A Parable for 3rd Party App Developers

Posted on April 16, 2010. Filed under: startups, venture capital | Tags: , , , , , |

It used to be that a startups were islands.  At the onset of a venture an island consisted of a sandy beach, a jungle, 2 founders, and 2 computers.  At first the founders, and then all those who came to work on the island (employees, management, investors, etc..) were focused on building the island into a city the size of Manhattan.  Everything that was built on the island was 100% owned and operated by the island.  Everything they learned, and everything they did stayed within the island.  The reason: in order for any new island to become Manhattan, it had to compete to attract millions of people to its population (users/customers).  In order to maintain an edge over the competition, islands did not open up their learnings (data) to new and competitive islands.

The islands that most quickly developed (built out indoor plumbing, public transportation systems, etc)…became the most desirable islands to live on, and their populations began to grow.  The first island with a public transportation system began growing fast.  As its population grew, the demands of inhabitants began to outpace the rate at which those working to build the island could develop solutions.  Inhabitants demanded a hospital, but the founders and employees of the island were still building roads.  The smart founders realized that they could not build a hospital fast enough on their own, so they sent a ship to Manhattan, found the guys who built Mount Sanai Hospital (3rd party application developers), and brought them back to the island to build one (3rd party applications) that would be owned by the hospital builders and not the island.  The founders and the island supported the hospital builders with local knowledge (open API and dev support), the hospital opened, and the inhabitants were happy.  Because they were so happy, inhabitants began to call their extended friends and families on other islands with invitations to come join the island with a new hospital.  The island’s population doubled in 2 months, the public transportation system generated 2x the revenue it did pre-hospital, and the island flourished.

A neighboring island, who had not yet built a public transportation system, but that had the best local fruit of any island in the sea, saw the success of this new hospital, and inquired as to whether these magic hospital builders would come build a hospital for them.  The hospital builders visited the island, saw that there were 1/10 the inhabitants on fruit island, and explained that they were concerned about their ability to operate a profitable hospital on an island with so few potential patients.  The fruit island founders explained that the fruit on their island was going to attract 10 times the inhabitants of public transportation island.  The hospital builders, lacking a competitive project at the time agreed to take on the new project, built the hospital, and fruit island’s population grew on a similar trajectory to public transportation island.  They island sold 2x the local fruit, and they flourished.

All new islands began to perceive the value of having a hospital (3rd party application), and the hospital builders all of the sudden had more islands calling then they did time and bandwidth to complete the projects.  The builders decided to prioritize the projects by which islands had the most inhabitants (user/customers) that would become patients the day the hospital opened its doors.  These islands would be the ones where they could recoup their development costs the most quickly.  As such, it became harder and harder for new islands to build hospitals, and thus harder for new islands to attract inhabitants.

Public Transportation Island saw a symbiosis in its relationship with the hospital builders, and decided to invite school builders, power utilities, and pretty much any builder from Manhattan to come and build out businesses and infrastructure.  All visiting builders could own and operate their projects on top of the island.  This time, every other island saw Public Transportation Island’s move, and now understanding the benefits of this concept, immediately extended the same invitation.  Public Transportation Island had the largest population, and so had no problem attracting these 3rd party builders, and the question became: how do less scaled islands compete to create the necessary infrastructure to attract inhabitants despite the scale of Public Transportation Island.

Promises of future growth, like that of Fruit Island’s to the hospital builders, became a dime a dozen, and then a group of visionary islands had a break through.  They said, “why do we ask these builders to come build our island, create the infrastructure that will help us scale our population, but still consider them visitors and not a part of our island?  We believe in cementing our relationship with those that help us grow.  From this day forward, those builders who build our hospitals and schools will become owners of our island, a part of our island, and enjoy not just the benefits of their own project’s growth, but the benefits of our entire island’s growth.

Public transportation was not prepared to match this offer because they were already so large, and builders started to leave Public Transportation Island, to build for islands that recognized them as true members of the community…The visionary island chain was able to attract builders who gave up near term revenue opportunities on Public Transportation and other scaled islands, for a piece of the visionary island’s growth (stock options), and this is how a small island was able to grow faster than a scaled island.

Lesson: It’s time for platforms to think of 3rd party developers as team members.  Carve out a piece of the rock, reward those who create the most value in your ecosystem with equity in your platform…we understand that Twitter and Apple need to make money, but let the companies on who’s back you built enjoy some of the upside as your platform scales.  If you don’t, they’re going to start scaling other environments to supplant you.

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3 Responses to “A Parable for 3rd Party App Developers”

RSS Feed for Jordan Cooper's Blog: startups, venture capital, etc… Comments RSS Feed

It will be interesting to see how this all plays out. I’d be interested to see how Netflix prize type offers from the islands to the hospital builders would work out. Or whether a pure equity stake offer is the right call.

it would be great to see this financial analysis.

agreed. where is highduchek?

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    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at Jordan.Cooper@gmail.com (p.s. i don’t use spell check…deal with it)


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