The chicken and egg problem for Startups
Over the past few years, I have had the opportunity to work on a variety of entrepreneurial ideas and startups, ¹ most of which either failed to take off or took off and abruptly came crashing to the ground. It is from these failures that we learnt how to be better, move faster and aim even higher in our pursuit to create lasting value. The successes that our startups now enjoy are based on the lessons learnt through the repeated onslaught of dream crushing disappointment, public ridicule and momentary regret that we had to bulldoze through to get to where we are now. ( Having a startup co-founder helps especially when you have to fight the war on two fronts from the trenches.)
One of the most expensive lessons I learnt came in the form of an e-commerce site that we set to build a couple of years ago. It was supposed to be a “meeting place” for buyers and sellers, a marketplace of sorts where the buyers and sellers would haggle, bid and negotiate concluding in a transaction on which we would generate revenue based on commission. It was to be one of those “eBay of X” platforms. I mean, the inspiration was there, e-commerce had worked in other places before, talk about Amazon and eBay. So we got psyched up, set to work and built a minimalistic version of the platform, then set out to talk to our targetted buyers and sellers. It was in talking to them that I came face to face with the one problem that kills most two facing platforms in their infancy, enter Chicken and Egg.
So after numerous meetings and “pavement side” demo’s, we were faced with the “needing the chicken to get the egg so as to have the chicken problem.” Essentially, buyers wouldn’t come to the platform until they saw a sufficient number of sellers advertising on the site, and sellers wouldn’t come on board until they saw a sufficient number of buyers on the platform, who then might buy their products. It became apparent that critical seller adoption would not happen without the raving crowds of buyers anxiously waiting to spend their hard earned dollars, Users, on the one side of the business model would only find the platform to be useful if the other side already existed, So who then would we focus on first? Should we have attempted to get both to sign up at the same time? In the spirit of ² “fake it till you make it,” how many dummy buyer accounts and fake activity would it take to reach critical adoption? (Yes, considered it. I have seen this on many platforms, its just too much work that will bite you in the end, see footnotes.) Should we build buyer-centric features or seller-centric features? It was a torrid task and it felt like we were building two products into one, for both the consumer market and the enterprise market. Startups are always undermanned, but this felt like a two man crew sailing the RMS Titanic dead straight into an iceberg, frantically running round and round the deck with our hands in the air. We hit that iceberg hard, here is what I learnt on the way down to the ocean floor.
1. The Customer and the Product
When building a platform that “seems” to offer value to two different customers, the real truth is that one set of those assumed customers are actually part of the product. The customer is the person who is going to pay you for the value that you would have created. Anyone else who uses the app/site/product is essentially part of the product itself. Take a social network (insert name here) that makes money via advertising as an example, you the users are part of the product. It is your personal data, ( gender, age, likes, location, device etc) that attracts advertisers ( the customer in this example) who wants to use said data to push adverts to people that have a higher probability of converting ( buying advertised item.) So know who the customer is and build the “product” that he will pay for, it will help you focus your efforts.
2. Startups must focus – Start small
Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is.
Peter Thiel’s book puts it across perfectly, start small! In a world that sells how “big is always better,” it is important for startups to start out small. Yes, you need to “justify the opportunity or market size,” it doesn’t mean that you have to go for the whole thing on day one.
Pick a small niche, monopolise it and expand to the next segment. ( Monopoly building 101.) Instead of ranging from real estate listings to phones and accessories to hair and beauty services ( as is the case with many of these platforms that failed, ours included.) Focus on one product type and its corresponding market segment. Starting small also means starting by focusing on a single geographic area, a city, or a neighbourhood. It makes it easier to onboard your first customers who share a common location, sub-culture and consumer behaviour. How and what people in Harare buy, compared to the purchasing behaviour in Bulawayo is quite different, and these are two cities just a 4-hour bus ride apart in Zimbabwe. It also creates a local and relatable product that scales as you expand to the next location. A good example is how Amazon started off as a site that sold books, outdoing brick and mortar stores like Barnes and Noble before it diversified. Amazon brought convenience and access and the brick and mortar bookstores have struggled for years to compete (say the rest of the sentence like it’s a movie trailer) IN A WORLD WHERE CONSUMERS HAVE GONE MAD FOR SHOPPING ONLINE AT AMAZON.
