Distribution channels

I recently ran into the founder of a startup in the advertising technology space who I first met in June 2013. The company will go unnamed as it’s raising a round right now and I want to respect their privacy. We looked into the company in June 2013 and, although we really liked the team, we decided not to invest because of the product’s reliance on third party platforms for its distribution. At the time, the company was active in Turkey and looking to expand into two new markets.

During our recent chance meeting with the founder, he updated me on the company’s progress which I then further researched on the web. They’re now in 12 countries and based on public information, count nearly every major Turkish company and at least 10 global blue chip companies as their clients. The company is doing very well for itself.

It was clear that the company would be able to execute on its growth and geographic expansion plans when we first met. The founders are simply smart and have a lot of hustle. As a result, seeing the progress that the company made in the 20 months since we first met gave me a short feeling of regret for not having invested when they were just starting out.

However, upon deeper reflection, I realized that our original reason for not investing remains intact. The company is still reliant on third party platforms for its distribution, and these platforms could cut off access to the company’s product at any time.

For example, Twitter recently limited live streaming app Meerkat’s ability to import a user’s Twitter followers and who they follow onto the Meerkat app. This took place immediately after Twitter purchased Meerkat competitor Periscope. Twitter hasn’t limited Meerkat’s ability to automatically broadcast its users’ live streams on Twitter yet but this remains a future risk.

A heavy reliance on third party platforms for distribution doesn’t prevent startups from getting funded. Some investors are comfortable taking this risk. For example, although Twitter’s decision likely had an adverse impact on Meerkat’s valuation, Greylock still invested $12M in the company after the decision.

However, our preference is to invest in companies that either control their own distribution or have multiple evenly balanced distribution channels which lower their reliance on any single channel.