How to Launch a Marketplace | Allen Lau, Founder of Wattpad

Allen (Guest) 0:00 Power of word of mouth is really strong. If you have a unique product that people actually use and find it appealing, people will talk to other people. The fact is if you are a leader, even in a very small niche and people will find you. And that's how we started to grow the user base. And we leveraged that to keep on expanding into different areas. Intro 0:24 Welcome to the product-market fit show, brought to you by Mistral, a seed stage firm based in Canada. I'm Pablo, I'm a founder turned VC. My goal is to help early-stage founders like you find product-market fit. Pablo (Host) 0:36 Today we have Allen , the co-founder and CEO of Wattpad, a social storytelling platform. On Wattpad, you can read and write your own stories or comment on existing ones. Some stories even get picked up and later published or produced into movies. Wattpad is a community of over 90 million readers and was recently acquired for $600 million. Allen, it's a pleasure to have you on the show. Allen (Guest) 1:03 Thanks for inviting me. Pablo (Host) 1:04 The topic of today's episode is how to launch a consumer to consumer marketplace. We're going back to the beginning here. Wattpad has been a long journey. You guys started in 2006-2007. Just to set context, mobile, if I understand, was already a hot area back then, but most people were on flip phones, on Blackberries. And in that era, you had this idea for Wattpad for a community of readers and writers. What was the first idea of what the product would be? Was it a website? Was it an app? Because I have to be honest, reading on a flip phone was not fun. Original Thesis Pablo (Host) 1:45 What was the thesis, and where was the emphasis when you thought about the MVP? Allen (Guest) 1:50 At that time, of course the flip phone was very, very primitive compared to today's standard, but at that time, people had been texting, people had been using the phone for more than just the voice function. Both co-founders believed that the phone capability will continue to go up. It wasn't quite ready for prime time, but good enough for us to launch the company. At the same time, it was in 2006, YouTube was one year old, Facebook was two years old, and they had maybe over 10 or 20 million monthly users around that time. You can start to see social network or building a community or user-generated content, a few concepts that we incorporated into Wattpad, starting to take off. So, we lavished that user behaviour and the market paved the foundation for us to build upon. Pablo (Host) 3:02 Those trends that you mentioned around user-generated content and social networking and communities, very well understood today, back then they were super nascent. Did you understand it or was it, now looking back, you understand that you wrote those trends, but at that time, were you aware that these are exciting trends, and we're going to kind of piggyback on top of them or was it just more of a coincidence how it worked out? Allen (Guest) 3:29 I think at that time we saw the early trends and the trend could not be mistaken. Everything goes by Facebook and YouTube, it's getting bigger and bigger. So, it was a real thing. That's for sure. How it turned out? Nobody knows, nobody understood UCG fully at that time. But we saw the big opportunity. We saw this was going to be ... It was very nascent at the time, and we saw that trend, and we believed that would be very, very disruptive to how people consume and create content. Pablo (Host) 4:20 Perfect. So then, moving forward from there, you have this idea you're going to go mobile. What does it even mean to launch on mobile back then? What are you building, obviously sounds like an app on the app store or play store. So, what did it look like back then? Allen (Guest) 4:36 There was no app store, there was no play store when we launched. The iPhone did not even exist, not even announced. So, the first app that we built was on the flip phone and to download the app on the flip phone, you had to go through hurdle after hurdle. You probably need to download a driver somewhere on the internet by cable because no one had mobile data at that time. This is something we also expected to become more ubiquitous. We started to see mobile plans were expensive at that time, but we expected the price would go down, and they would become ubiquitous, whether it's mobile data or Wi-Fi even. I think our prediction was quite spot on. The mobile device capability and the ubiquitous nature of mobile data, including Wi-Fi, became reality a few years after we launched. SEO Strategy Pablo (Host) 5:41 So, that's a great point. And just to be clear, day zero, you launched this app, you have this website, tells you how to download it, is that the strategy? We're going to leverage SEO and classic books. When people search, we'll come up first or that just happen? What the strategy when it comes to discovery? Top of the funnel, how are people going to find out about Wattpad? Allen (Guest) 6:04 The SEO strategy wasn't intentional at that time. What was intentional was the classic book strategy. We employed that on day one, but how we get it discovered, it