Sometimes in the economy, monolithic entities that serve many needs disintegrate into an ecosystem of single-purpose entities. When that happens, there’s a huge opportunity for startups.
Take, for example, Craigslist. Since its founding 25 years ago, Craigslist’s horizontal breadth, coupled with its shallow feature set and stagnant product, has presented rich opportunities for startups to carve off vertical-specific niches. This is illustrated by the now-iconic market map of vertical-specific marketplace startups aiming to unbundle Craigslist and build optimized experiences for certain categories, from Coursera for education to Airbnb for short-term accommodations.
Entering the “Unbundled Work” Era
While the unbundling of Craigslist created billions of dollars of value, it pales in comparison to the unbundling we’re currently living through. Outside of commerce, unbundling is now affecting a much broader domain of everyone’s lives: work is being unbundled from traditional employment.
The notion of the “organization man”—a term popularized by William H. Whyte’s seminal 1956 book that describes the subsuming of individual agency in service of a large corporation—is giving way to the rise of “micro-entrepreneurs,” or free agents, creators, freelancers, and independent workers who utilize digital platforms to make a living by leveraging skills and knowledge in the absence of a traditional employer-employee relationship. Accelerated by digital platforms that help surface job opportunities, facilitate customer connections, and aid in setting up and operating a business, workers are empowered to go independent and to earn a livelihood outside the confines of a traditional company.
Tech platforms have removed gatekeepers and democratized access to customers, enabling people to do work outside of the traditional employer-employee relationship
A 2017 McKinsey Global Institute study showed that 20-30% of the working age population in the US was engaged in independent work, and that the proportion of such work mediated by digital platforms like Uber and Etsy was growing rapidly. This trend spans the gamut from individuals who convert their passions into professions—think of YouTubers, podcasters, and gaming livestreamers who’ve monetized digitally-native hobbies—as well as those whom we don’t traditionally think of as “creators,” but who are also similarly shifting to digitally-mediated self-employment, including teachers, salespeople, farmers, chefs, and personal shoppers.
What is driving this rearrangement of work? For one, it’s catalyzed by innate human desire: Freshbooks’ 2019 study on self-employment found that the primary motivations for those pursuing self-employment were non-financial: most individuals seek a combination of freedom, fulfillment, and career control. Author Daniel Pink’s theory of motivation corroborates this finding, arguing that humans are driven by autonomy (desire to be self-directed), mastery (urge to improve), and purpose (desire to do something meaningful)—all of which independent work can facilitate.
Tech platforms have removed gatekeepers and democratized access to potential customers worldwide; direct payment models have made it viable for workers to earn a livelihood from even a small number of loyal fans; and platform companies in the gig economy and passion economy have paved new paths to work.
How to best support the unbundling of work: horizontal or vertical?
For startups looking to support this trend of unbundling work from employment, a fundamental question is whether to pursue a horizontal or vertical strategy.
What’s the difference? While horizontal companies support workers in an industry-agnostic way, vertical platforms are focused on a particular industry. Patreon is a horizontal SaaS platform that allows any type of content creator, from comic book authors to YouTubers, to set up a membership subscription. In contrast, vertical-specific companies are building products for a given industry. For instance, Substack has enabled writers to more easily earn income from writing, and Blok.fit and Playbook have enabled fitness instructors to run a virtual business.
What is the best approach to take, and where are the opportunities?
The opportunity for vertical-specific work platforms: “Shopify for X”
New platforms are emerging that broaden access to or potentially create an entirely new type of work. The “business-in-a-box” model, wherein companies provide individuals tools to build an independently-owned business for a given line of work, is inherently vertical, with examples including Dumpling for grocery delivery businesses and Wonderschool for in-home daycares.
The benefit of building for a particular vertical is focus. Startups are able to align execution to a particular type of work and provide greater value for workers in a specific industry. A vertical approach also means more focused marketing, sales, and user acquisition strategies. Given that the online creative economy is growing at nearly 20% per year, verticalization is becoming an increasingly viable strategy as each vertical grows larger. And, in particular, COVID is an accelerant to new vertical platforms as nearly half of the US is jobless and seeking new, turnkey ways to earn income through end-to-end digital platforms.
Vertical-specific platforms can excel in a few key ways versus horizontal products:
1. They turn non-producers into producers, i.e. actually expand the market
Vertical-focused platforms can actually expand the market of workers who can participate in a certain industry, by honing in on and removing the obstacles for prospective workers. Many vertical-specific platforms support productizing knowledge or skills in new ways, thereby normalizing and broadening new paths to work. In other words, a vertical focus can unlock productivity and economic value, turning non-producers into producers.
Podcasting has been around since the early 2000s, but Anchor, a podcast platform launched in 2017 that simplifies podcast creation, was reported to be powering 70% of all new podcasts as of Q1 2020 and believes that its monetization platform effectively doubled the number of podcasts running ads.
