Mining Vertical Winners from Generational Platforms
Exporting TikTok’s Learnings on Gen Z to New Frontiers
Today’s piece is helpful for entrepreneurs and investors seeking a framework to help verticalize a disruptive horizontal trend into theses in specific end markets. I use TikTok’s codification of the shift to short form video for Gen Z as a case study to investigate vertical businesses also capitalizing on this disruptive media transition effectively. Read on for more about:
When a trailblazing business establishes a disruptive trend, what types of vertical businesses are well positioned to carve out a niche for themselves and which are bound to be “Zombies” or DOA?
A framework for mining vertical winners from larger tech platforms with a focus on i) proximity to product roadmap, ii) serviceable addressable market size, iii) niche expertise and functionality requirements, iv) regulatory complexity, v) veil of competition, vi) ancillary platform benefits and vii) platform misalignment
Which vertical players are best capturing tail winds established by TikTok in the transition to short form video while simultaneously building defensible independent businesses
Interviews with Kim Kaplan (CEO & Founder of Snack), Tobias Heaslip (CEO & Founder of Trading.TV), Anisa Mirza (CEO & Founder of Litnerd), Juan Zavala Aleman (CEO & Co-Founder of FinZi) and Sajal Khanna (CEO & Co-Founder of Akudo). Thank you all for sharing your perspectives for this piece!
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Elenas is the leading social commerce platform in Latin America, pioneering the model of distributed creator, social-first selling in the region. Elenas works with independent micro-influencers across Latam, providing them with goods from wholesalers and manufacturers to sell through their social channels (including WhatsApp and Facebook), along with the digital tools to manage their business. Elenas' model is a win-win situation for all commerce stakeholders: manufacturers, sellers and consumers. Its model helps meaningfully expand the reach of manufacturers across the continent by tapping into the trusted and genuine networks of local creators, all while empowering micro-entrepreneurs to achieve upward mobility and delivering group-discounted prices to end consumers. The Elenas platform is where social commerce meets the passion economy. Elenas has 50k+ entrepreneurs across Colombia and Mexico already selling on its platform and is growing its gross merchandise volume at an astonishing triple digit rate year-over-year. Check out The Manifesto of Social Commerce for more on why Elenas is well positioned to become the social commerce powerhouse across all of LatAm.
The Offspring of Generational Businesses
Whenever there is a transformative business model that codifies a generational trend, there are always some pretty ludicrous sounding offshoots that emerge and claim to capitalize on that industry shift. Airbnb helped create the sharing economy and codified sharing of assets as a favorable business model in some segments. How about sharing economy for bedding? Sounds like a great way to get bed bugs from dirty sheets. Uber was one of the first gig economy companies? How about gig economy for other people’s cats you can pet on demand but that you don’t need to take care of?
If you think gig economy for cats is crazy, here’s an even crazier idea: gig economy for contractors without benefits or fair pay:
Maybe gig economy for cats would serve these business models better since cats aren’t able protest with speech (THIS IS SARCASTIC🙃).... However, there is also always a smaller but really interesting and compelling set of businesses that further verticalize and contextualize an initial trend codified by a truly trailblazing business. These vertical powerhouses are sandwiched between a horizontal category killer and a bunch of duds where entrepreneurs are merely pulling at straws. Go too vertical and deep in applying this trend, the business concept serves too small a market and lacks touch with real consumer needs. Don’t go vertical enough and the trail-blazing horizontal player can easily replicate your business which has limited barriers to entry and differentiation. Below, I crystalize a framework for thinking about this vertical sweetspot in the context of the sharing economy:
Outside of the initial trailblazing use case, it is important to elaborate on each of these other categories:
Zombies - WIMDU was a Rocket Internet clone of Airbnb with little differentiation which recently shut down. While late copycats of the app would also fall in this category, I want to focus on a different type of zombie here. This segment is in a sizeable market that it is logical for the trailblazing business to attack in its short-term product roadmap but is not currently going after today. Unfortunately, this zone is a tempting area for founders to build because the serviceable addressable market is large and the trailblazer appears not focused there today. Don’t fall for it! Here is a good theoretical example: when Airbnb started, it had more limited chat functionality for hosts to communicate with guests. A hospitality communication tool focused on peer-to-peer rental would be in the zombie zone because it was nearly an inevitability that Airbnb would need this functionality. Hence these business models are walking dead: they appear alive and well but it’s only a matter of time until the initial trailblazing business expands and takes over this vertical because this segment checks three key boxes: 1) moves the needle from a growth perspective, 2) is important to delivering value to customers and 3) is logical to expand to in the short-term.