was a big problem. And discovery on mobile was even worse. We tried different experiments, and it turned out, SEO at that time was the right strategy to help. Pablo (Host) 6:39 What were some of the experiments and tears? Allen (Guest) 6:41 Mobile advertising wasn't available. Google did not have mobile ads at that time. Even if we had the budget, we didn't to be honest, we were strapped in at that time, even if he had the budget, we cannot find our way to bootstrap the user base. So, generating awareness was the biggest issue. Maybe it sounds not scalable, but when a company is very, very early, there are things that are not scalable, actually is not a bad idea because you're not at the time that you can scale anyway. So, we contacted bloggers, for example. And some people are interested in writing about us because it's a very unique product on the market. Reading classic books on your flip phone apparently wasn't readily available. So, there are people who wanted to blog about us, and slowly we gained traction. It's not like we can press a button or write a blog post or have someone to write blog posts that we can gain a hundred thousand people all at once, It was more like 50-100, but power of word of mouth is really strong. If you have a unique product that people actually use and find it appealing, people will talk to other people. Pablo (Host) 8:21 Got it. Yeah. And to be clear, you couldn't really... there probably wasn't too big of an audience to advertise on Facebook. You can't advertise on Google because it's not on mobile yet. You can't pay to be number one in the app store. I mean, a lot of traditional things that are done today were just not an option. That limited the Why Niche Might be a Good Thing Pablo (Host) 8:43 set of possibilities. And I do have to say... one of the questions I have because what you're mentioning there is being really, really unique. That is kind of high-level theme, which is, if you have an offering that's extremely good for a really small set of people, you might think that that's a weakness because it's such a small market and so on, but the strength is it makes everything else so clear, right? Marketing becomes clear, your branding, your positioning, who you have to go after, all of that becomes super clear because it's so targeted. When I think about reading on mobile, and you and your co-founders, was that something that you knew you wanted to do? You wanted to read classical books on mobile, and so that's where you started or was it just, you knew you wanted to read on mobile and classical books happened to be the only thing you could import at the time? Allen (Guest) 9:35 Yeah. I think a classic book was a tactic to support our strategy rather than the strategy itself. It's like launching a rocket ship. After 60 seconds, the bottom half of the rocket should be far away because it helps you launch, but after 60 seconds, it's no longer useful. For us, vision was very, very clear early on. We were not interested in building just a reading app on mobile for classic books. We wanted to build the largest platform for people to read and also write and share the writings freely. The UGC idea that we talked about early on, the problem is to overcome that chicken and egg problem, we had to leverage something else for a period of time. And that was the classic book idea. And I think for many founders, I think the TAM or Total Addressable Market, if it's very small early on, if you can provide a unique and excellent solution to solve that problem, it's okay. However, that cannot go on forever for a company to be venture scale. Eventually, your roadmap, your vision has to be big maybe enough for a VC to invest in. So, if the idea was a mobile reading app for classic books, it's a good, perhaps lifestyle business, allow me to say, but it would never be venture scale. And that was never the intention. Pablo (Host) 11:23 First question, are you still bootstrapped to this point and related, is this free, are you generating any income at this point? Allen (Guest) 11:32 No. The UGC idea only started to take off two years after we started. When we launched the classic book , on day one, in the first year, or even after two years, we had maybe a thousand users, it's all free. In a way, it sounds great, but in fact, it's not. For a free product when you have only half a thousand users after a year, it's not something you should celebrate. It means you don't really have real product-market fit. Pablo (Host) 12:08 Correct. Allen (Guest) 12:09 But the thousand users gave us a lot of insights of what's working, what's not working. And, of course, it gave us the audience as well. So, another way to put it, we figured out the atomic units for our product, which is a story. And then we seeded the supply side, which is the classic books. And then we leveraged the small supply who start scaling the demand, which is the readers. Once we have the readers, no matter how small, it becomes attractive to the writers to share. So, two years after we started, we finally saw the first upload to our platform. It took two full years, even though the upload backend had always been there. And at that point we were still