Prior to Cameo being founded in 2017, it would have been strange for celebrities to charge fans for personalized shout-out videos, but Cameo normalized this type of paid interaction—and anticipates $100M in bookings this year.
2. They provide deeper value in helping the worker to manage and grow their business
Vertical-specific creator tools can focus on supporting the “enterprization” journey from launch to growth, starting from serving an individual hobbyist and scaling up with them as they eventually grow into a business. CALA, a platform focused on helping designers launch apparel lines, offers a software tool accessible to everyone from design students to fashion brands. CALA’s founder Andrew Wyatt calls their internal framework of product design “solving the next biggest pain point”: “As a creator starts to have success on the platform, they begin having additional needs. If possible, they will source the solution on-platform, because there is already trust and everyone wants just one login.”
Vertical-specific tools can provide a depth of value for creators that is challenging for horizontal platforms to replicate. Shopify, which has stated that its mission is to “make entrepreneurship more accessible,” doesn’t just superficially enable the creation of an online storefront, but offers deeper functionality tailored to e-commerce merchants: a dedicated network of fulfillment centers, merchant cash advances, marketing & SEO, etc. This focus on the e-commerce vertical has enabled it to build a $114 billion business, blowing past horizontal website builders like Wix that also offer e-commerce functionality (market cap of $14 billion, as of 7/28/20).
Vertical-specific platforms for independent workers are closely related to vertical SaaS, which Bessemer and Lightspeed have covered extensively. The difference now is that the new SMB is oftentimes a single individual, who is able to operate independently without a team by leveraging software. In the local services vertical, Dumpling gives personal shoppers everything they need to run their own grocery delivery businesses, including a fully-funded credit card for purchasing orders, professional website, client-facing app, and business coaching.
3. They can re-introduce services that workers lose when they are unbundled from companies
Employment at a company is itself a bundle of various services and infrastructure, and there’s an opportunity for platforms to replace what workers lose when they leave traditional employment arrangements. For micro-entrepreneurs, the tradeoff of independence is a de-risked company environment for learning, pivoting, and risk-taking—and there’s an opportunity for platforms to foster this sense of “confidence and comfort.” Recently, Substack announced it was launching a program to provide legal support for writers on its platform:
Substack Defender is one of many initiatives that will form a comprehensive support structure for independent writers. [...] [S]oftware alone is not enough. We are committed to creating the conditions that allow independent writers to flourish, which means helping to restore the infrastructure that has been eroded by the continued dismantling of models and institutions that once supported a healthy free press.
Other services that employers typically provide include the comradery of a team, office space, and other vertical-specific functions (for instance, in the case of Substack, editing, distribution, and design). There is potential for work platforms to not only enable participants to earn money, but to ease the transition to independent work by providing these services.
Interestingly, platforms supporting the unbundling of work are also giving rise to a re-bundling—in effect, creating new employers and organizations. On Substack, individual newsletter writers are already self-organizing into subscription bundles, and some are hiring teams and further professionalizing their content, effectively re-bundling into a new media organization (albeit, with a significantly different cost structure).
4. They foster vertical-specific network effects: discovery of new creators or fan-to-fan interaction
Discovery experiences make sense for verticals/use cases where customers benefit from repeated matching. For instance, the supplemental education platform Outschool is designed as a marketplace because parents and students find value in discovering new courses and teachers on a consistent basis.
On the other end of the spectrum, fans often discover Pietra, a creator e-commerce platform, through a particular creator, and discovery makes less sense in this context and can even alienate creators. Facilitating discovery raises the platform vs. aggregator issue that Ben Thompson has extensively covered: “Aggregators tend to internalize their network effects and commoditize their suppliers.”
Within a certain vertical, fans often want to connect with each other, given their affinity to what a creator represents. Substack’s initial foray into community consists of discussion threads that publishers can activate. CommonStock’s social investing platform is predicated on this idea of “Come for the creator, stay for the network.” As I wrote earlier this year, “Frequently, premium content and community are bundled together to enhance the [user] experience by providing valuable social reinforcement and support.” Community experiences can benefit from being bundled into a verticalized platform given the nature of content and experiences users are connecting over.
Clearly, vertical-specific platforms can unlock tremendous value for independent workers. So what’s left for horizontal work platforms?
Horizontal platforms supporting independent workers
The key question for startups seeking to build horizontal work platforms is: what are the commonalities between workers such that a standalone, defensible product can be built by an independent company? Whether they’re hobbyists-turned-entrepreneurs, freelancers, or gig economy workers, independent workers regardless of industry share some common needs.
Here’s where horizontal approaches can be better in supporting micro-entrepreneurs:
1. They act as a discovery destination for consumers
Despite myriad attempts by startups to create better video consumption experiences aligned to a specific vertical, YouTube remains unbundled because it aligns to consumer usage patterns: there’s a large base of casual consumers who want to watch diverse content across categories, rather than visiting various destinations for different content verticals. As such, YouTube is an indispensable horizontal platform in the ‘entrepreneurship stack’ that supports independent creators across a variety of industries, from financial experts to unboxing video creators.
