it till you make it
Sometimes, it’s difficult to obtain one side of the model quickly enough. In this case, you have to build one side gradually with a makeshift offering, and then get the other.
a. Be the counterparty till the real counterparty appears
Most large e-commerce marketplaces started with an inventory led model, where they stocked products themselves. Once user base was built, they found it easier to make the shift to the more lucrative marketplace model, connecting product suppliers to buyers.
b. Use existing systems or services
Sometimes, you don’t need to build the entire solution for all sides of your platform – winging one side of the platform is an option, at least until you demonstrate user traction. I’ve heard the story, possibly apocryphal, of how the Flipkart founders would actually go buy books from stores to fulfill their initial orders. Look for a repetitive, non-scalable way to fulfil one end of the bargain initially, rather than investing in building service infrastructure, supplier base, etc. for a model that is yet unproven – not only is the latter risky, it also delays your product’s launch.
4. Bait & switch
A very nifty way to build a multi-sided platform is to first offer a single-sided service, that doesn’t need a counterparty. Once a user base is built, you can layer on the multi-sided service. Sounds complicated?
a. Build a user base on one side with a focused (different) offering, then introduce the second side
Square is a payments solution for small businesses in the US. It’s really cool – a small chip-sized device that plugs into a mobile’s headphone slot and allows you to start accepting credit card payments. At least this is what it was initially. Once it built a sufficient scale of retailers, it added a second business model. Today, Square also runs a discounting app offering consumers great deals at its partner retailers, card-less transactions, etc.
LinkedIn also did something similar. It started as a pure play network for professionals. Today, a huge user base allows it to be much more – it now offers unique solutions to recruiters, job seekers, and professionals.
b. Start as an information portal
Another way to do this is to start as an information portal for one side of the platform, offering users a directory of information about the other side. Zomato started as a pure-play information source on restaurants in your neighborhood. Gradually, as user base grew, they started overlaying restaurant promotions. I bet they’ll add other services soon – allowing you to book a table, pay after your meal through the app, etc.
These are the four different approaches that companies have used to resolve their chicken and egg deadlocks. What do you think? Have you faced chicken and egg situations of your own? Would love to hear from you – mail me at [email protected], tweet at @jithamithra, or comment here on this blog. And do subscribe here – I post roughly once a week, on startups, business models, consumer behavior, etc.
PS. In the actual chicken and egg problem, the egg comes first (there’s absolutely no doubt about that).
