Buyer beware – ignoring platform risk when buying a SaaS can be costly

A very interesting blog post has been making the rounds recently. The summary is that a guy built an impressive business on top of Shopify but was subsequently completely banned. Now, he was warned in advance of being banned and technically he may have been playing fast and loose with their terms of service. The point remains: he built a serious business (600k euro/mo) and lost it all on a dime – this is a story about Platform Risk.

Defining Platform Risk

What is platform risk? Platform risk is when you build a business that is wholly dependent on another business whose incentives may not align with yours.¹ A Shopify app has exposure to platform risk, so does a site that’s fully dependent on SEO for distribution (Google may change their algorithm)². This is a particularly important truth to understand for SaaS buyers because so many of the SaaS businesses for sale are built on top of other providers.

It’s worth noting that there are different degrees of platform risk. Shopify, for example, has a robust app ecosystem and they want developers building applications and providing additional functionality to their merchants. Platforms with official app stores are less dangerous. But you do risk flying too close to the sun. If your app provides a great feature that the underlying platform doesn’t, then there’s always the risk that they’ll come behind you a build a better, native version.

You can also run afoul of the platform’s rules, like in this case, and end up in a rough situation. This was a somewhat blatant violation but to give you an idea of the subtleties involved, I once had an app delisted from Shopify because the marketing description wasn’t up-to-date with some new standards they’d applied.

Finally, don’t forget that the platform sets the rules and, often, the fees. You’re usually paying some kind of tax to be listed in their app store. Apple often finds itself in contentious battles over this. If they decide to raise their fee structure next year, how will that affect your margins?

Mitigating Platform Risk

Mitigating platform risk is tough because usually the platform provides a means of distribution for your potential acquisition. Here’s how I would think about the problem:

• Is the app compliant with the terms of service of the platform? You want to make sure you aren’t breaking any rules, knowingly or unknowingly, that could get you kicked off. This might mean anything from making sure your app implements the platform’s best practices to making sure that your app listing is up to date.
• Has the owner received any prior warnings from the platform? Make sure you know of any communications received by the prior owner from the platform. You could be one late email away from being de-listed.
• Can I realistically diversify my risk by expanding? If you’re just on Shopify, can you move to BigCommerce or WooCommerce? Platform risk is very similar to customer concentration risk, in the sense that you can decrease it by spreading your revenue across several sources. Now this may be easier said than done. Expanding to another platform will likely require extensive development work and will depend on how modular the application is. Is all of the code written around the assumption that it will always run on Shopify or is it architected to be plug and play with other platforms?
• How much revenue is at risk? How much margin? If the platform was shut off completely tomorrow, would the business lose everything? The answer may well be yes and that’s okay, it’s just something to keep in mind. A more realistic exercise may be, “If the platform bumps its fees by 1 or 2%, what does that do to my business”? Could you raise prices or is there lots of competition in your niche?

Summary

There’s no free lunch in business and platform risk is another key thing to consider when buying a SaaS company. The good news is that it can be mitigated and, often, remaining in good standing will be sufficient to continue operations. But it’s good to be prepared.

1. Note that unless you’re at VERY LARGE scale, then I wouldn’t consider a cloud provider a platform risk. At the low end they’re very commoditized. Big technology companies will often explore something called “cloud optionality” to avoid vendor lock-in. ↩︎
2. WordPress plugins are kind of an exception because although they’re built on top of a particular platform, there are many WordPress hosting businesses, meaning the underlying provider is somewhat commoditized. ↩︎