Independent workers and creators will continue to leverage horizontal social platforms for discovery and audience building. Increasingly, social media is seen as a marketing channel for the unbundling of work:
2. They benefit from fragmentation of creator tools
22% of self-employed workers have multiple revenue streams, compared to 11% who work for an employer, according to a 2019 Intuit survey. With COVID, that percentage may be even higher as independent workers piece together income from different sources.
The fragmentation of different platforms for engaging with and monetizing audiences presents a pain point that can be addressed by a horizontal platform that unites audiences. For instance, Community is a messaging platform that allows creators—often celebrities with presences across Instagram, TikTok, and YouTube—to aggregate their audiences in one place and to text fans directly; its homepage markets the ability to “communicate one-to-one with millions, without getting buried by social feeds and algorithms.”
3. There are economies of scale
Horizontal platforms excel when there are economies of scale. For instance, there are benefits of scale in the lending business, with a virtuous loop of scale of customers, stronger models for underwriting, higher approval rates, and accelerated customer acquisition. Across multiple verticals, independent workers often lack predictable income, which presents an opportunity for lending. Early products in this space include Patreon Capital (merchant cash advances for Patreon creators), Shopify Capital, as well as horizontal creator business platforms Karat and Stir.
4. They provide common infrastructure or services needed across verticals
What do all micro-entrepreneurs have in common, that can be solved via an independent platform rather than being rebuilt by every vertically-focused platform? Independent workers, in general, aspire to grow their earnings, find new customers, plan for the future, run their own businesses, and manage incomes from different sources. For example, Moe Assist is a project management tool that helps creators manage projects and collaborations, invoice clients, and receive payments, serving the needs of all types of creators who earn income from brand deals.
Employment at a company is itself a bundle of various services and infrastructure, and micro-entrepreneurs piece these together on their own.
What are some ideas for horizontal platforms? (not exhaustive)
1. Single sign-on for fans
With increasing verticalization by content type, a single login/authorization system can help superfans pay for a single subscription and access all of a creator’s content. For instance, paying for a creator on Patreon could grant access to their private Substack group, private Zoom events, paid podcast, etc.
2. Connections between different apps & automation of experiences
Marketo—which was purchased by Adobe for $4.75B—develops marketing automation software for businesses to market to customers. Creators and independent workers are likewise seeking to re-engage and customize experiences for their fans/customers, but lack the tools to do so. For instance, if someone subscribes to a paid podcast, trigger an email inviting them to a private Facebook group, invite them to a local event, etc.
3. Business services for 1099 workers:
When workers are unbundled from institutions, they lose access to many of the services and benefits that traditional employment conferred: income smoothing with automated tax withholding (i.e. a paycheck), healthcare, employer-sponsored retirement plans, as well as a sense of comradery and community.
Employer-based healthcare in the US means that self-employed workers have a challenging time finding affordable and comprehensive coverage (or even view it as a blocker to leaving a full-time job); and the US tax code means being independent requires increased time, money, and complexity. Companies like Hyke, Catch, Better, Wingspan, Decent, Keeper and others are facilitating self-employment by providing services related to the administrative side of freelancing. Creator communities—both online and offline—like Indie Hackers, Type House, and TikTok houses are filling the team and community support gap for micro-entrepreneurs.
4. Learning, upskilling, and development
Organizations spent $359 billion globally on training in 2016. Employer-provided learning, development, mentorship, and coaching programs means that independent workers need to piece together these resources on their own. Startups like Walden, Knowable, HireClub, Skillshare, Udemy, and more are creating standalone learning and development resources that freelancers can leverage to advance in their self-crafted careers.
Looking ahead… A re-bundling and a new type of organization?
At the turn of the 20th century, in the wake of the Industrial Revolution in America, agrarian society and cottage industries gave way to urbanization, mass production, and corporate employment. At the dawn of the 21st century, new internet platforms are empowering a shift in work once again, from traditional employment arrangements to independent work that allows for greater autonomy and monetization of uniqueness and creativity at scale.
While past platforms largely focused on connecting consumers with workers and honed in on facilitating transactions, there’s a lot more to work than just earning income. To legitimize independent workers and creators, there needs to be dedicated tools—both vertical and horizontal—to support managing and growing their businesses, forging new connections, learning new skills, and connecting to work opportunities.
Looking forward, as individuals professionalize and seek to take their businesses to the next level, I anticipate more re-bundling—whether it’s short term collaborations with other micro-entrepreneurs, or building out teams that work together for longer-term projects. There’s a massive opportunity for digital platforms that lower the barriers to micro-entrepreneurship to support the growth of these workers, in whichever directions they seek.
If you’re building a company in this space, please reach out — I’d love to chat.
Acknowledgements: Thank you Brandon Handoko for creating the graphic designs for this post!