3. Come for this….stay for that
In the many pitches and street side demos’s we did as a startup, the one recurring question or topic that came up had to do with inventory/stock management. We naturally disregarded it, I mean, it is the one thing that the majority of high school computer science students in Zimbabwe work on as a final year project. We wouldn’t be caught dead selling something that generic right? ( being the disruptive innovators that we were trying to be.) Wrong! I wish we had, innovation isn’t invention, its simply taking the status quo and making it significantly better, this can be done at any stage in a value chain, at the product level, business model level or across the entire chain.
Building a “platform-as-a-tool” would have helped us onboard sellers much quicker. It is the “come for the tool, stay for the network/community” approach which would help us stock up the users on the one side of the business model, that would bring the other set of users. Its like finally getting the chickens that will lay the eggs and make more chickens. We could have used the “inventory management” tool to get as many sellers as possible onto our platform, we would indirectly have access to their entire product offering, convincing them to then make that available online would have been easier and would have reduced the amount of work and steps to onboard them. Remember we are impatient millennials, customer churn ( losing customers) increases as you increase the number of steps before checkout. A good example of the “come for the tool” approach is how Instagram became a tool that could take photos and make them look good before it became a social networking platform. To this day, I know of people who use it just for the filters….and then post to facebook.
4. Think Community and Ecosystem
Trying to build your own network is difficult, it’s always easier to leverage on an existing network or community. Very few people would join a community where the curator simply shoves advert after advert down their throats. Leveraging on existing “fan” clubs and groupings will help get users who simply love a particular product. The catch, however, is that you have to provide incremental value for your “poached users” to stay. I have had fellow honda drivers pull up to me and ask about fuel efficiency, car service, accessories and a horde of other car related things. I look forward to the day when retail companies actively create and support fan clubs and communities around their products and services. Instead of focusing just on the transactions, think about the additional value you could provide that will, in turn, lead to more sales. It, however, is important to not go overboard with the additional value, a million features don’t make up for a lousy product offering, that will just distract and confuse the user.
5. Make it feel like home
Before I transact on a new platform, I go through numerous reviews to ascertain whether the platform is safe. I remember going through numerous articles on the differences between Amazon and Ebay, and talking to people who have bought off of these platforms. I know people who take that extra step and contact existing buyers and sellers to verify if it really is safe and secure and what the return/refund policy is like. I went through the exact same “safety first” process when I bought my first car. So it pays to make users feel like it is not just about the sale, making users feel comfortable enough to let go of their hard earned money, and creating a transparent culture around how products are displayed, shipped, delivered and in the unlikely event, returned. One could easily achieve this by leveraging on the expert knowledge in your community to bring in more users. Imagine a phones and accessories platform that also gave expert advice on phone problems, repairs and available accessories. Information has been treated like a currency and many have profiteered off of their having and hoarding information that others do not. Educate the customer, they will, in turn, spend more based on your “expert opinion” and genuine care.
Fighting a two front war isn’t easy and it quickly gets all sticky and confusing. There are numerous startups in the “platforms” section of the graveyard that failed for many other reasons, I, however, believe that this chicken and egg pandemic is an unforeseen infant killer that founders should do well to prepare for or avoid. I hope that learning from my early failures will help you build a more sustainable and scalable startup. We are working on a startup that will help solve this chicken and egg problem called ³X-Beta by accelerating user driven product development through early user acquisition. Their mantra is Build – Beta – Launch! Exciting stuff.
¹It is important to not that there were other problems that plagued us then as a startup, from payment challenges, logistics, delivery and turn around times, to the firm belief in face to face interactions for haggling as opposed to online sales, the chicken and egg problem was the first and major challenge we faced in onboarding users.
²I do not believe in the whole “fake it till you make it” startup mentality. It’s always easier to just be authentic and upfront about the state of your product, the consumer isn’t a moron and appreciates honesty over flashy ads and simulated growth that hides a dysfunctional undersell of a product.
³ You can contact the startup’s founder at email@example.com for more information.