bootstrapping because the traction was not enough to attract even the seed investor at that time. And remember it was like 15 years ago or 12 years ago, 13 years ago. At that time, no one would fund you if your product had no traction. Pablo (Host) 13:38 In those two years, what was the focus? Was it, we only have a thousand readers, we need to somehow drive the number of readers on here? Was it around just learning and insights and talking to your readers and combining the data with these qualitative interviews? Was it around getting uploads? What was the focus during those two initial years before this first upload and leading up to it? Allen (Guest) 14:05 Before Two years to get one upload Allen (Guest) 14:14 the first upload, I have to say it was quite depressing because there was no traction and there's no easy way to get out of that. So, we thought about giving up, to be frank. One of us, when we decided what we wanted to do in the next step, one of the options was to pull the plug, but I can't remember who, which co-founder said, "Hey, you know, advertising dollars. We had some banner ads on our website, and we generated $2 in a month from Google. I wish I kept that check, good thing to depose in the background. The point is because the usage was so low, our hosting cost was only five bucks. And one of us said, "Well, we have so much conviction. And this idea, we are $3 away from breaking even, let's continue." Pablo (Host) 15:07 It makes a lot of sense. When you think about network effects, and you think about being pre-product market fit, that money can do as much harm as good, especially if it's shortened, it creates a runway, right? When you're in this bootstrap mode, you don't have... your runway is really just more on your mental energy and desire, right? It's not a real runway in the sense that at some point you're bankrupt. When you raise money, and you start hiring people, all of a sudden, you've got payroll and there's a real runway. And that kind of changes the dynamics, changes the focus and all of a sudden, growth becomes important and if growth becomes important earlier than product-market fit, it can be dangerous. Why bootstrapping helps Allen (Guest) 15:50 Absolutely. Yeah. I think for seed stage company, the biggest risk, of course, having capital is good, but the biggest risk is actually premature scaling. When you have capital and when you don't have product-market fit yet, and you force yourself to scale, you do artificial things to scale the demand or the supply, or worst both, while the product actually has... it's not solving a real problem. Then the problem becomes the company itself. Pablo (Host) 16:25 That's right. Let's go back to that first upload. The question I have is, did that just happened? Were you doing anything in order to try to get people to upload or did one day you went through your day and all of a sudden, you saw, wow, there's an upload in there? Allen (Guest) 16:42 In a way, it happened automatically but, at the same time we had been talking to bloggers, we had been talking to people on the internet. The word of mouth effect has been going on mostly on the demand side, less so on the supply side to find writers, sometimes we're paying writers... "Hey, we have a new product. People can read your creative writing on a mobile. Would you be interested in uploading?" And many people said, "No because, well, there's no incentive." Pablo (Host) 17:26 Right. Allen (Guest) 17:28 There's no reader. But over time, all it takes is one. The hardest is the first one, but once you get the first one, and if the first one has a good experience, and at that time , that writer had maybe a hundred readers and some of them in common, encouraging her to continue to upload the next chapter and on and so forth. And that was a pretty good experience, and some of the readers ping other writers, and that's how we get the multiplier effect over time. Pablo (Host) 18:00 So, how did you... maybe talk to that a bit more... so you had this one, this first book. Zero to one, I agree, is the hardest. So, this one person starts to write, they have a good experience, they're writing more. But how did you translate that one to ten or some more meaningful number of writers? Allen (Guest) 18:18 In How to speed up network effects Allen (Guest) 18:29 retrospect, we didn't fully understand at that time, that's where we found involvement in the marketplace became so important. We were very actively involved. We were monitoring, and we were engaging in the conversation. We were asking writers what's working, what's not working for you and for the readers as well. Also observing how they engage. And we realized that they actually talk a lot. The readers would comment, I really like this, I really like that, I wish you would upload the next chapter soon. And that became the encouragement that becomes a self reinforcing feedback loop, a positive feedback loop to the writer. So, we take that feedback and improve the product. That way it's easier to comment, encourage people to comment. After reading, we make sure at the end of the chapter, we have a big comment box, encourage the readers to say something positive. We make sure they