Dead on Arrival (DOA) - this zone of business model can suffer from many issues arising from being too niche and too verticalized. First, you can extrapolate a value proposition from a trailblazing company so far outside of its initial context that it no longer delivers meaningful customer value. Second, you can apply the logic of the initial business to an area that isn’t really a problem customers care about. Lastly, you try to port the value proposition to a market that is just fundamentally too small.
Vertical Sweetspot - The vertical sweet spot sits squarely between Zombies and DOA. In my opinion, this is one of the holy grails of company building and investing. Soon after a trailblazing company codifies a generational / meaningful shift in consumption habits, new vertical companies that emerge in that space benefit from multiple highly desirable company building conditions:
Fundraising advantage due to greater willingness by institutions to deploy capital into the space because of the presence of the first aspirational peer company. Vertical sweet spots create significant investor FOMO
Under the Radar and Lesser competition because many i) entrepreneurs are scared out of space by the initial behemoth and ii) building the vertical businesses requires deep sector expertise
Potential opportunity to leverage the trailblazer to reduce building / customer acquisition costs (more on this later)
Logical exit targets for investors (namely the initial horizontal trailblazing platforms competing against one another)
Success of trailblazing company de-risks certain hypotheses core to an entrepreneur’s initial building thesis
HipCamp, a platform connecting owners of private lands and campsites with potential campers, threads the needle very well to hit the deeply vertical sweet spot within Airbnb’s initial sharing economy thesis. There was a lot of whitespace within traditional housing, hotels and experiences for Airbnb to go after before it made sense for them to attack camping. However, camping is still a sizeable, growing market that required vertical expertise and specific vertical features to penetrate like creative access control.
So the logical question is: after a category defining company emerges, how do we know which vertical businesses thread the needle to achieve this holy grail? How do we know where to mine during the gold rush?
Threading the Needle: How to Identify and Mine the Vertical Sweet Spot
There are many data points that demonstrate the powerful and sharp rise of short form video within Gen Z. Many authors have written on this so I won’t belabor the point but a few:
TikTok recently overtook Facebook as the world’s most downloaded application
73% of US Gen Z watches short form video content regularly on their smartphones
In the US and UK, within Gen Z, Vlogger is a top career aspiration
TikTok has facilitated a horizontal, generational and global shift in younger generations wanting to engage with short form video across many vectors of their lives. As an entrepreneur or investor, there are many different directions to take a thesis around “vertical diffusion of short form video” to traditional channels. Below I lay out a scorecard to more clearly understand the factors that help determine if your vertical application is in the sweet spot, not the zombie zone or DOA:
Proximity on Product Road Map - while the product roadmap of TikTok is not public and is not knowable with certainty, as an entrepreneur / investor, if you want to mine a vertical of short form video, it is important to consider how that vertical ranks in terms of order of priority for the Company. This is a function of various factors but should factor in a) TikTok’s perception of the size of that vertical, b) relative ease of monetization vs. whitespace in the Company's existing core verticals, c) time required to build into that vertical amongst other factors and d) relative importance of that feature to the average TikTok user. Generally, as the entrepreneur, you don’t want to go after a vertical that seems like relatively low hanging fruit to TikTok but want to attack a vertical that you wouldn’t expect they would expand into for quite some time. TikTok has so much whitespace in advertising that I believe their core short-term focus is likely there. You want the vertical you intend to mine to be as far at as possible on the theoretical long-term roadmap. Building a startup for “creator marketplace built on TikTok” or “commerce built on TikTok” is probably a bad idea, but dating and K-5 education are probably pretty far out on their timeline. More on this later.
