How to Blow Up an Ecosystem (and Prosper Within One)

Are you a part of an ecosystem or do you plan to destroy one? You must decide before plotting a path to success

During the four years we spent building MerchantCircle, I didn’t set out to work with Google. I just wanted to bring local merchants onto the Web.

But local is search and search is Google. And that put us squarely in the Google ecosystem. So working with Google became 75% of what I thought about every day and 50% of my dreams at night.

They weren’t always pleasant thoughts. And they were frequently nightmares rather than dreams.

A lot of venture investing stems from the theory that companies and products are a platform, or rather an ecosystem. This is for one simple reason: a well-managed, well-cared for ecosystem can provide fantastic long-term sustainable advantage to build and capture value.

I know this first hand. After investing in Tapulous, I spent 18 months advising Bart Decrem, the co founder, as he built a company on his idea that “this iPhone thing is going to create an ecosystem.” He then sold to Disney.

If you invest in a startup taking advantage of an ecosystem or platform, you have a chance to make great returns. On the flipside, if you make an investment in a company mining an ecosystem and the ecosystem blows up, loses its prominence or fails to expand, you are going to lose on what was supposed to be a safe bet.

Three Ways To Destroy An Ecosystem

•You can destroy an ecosystem by not knowing you have one. Google seems to not really know it has an ecosystem. It does not proactively work to support the publishers who are so important to its AdSense/Adwords success.

•You can lose an ecosystem through abuse. As a company, you may control the ecosystem, but only so far as your partners let you. Step on them enough and they will help see that you don’t own it. You only have to look at the Federal Trade Commission investigation of Google to know what it looks like when ecosystem partners hire lobbyists to convince the world you are abusing your ecosystem stewardship.

•Competitors can outmaneuver you when you are asleep at the wheel. RIM owned an ecosystem and did a great job working with carriers to extend and capture value. Then Apple came around and made developers the center of the ecosystem. Tapulous was among the first to build on the iPhone platform with a set of apps including Tap Tap Revenge. We may see this shift again as Android competes against Apple’s closed ecosystem.

Most venture-backed companies don’t own ecosystems. But they should know how to be part of them.

Three Mistakes The Little Guys Make

•Pretending you aren’t part of one. I have seen 20 startups say they hate Google and are going to market directly to local consumers. This makes about as much sense as a game company, like Tapulous, ignoring the Apple ecosystem.

•Fighting vs. embracing. Companies that recognize they are part of one sometimes try to fight to escape. Winning often means accepting and figuring out how the ecosystem’s owner thinks. At MerchantCircle, I decided to embrace the “local was search and search was Google” concept rather than fight it.

•Misunderstanding your business model. I have seen a number of companies confuse“riding an ecosystem” with a business model. You only have to look to the disk drive companies that sold into the Sun Microsystems ecosystem in the early ‘90s. They no longer exist, despite once having billion-dollar valuations.

We all want to slipstream an ecosystem. It’s important to decide if you are really part of one and whether its owners are going to destroy it. Then plot a path to success in their world.

Remember, it is a Google earth, and we just live on it. For now.  This piece was originally published in Venture Capital Journal

A great piece written by Dalton Caldwell who learned the dangers of the facebook ecosytem recently.

“Platforms are judged by the value generated by their ecosystem, not by the value the platforms directly capture.”  Dalton Caldwell

Ben T. Smith IV is a serial entrepreneur, investor and a co-founder of MerchantCircle and Spoke. He is available on Twitter at @bentsmithfour.