Platforms, Markets and Innovation

Platforms, Markets and Innovation

Edited by Annabelle Gawer

Annabelle Gawer presents cutting-edge contributions from 24 top international scholars from 19 universities across Europe, the USA and Asia, from the disciplines of strategy, economics, innovation, organization studies and knowledge management. The novel insights assembled in this volume constitute a fundamental step towards an empirically based, nuanced understanding of the nature of platforms and the implications they hold for the evolution of industrial innovation. The book provides an overview of platforms and discusses governance, management, design and knowledge issues.

Chapter 5: How Catalysts Ignite: The Economics of Platform-Based Start-Ups

David S. Evans

Subjects: business and management, strategic management, economics and finance, economics of innovation, industrial organisation, services, innovation and technology, economics of innovation

Extract

5. How catalysts ignite: the economics of platform-based start-ups David S. Evans1 INTRODUCTION 1. Starting a business and getting it to the point where it is economically viable is the most difficult problem for all entrepreneurs. Most new businesses fail. In the USA, 61 percent of new businesses that were started in the second quarter of 1998 had ceased business within five years (Knaup and Piazza, 2007). Venture capital firms that invested in new firms do not get any of their money back in 43.7 percent of the first-round investments they make and get less than their initial investment back in 66.7 percent of the first-round investments (Metrik, 2006, exhibit 7-4). The start-up problem is particularly difficult for firms that are based on multi-sided platforms. In addition to the usual problems faced by new firms, they often must contend with the well-known chicken-and-egg problem. Their firm can deliver value to one side of the platform only if there are participants on the other side of the platform. They have to figure out how to get both sides on board their platform. That problem, which is the subject of this chapter, is very different from that faced by a one-sided start-up whose main challenge is getting just one set of customers to buy its product or service.2 The chicken-and-egg problem is central to the study of multi-sided platforms. Yet most of the theoretical and empirical research on two-sided businesses has focused on mature platforms and examined their pricing structures and other...

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