say something constructive as well. So all those little things add up to help get the flywheel faster and faster. But I have to say if we just stay on the sideline and wait for it to happen, it won't happen. We have to be very actively involved. Pablo (Host) 19:55 How much of growing a successful marketplace is really about identifying the flywheels and just lubricating them, and just removing friction for them to speed up and go faster and faster? The ASSET framework Speaker 1 20:10 It's a big part of it. At the same time, all the steps that I talked about, they have to happen in sequence. You have to identify what really is your atomic unit first. In our case, it's a story, but in some other marketplaces, it might not be that obvious. So, using Uber as an example, you would think it's a ride, but, if you consider Uber Eats as well, it's not really a ride as point A to point B. It's not a person, a ride of a person. So, once you discover that atomic unit, the second step is to scale the supply side. You cannot scale the demand first because when there's no supply, there absolutely will be serious retention on your demand. That's why you have to scale the supply first. And supply can wait for the demand, but not the other way around. So, then you scale the demand, and then you enable the engagement. This is the comments, this is the reading time that I talked about. And then finally, the last step, based on the engagement, you collect a lot of data. Many of the information or data that you collect is proprietary to your marketplace, and that becomes unique to you. And over time, as you accumulate more data, that also creates the data network effect for you to scale and make the product very defensible. This is what I call the asset framework, atomic unit supply scale. They supply a scaling demand, and then the engagement, and then track the proprietary data. This is what I call the asset framework that you can find on Two Small Fish VC website that's based on how experience - as a matter of fact what we've found as very generic but can be used in, pretty much, all the marketplaces in the early stage. When things turned for the better Pablo (Host) 22:30 What I have to ask now is, at some point in the early story, you had so little traction that, as you said, you almost quit. When did you go 180 on that? At some point, you had readers, then you had one upload, you had 10 uploads, and you started to see word of mouth and flywheel effects take off. When did you and your team say, "Okay, we are onto something. This is something real"? Allen (Guest) 22:54 I think it came maybe half a year after we saw the first upload. Remember, it took two years to see the first upload. But then the second upload came much faster, in two more weeks, the second writer joined the platform and both have very good experience. The readers and writers told other people and then the third came, in a week or something. The marketplace had grown exponentially in the early stage, don't get me wrong. We started to see the traction, and it was half a year after we saw the first upload. At that time, there was one activity that I really liked. I talked about founder involvement early on, and this is one thing I always did in the evening, was to go through the social graph, look at who this person is following, or the following-follower relationship and walk around the network and see if there are any new writers that I might have missed. It was a small town in a way, you know everyone, but there was one evening that I started to realize that I keep on clicking, and it's endless. I keep on bumping into new people. That was a very, very clear indication to me that we were onto something. Recap Pablo (Host) 24:32 Awesome. All right, well, Allen, we'll stop it there. I think this was an amazing story about how a marketplace that now has about a hundred million users. And its community started off, we're talking about 2006, very early in the mobile era, pre iPhone, and really going through the details of starting off with single player mode, finding a way to build a very unique value proposition for a very specific set of users, leveraging that to build word of mouth in a small community, and then playing the waiting game, which I think is really important, and the ability to have a long runway in this pre-market fit part of the... I'm not even going to call it a business, more of a project and experiment and not having to rush and scaling ahead of product-market fit. And so, you've allowed that to happen organically, the user-generated content piece of the puzzle started to work, and then once those flywheels were spinning, really just finding ways to accelerate them and not worrying about monetization until much, much later, and then ultimately to an extremely successful acquisition. And, that's not the end of Wattpad. Wattpad continues to grow and will continue to grow for many, many years. So thanks a lot, Allen, for sharing that story with us. Allen (Guest) 25:53 Thank you so much for inviting me. Pablo (Host) 25:55 Thank you so much for listening all the way through. It's been a pleasure having you here, make sure to subscribe. So you don't miss the next episode.