Why do most social networks never take off? Why are marketplaces such difficult businesses? Why do startups with the best technology fail so often?

There are two broad business models: pipes and platforms. You could be running your business the wrong way if you’re building a platform, but using pipe strategies.

More on that soon, but first a few definitions.

Pipes

Pipes have been around us for as long as we’ve had industry. They’ve been the dominant model of business. Firms create stuff, push them out and sell them to customers. Value is produced upstream and consumed downstream. There is a linear flow, much like water flowing through a pipe.
We see pipes everywhere. Every consumer good that we use essentially comes to us via a pipe. All of manufacturing runs on a pipe model. Television and Radio are pipes spewing out content at us. Our education system is a pipe where teachers push out their ‘knowledge’ to children. Prior to the internet, much of the services industry ran on the pipe model as well.
This model was brought over to the internet as well. Blogs run on a pipe model. An e-commerce store like Zappos works as a pipe as well. Single-user SAAS runs on a pipe model where the software is created by the business and delivered on a pay-as-you-use model to the consumer.

Platforms

Had the internet not come up, we would never have seen the emergence of platform business models. Unlike pipes, platforms do not just create and push stuff out. They allow users to create and consume value. At the technology layer, external developers can extend platform functionality using APIs. At the business layer, users (producers) can create value on the platform for other users (consumers) to consume. This is a massive shift from any form of business we have ever known in our industrial hangover.

TV Channels work on a Pipe model but YouTube works on a Platform model. Encyclopedia Britannica worked on a Pipe model but Wikipedia has flipped it and built value on a Platform model. Our classrooms still work on a Pipe model but Udemy and Skillshare are turning on the Platform model for education.

Business Model Failure

So why is the distinction important? Platforms are fundamentally different business model. If you go about building a platform the way you would build a pipe, you are probably setting yourself up for failure.
We’ve been building pipes for the last few centuries and we often tend to bring over that execution model to building platforms. The media industry is struggling to come to terms with the fact that the model has shifted. Traditional retail, a pipe, is being disrupted by the rise of marketplaces and in-store technology, which work on the platform model.

Pipe Thinking vs. Platform Thinking

So how do you avoid this as an entrepreneur? Here’s a quick summary of the ways that these two models of building businesses are different from each other.

User acquisition:

Getting users onboard is fairly straightforward for pipes. You get users in and convert them to transact. Much like driving footfalls into a retail store and converting them, online stores also focus on getting users in and converting them.

Many platforms launch and follow pipe tactics like the above. Getting users in, and trying to convert them to certain actions. However, platforms often have no value when the first few users come in. They suffer from a chicken and egg problem, which I talk extensively about on this blog. Users (as producers) typically produce value for other users (consumers). Producers upload photos on Flickr and product listings on eBay, which consumers consume. Hence, without producers, there is no value for consumers and without consumers, there is no value for producers.
Platforms have two key challenges:

• Solving the chicken and egg problem to get both producers and consumers on board.
• Ensuring that producers produce, and create value.

Without solving for these two challenges, driving site traffic or app downloads will not help with user acquisition.

Startups often fail when they are actually building platforms but use Pipe Thinking for user acquisition.

• Pipe Thinking: Optimize conversion funnels to grow.
• Platform Thinking: Build network effects before you optimize conversions.

Product design and management:

Creating a pipe is very different from creating a platform. Creating a pipe requires us to build with the consumer in mind. An online travel agent likeKayak.com is a pipe that allows users to consume air lie tickets. All features are built with a view to enabling consumers to find and consume airline tickets.
In contrast, a platform requires us to build with both producers and consumers in mind. Building YouTube, Dribbble or AirBnB requires us to build tools for producers (e.g. video hosting on YouTube) as well as for consumers (e.g. video viewing, voting, etc.). Keeping two separate lenses helps us build out the right features.

The use cases for pipes are usually well established. The use cases for platforms, sometimes, emerge through usage. E.g. Twitter developed many use cases over time. It started off as something which allowed you to express yourself within the constraints of 140 characters (hardly useful?), moved to a platform for sharing and consuming news and content, and ultimately created an entirely new model for consuming trending topics. Users often take platforms in surprisingly new directions. There’s only so much that customer development helps you with.

• Pipe Thinking: Our users interact with the software we create. Our product is valuable in itself.
• Platform Thinking: Our users interact with each other, using the software we create. Our product has no value unless users use it.

Monetization.

Monetization for a pipe, again, is straightforward. You calculate all the costs of running a unit through a pipe all the way to the end consumer and you ensure that Price = Cost + Desired Margin. This is an oversimplification of the intricate art of pricing, but it captures the fact that the customer is typically the one consuming value created by the business.

On a platform business, monetization isn’t quite as straightforward. When producers and consumers transact (e.g. Airbnb, SitterCity, Etsy), one or both sides pay the platform a transaction cut. When producers create content to engage consumers (YouTube), the platform may monetize consumer attention (through advertising). In some cases, platforms may license API usage.

Platform economics isn’t quite as straightforward either. At least one side is usually subsidized to participate on the platform. Producers may even be incentivized to participate. For pipes, a simple formula helps understand monetization:

Customer Acquisition Cost (CAC) < Life Time Value (LTV)

This formula works extremely well for eCommerce shops or subscription plays. On platforms, more of a systems view is needed to balance out subsidies and prices and determine the traction needed on either side for the business model to work.