Serviceable Addressable Market (SAM) - Related to determining proximity on product roadmap, but worth calling out separately. The more vertical you go, the lower the serviceable addressable market will be vs. that of the initial horizontal platform. The SAM should be large enough that you are a) solving a problem lots of people face and b) can get investors excited about the size of the value creation opportunity. However, it should also be small enough that if TikTok focused on penetrating it, on a percentage growth basis, it wouldn’t really move the needle in terms of its topline revenue vs. whitespace in its core markets.
Niche Expertise & Functionality Requirements - Certain verticals require a lot of niche expertise and depth to build in. The more niche understanding required to build for that user, the better when it comes to carving out a niche from a horizontal platform like TikTok. Combined with a relatively low SAM, if there is lots of niche context and feature building that is required to penetrate a vertical, a company like TikTok in the short-term will not be able to justify the return on investment of building out an in-depth team relative to other investment opportunities. Real estate is an area where there is lots of complexity in terms of workflows related to closing software, payment integrations, regulatory considerations, etc. where the ROI is probably lower than other current focus areas for TikTok. This is also an area where a) there could be a benefit to creating bespoke content creation tools tied to real estate to and b) where there is an opportunity to penetrate a greater total addressable market if you build out additional software capabilities in the real estate space.
Regulatory Complexity - there are two types of regulatory complex of note here: political and regulatory aversion. Politically, if TikTok wanted to launch short form content curricula to penetrate K-5 classrooms, it would be extremely difficult. The idea that the US government would let a Chinese owned Company generate parts of the curriculum we teach to impressionable children seems nearly impossible given the current geopolitical environment. Separately, regulatory aversion relates to the idea that TikTok won’t want to risk operations of its core business to penetrate an area with lots of legal complexity or risk of legal liability. The potential criticism from legal infractions in that area is not worth the potential cost of jeopardizing its image in its core vertical where it operates currently and will continue to print most of its money. An example here is leveraging content from financial influencers to build out a short form video based trading market. There are so many regulatory constraints and enough legal risk from non-compliance that it may not worth it for TikTok to try to build out a trading marketplace off of its financial content.
Veil of Competition - the “Veil of Competition” is when a horizontal platform de-prioritizes a feature / vertical partially because it is logical that an existing player in that vertical will build new features to capture that vertical. However, unbeknownst to the platform there is a barrier to entry that prevents the existing player from effectively penetrating the new vertical. The platform can’t see through the “veil” to understand the barrier to entry and the true colors of the existing business. Dating is a good example when it comes to TikTok. It appears logical at face value that Match.com would expand Tinder or another one of its portfolio apps by launching video features. Tinder is launching video features but they are handicapped by both a) the fact that the platform is not and never will be “video first” and b) by Tinder’s brand which is not relatable to Gen Z. That is why they are hiring a new marketing team to try to re-engineer its brand to better target Gen Z.
