How Incumbents Win at Platform Innovation: Enterprise Dry Powder

By Alex Moazed

Dry powder is a familiar concept in board rooms, referring to cash or other relatively liquid assets that a business has at ready use. But in the context of platforms and the advantages that large enterprises have in building them, dry powder takes on a whole new meaning.

The mention of platforms often conjures up modern-era tech startups like Uber and Airbnb that grow quickly, dominate their verticals, and sometimes become attractive acquisition targets. But startups lack incumbents’ competitive advantages in regards to validating new ventures and helping them achieve breakthrough scale.

Over the next 20 years, more traditional enterprises will take the spotlight back from startups and create leading platforms, even ones that can beat the modern tech monopolies at their own game.

Whether the goal is to build a homegrown platform venture or acquire a promising one, enterprises need to be able to tap into the value they have within the core business. These latent assets can give a new platform business a strong competitive advantage compared to startups that have to build from scratch.

The “Driest” of Dry Powder: The Ability to Capture Latent Demand

Every new platform needs to find a way out of the chicken-and-egg problem. You need enough supply to meet demand, and vice versa, in order to jumpstart the engine of the business.

Incumbent enterprises already have a part of this problem solved. They have customers. They know to some extent what those customers want and are willing to pay for. An enterprise can use that knowledge, customer data and customer relationships to tap into extra demand that exists behind the scenes.

Once the platform can establish initial demand, suppliers will be attracted to that growing base, and therein lie the seeds of network effects that get platforms going.

Here are a few examples of this kind of latent demand in several different industries.

Retail

There’s never been a better time for traditional retailers to launch marketplace platforms. Besides simply using a portion of revenues to fund development, a retailer could make the bolder move of converting its eCommerce presence into a proper marketplace through self-disruption.

That means opening up the core of your online retail operations to third-party sellers, who would compete with your internal buyers and potentially sell the same products you already sell, possibly undercutting you on price.

While that’s risky, it’s important to think long-term and remember the mechanics behind winning marketplace platforms. By opening up to third-party sellers and not placing too many restrictions on the supply side that you minimize the platform’s value, you’re laying ground for network effects to take hold.

Another form of dry powder for retailers lies in complementary product sales. If you have existing partnerships for items that your customers also buy, that you don’t sell, these items are often a good fit for initial supply you can funnel into the marketplace. The challenge is that these partners need to be willing to compete with other third-party sellers, and this isn’t always the case

B2B Distribution

The eCommerce marketplace phenomenon started in B2C, but is quickly finding resonance in the B2B world. B2B distributors looking to build a viable marketplace might take the approach of offering complementary third-party products, or products you can recommend based on what customers are already purchasing.

The twist? Instead of buying relevant products from competitors and then reselling them, a B2B distribution marketplace would allow those companies to join the ecosystem and start selling those products themselves. The distributor can then set a healthy take rate on transactions. But this arrangement is all to the benefit of business consumers, who are often better served by a one-stop-shop.

Just as Amazon has dominated general B2C eCommerce, it has thoroughly disrupted B2B distribution through Amazon Business, which sells everything from electronics to industrial supplies, and is predicted to reach $31 billion in revenue and $52 billion in sales by 2023.

Distributors can’t expect to go head to head with Amazon Business and win as a generalist marketplace. But they can tap into their existing demand to help accelerate a vertical-specific B2B marketplace.

Banking

Large legacy banks can create platforms if they’re willing to lend to customers they have traditionally been wary of, for regulatory and practical reasons: individuals who lack traditional financial data and small businesses.

These customers represent a large pool of latent demand that incumbents are unable to serve effectively today. But today’s fintech lending startups are happy to bite.

In 2018, 38% of personal loans in the US came from fintech lenders, whereas just 5 years prior, 40% of them were issued by banks. And with banks only accepting a quarter of small business loan applications they get, fintech lenders are stepping in to fill the gap.

Legacy banks can tap into latent demand by spinning off lending platforms that bring on smaller fintech and alternative lenders to serve these loan applicant segments that the bank is unable to.

Other Examples of Enterprise Dry Powder

The ability to tap latent demand is the easiest to understand example of incumbent enterprise’s platform dry powder.

But there are a number of others, such as supplier relationships, an established brand, deep consumer insights, ample inventory, and an array of value-added services: logistics, technical support, credit offerings, and in the case of banks, the preexisting fine-tuned machinery around underwriting and collections.

Incumbent enterprises can offer a lot of these assets to new platform ventures. These advantages can get a new platform past the initial chicken and egg problem, at which point network effects take over and drive continued growth. After that point, enterprise soft assets can help build and reinforce a defensible moat for the platform, and make it increasingly valuable and “sticky” for each user group.

Latent Value Beats Pure Capital

Of course, a hard asset that large enterprises have over startups is capital. However, early on too much capital can be harmful rather than helpful.

Capital can be helpful to gin up some initial demand, such as by deeply discounting the product or service in the beginning. But that alone doesn’t make for a sustainable business. Unless you prove out the business model around a viable core transaction, you can end up running the new venture on false premises. This mistake has been the downfall of many well-funded startups.

That customers are willing to join for heavy discounts is no guarantee that they’ll stick around when those go away. It can also mean that you attract the wrong kind of customers for scaling the network long term.

Too frequently, large enterprises make huge upfront capital commitments, in the tens of millions of dollars or more, before the platform has even proven out its business model and organic value proposition. In many cases, in a bid to impress investors with innovation, large enterprises will make such a commitment before even really launching the new business.

The more effective approach is to start small, prove the organic value proposition, and then look to tap into your enterprise dry powder. Once you’ve fully incorporated that value into the platform, then you can look to scale aggressively with capital.

Capital helps you build on what works. It’s not a replacement for a viable business model with a strong organic value proposition.

Traditional Enterprises and Platform Ventures: A Two-Way Street

As enterprises give their startup ventures value, the startup can eventually start to feed value back to the core business once it reaches maturity. Think symbiosis, as opposed to codependency.

In this scenario, the enterprise could earn high marks from investors and analysts who see the proven stickiness of customer relationships, and who can be more confident in the growth prospects of the younger platform and the growth-oriented thinking of the parent company.

Given the many tangible and intangible upsides of platform innovation, enterprises should strive to capitalize on platform opportunities before their competitors catch on.

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Filed under: Innovation Leadership | Topics: enterprise hacks