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