• Pipe Thinking: We charge consumers for the value we create.
• Platform Thinking: We’ve got to figure out who creates value and who we charge for that.

However, platform thinking applies to all Internet businesses.

If the Internet hadn’t happened, we would still be in a world dominated by pipes. The Internet, being a participatory network, is a platform itself and allows any business, building on top of it, to leverage these platform properties.

Every business on the Internet has some Platform properties. I did mention earlier that blogs, e-commerce stores, and single-user SAAS work on pipe models. However, by virtue of the fact that they are Internet-enabled, even they have elements that make them platform-like. Blogs allow comments and discussions. The main interaction involves the blogger pushing content to the reader, but secondary interactions (like comments) lend a blog some of the characteristics of platforms. Readers co-create value.
Ecommerce sites have reviews created by users, again an “intelligent” platform model.

The End of Pipes

In the future, every company will be a tech company. We already see this change around us as companies move to restructure their business models in a way that uses data to create value.
We are moving from linear to networked business models, from dumb pipes to intelligent platforms. All businesses will need to move to this new model at some point, or risk being disrupted by platforms that do.

There are two types of business models: Pipes and Platforms. Startups that don’t realize this fail. Startups with the best technology often fail because they build the wrong business model.
In the future, every company needs to be a tech company. This is why most social networks and marketplaces fail.

Source: Wired

Being a combination of two traditionally male-dominated landscape – finance and technology, Fintech is well known to have a gender diversity problems. According to Oliver Wyman’s analysis (2020), women only account for 24% of boards of FinTech payment companies, and 14% in Fintech banks.

Diversity matters. “It is critical for women to participate in the development of the fintech industry. Women are able to take risks – accepting measured and reasonable ones for good reasons – and to manage these risks. The world is rapidly changing, so we need unconventional solutions, open-mindedness, and mental mobility.”, citing Tatyana Zharkova, Managing Director, The Fintech Association of Russia. However, it is not only for the sake of diversity that women should represent more in the Financial services and technology sector. The Women in Financial services 2020 report estimates at least $700 billion revenue opportunity each year are being missed out on, and that is due to financial products not considering improving its stakes in female customers.

In the investment world, where the gender gap is already significant, FinTech represents yet another “boys-club” issue. A study by Deloitte (2020) estimates that in 2019, fintechs with women (co-)founders comprise of only 12.2% of the total startups, a 1.3% increase, compared to a decade ago.

Statistically, women-founded startups received around 3% funding, and women-founded fintechs received  roughly 1% of total fintech investment. However, zooming in the picture over time shows a more positive note. As shown in figure below, funding for women-founded fintech startups grew at a compound annual growth rate (CAGR) of 58.9%, siginificantly higher compared to men-founded ones at 29.1%. Also it’s noteworthy that from 2015 to 2019, $85M funding to women fintechs has grown over 6-fold to $540.

Meaningful progress it was, yet the underpresentation of women in fintech suggests that there’s still a long way to go. Breaking down the average investment amount by founder team’s gender, it can be clearly seen that the male-factor added a significantly positive touch to the average investment received by fintechs.

One of the reasons could be the long-lived bias legacy effect. Female founders may not be receiving enough trust from investors mainly because: i) People tend to have trust in models that have been proven (successful male founders in the past years, especially in financial and technology sectors) and ii) Male investors may not share the same level of interest/ thinking with the problems that female entrepreneurs try to solve. The later factor brings our attention to women’s representation in VCs as well. On the other side of the deal table, VCs is believed to traditionally originated by men, and hiring is often done by a “pool of (white male) investment banker”, which leads to the systematic inequality of gender workforce (Karen McCornick, CIO at Beringea in London). Pregnancy and maternity also comes as an issue as most VC firms’ size is small, and the high work pace makes it hard for some one to leave for a long period.  This issue, however, underlies gender gap in most industries.

To narrow the gender gap in fintech investment, a collaboration between female and male founders, fintech enterprises and VC firms is required. In their report “Achieving gender equity in the fintech community”, Deloitte team maps out the action path for the three key stakeholder group to improve gender diversity in fintech community.

• Investors: To widen the investment lens (acknowledge the bias) and Put the multiplier effect to work (e.g. women VCs are twice more likely to invest in women-founded startups)
• Women founders: To be confident and “create the next big thing”. Considering the yet-to-resolved challenges of women accessing traditionally fundraising, female entrepreneurs are also reccommended to seek for alternative channels (e.g. crowdfunding, women-targeted funds…) as well.
• Financial institutions: To foster gender diversity (e.g. Goldman Sachs and JP Morgan are two of the big players who have pioneered the path). Having the institution power, they can also help to initiate partnership and enriching the networks between investors and women founders/ women capitalists.

As COVID-19 has changed the society in many unpredicted ways, the crisis represents huge challenges, yet opportunities at the same time. This chaotic period is when women’s unique advantages come into place. Women is expected to better handle uncertainty and establish harmonic collaboration when needed. They are also more capital efficient, more well-prepared for unprecedented shocks and resilient – valuable survival skills especially during this pandemic period.

For more current news and trending topics of VC investing, , join our upcoming Etalk session 2 to meet up with Jenny L, Investment Manager at Cathay Ventures. She will share her interesting insights on recent emerging trends of Fintech, as well as how the capitalist are navigating the investment process during this historical time of Covid-19, through a lense of an experienced female investor.