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When a startup builds atop a distribution platform, the company prioritizes immediate growth over control. Distribution platforms like Facebook and iOS offer access to hundreds of millions of users inexpensively.

The alternative, building a customer acquisition channel from scratch, is a resource heavy effort requiring marketing teams, ad spend, PR, etc. Most companies don’t have the capital to invest in building these assets at inception.

So, many startups including ones in our portfolio like Branchout, Gogobot and Machinima, have opted for growth and have built large user bases on top of platforms. User growth is a prerequisite for raising money which can be used to build customer acquisition channels.

As these companies grow, they must regain control over distribution, complementing Facebook’s user funnel with other funnels to ultimately reduce Facebook’s contribution to new users to a minority. Otherwise, the company is wholly dependent on Facebook for growth. Kabam has made this transition very successfully.

On the other hand, Zynga built a system of customer acquisition exclusively on Facebook. And though they tried to diversify with a standalone website, the effort wasn’t successful.

One might argue Zynga waited too long to diversify. Part of the challenge, I imagine, is short-term revenue maximization. At the beginning, each dollar invested into a standalone site returns less than a dollar invested in additional Facebook growth. Ultimately, a user on a standalone site is much more profitable because Facebook doesn’t tax revenue at 30%.

As a result, Zynga doesn’t have direct access to the vast majority of its user base. They must pass through Facebook to reach their user base and must abide by rules that Facebook sets and change their communication methods as Facebook’s products evolve.

Choosing when to diversify customer acquisition channels is tricky and will vary for every business. But by and large, the earlier, the better. For every company, it’s critical to maintain control of distribution channels.

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2 thoughts on “Trading Growth for Control

  1. The premise that a company has control and can easily add distribution channels at its own free will is pretty flawed IMHO.

    I think the only controllable set of activities is to have great product/market fit such that when the primary growth channel wanes in effectiveness, direct traffic and retention replaces it (e.g. Youtube on MySpace, Paypal on eBay)

    Check out the PandoMonthly event with Pincus. Diversification isn’t for a lack of trying with mobile and the Draw Something acquisition seemed almost in frustration of that.

    Another missing piece in the Zynga comments are around the direct access: The company does and the successful migration of players between games is testament to that and so too all their small acquisitions that they were able to bring scale too.

    The 30% tax on fb isn’t great but so too iOS and I do believe that over time the 30% will even be worth it in terms of conversion lift of the player not having to keep entering their credit card number/billing address and just clicking ‘yes’ to pay. Not to mention years of training of spending money on both those platforms that it becomes second nature to buy stuff through them.

  2. Startups can add marketing teams, spend money on advertising, hire PR firms, hire a BD team and forge partnerships, build for other platforms. Those are the distribution channels I was referring to.

    The YouTube and PayPal examples are great ones where a race to scale mattered most. PayPal was eventually able to build a standalone business. You could make the argument YouTube could have as well.

    It’s true Zynga tried to diversify and perhaps they did succeed on iOS. As for cross promotion, it occurred exclusively within FB.

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