Ancillary Platform Benefits - in my opinion, there are two primary ways these platforms can be beneficial to emerging vertical players. First, user behavior can provide validation to help prove or disprove a particular thesis that you may have. Before you make the jump to start you business, you should better understand user demand for what your service would be within the constraints of the initial platform. In the case of online dating, there are many documented viral cases of times where users have tried to ask others out on the app. However, the platform isn’t optimized for this user engagement and many other users don’t view TikTok as the right forum / don’t want to be hit on while using the app. Here’s a funny story about when Miley Cyrus asked out a fan on TikTok. These cases validate a demanded use case that is under-optimized on TikTok proper but which you can still use TikTok to explore / validate. Second, the platform itself can be a lead generation engine for a separate vertical product. In the case of TikTok, existing content can both be a source of users and help generate leads with a more efficient customer acquisition cost
Platform Misalignment - it is interesting to think about whether the nature of the medium, or what it is not more saliently, can provide hints as to interesting vertical opportunities. If you can use the differentiation of the app itself as a barrier to entry against that platform player, your business idea is likely pretty well defended. In the case of TikTok, part of why it is so differentiated because of its discovery focus that presents videos based on personalization algorithms rather than by copying the newsfeed and search focus of traditional social media platforms. For customer support inquiries, I’d think Gen Z and younger cohorts would much rather watch bespoke DIY content on “FAQs” and common product questions. Given the way content is discovered on TikTok though, it makes no sense to show “how to” videos about products and issues TikTok doesn’t know whether the user has. Building B2B tools to help traditional businesses better engage Gen Z in customer support inquiries through short form video (vs. phone call, email or text) would therefore be platform misaligned with TikTok’s key platform differentiation
Who is Poised to Win the Short Form Video Gold Rush in Key Verticals?
Now that we’ve laid out the framework for better understanding the “vertical sweet spot”, let’s discuss some interesting companies that are threading the needle well when it comes to short form video. Before I jump into specific companies, I wanted to clarify two different vertical approaches here: Content Core and Content Accelerant. Content Core businesses leverage short form content as core to their client offering and Content Accelerant businesses capitalize on growth in short form video as means to grow their brands, to catalyze demand for their business or gain a cost advantage, but where the content is not necessarily the primary feature of the platform. I am most excited about the applications of short form video to education, dating, investing, real estate and banking:
Snack- video-first dating app where TikTok meets dating and users post videos of themselves and interact with video-based profiles to discover potential partners. Many members of Gen Z have tried unsuccessful attempts at dating through TikTok. The issue is TikTok is not optimized for dating or fostering intimate connections with other users. Plus, traditional dating apps struggle to maintain the attention of Gen Z users post-discovery who will often match but then take their conversations to DMs on other social media platforms. There is a great opportunity for Snack to leverage a video first approach to drive a better end-to-end experience: stronger profile discovery, more meaningful personal expression and higher conversational engagement in mobile dating. As discussed earlier, Snack’s business model is a particularly good example of capitalizing on the “veil of competition” in a large SAM that is likely pretty far out on TikTok’s roadmap. This last point is evidenced by TikTok’s willingness to integrate with Snack to more seamlessly leverage existing TikTok content for profiles. Snack is also a great example of leveraging strong “ancillary platform benefits”. The dating use case is already validated by existing TikTok user attempts to date. More saliently, from a content and user acquisition perspective, a lot of the content of singles in Gen Z can serve as both a) lead generation generation for Snack and b) strong profile content
I caught up with Kim Kaplan, CEO & Founder of Snack to hear more about her thesis directly from the source:
“A friend introduced me to TikTok back in November 2019. Pretty quickly, I came across a video of a woman saying, “What’s your name? What’s your age? What’s your sign? Where you from?” It struck me that she was trying to flirt and date. A quick search showed the hashtag #single had 13 billion views. That was when the idea struck me - there was an underbelly of dating trying to happen on TikTok. So why not create the TikTok for dating? I launched Snack in February 2021 as a Gen Z focused app where “TikTok meets dating.” Snack combines the familiar matching algorithms of a dating platform with the ability to share videos of your life in real time like you would on social media. In fact, we encourage you to share the same content that you are putting up on Instagram, Snapchat, or TikTok. This replicates the social media experience that Gen Z is most comfortable with, where connections happen organically through likes and comments. We believe that through video, people can express their authentic selves more than they could through static images and text.”
Litnerd - provides schools with live online SEL and literacy workshops to use as course curriculum based on short form video live re-enactments of books with creators and actors. 42% of students in the US cannot read still by 4th grade and much of this problem is attributable to the fact that students are bored with reading and ELA work especially as their attention is diverted to new media forms like short form video. Litnerd helps to solve this problem and help teachers better engage with students through more compelling ELA curriculum that incorporates exciting short form video content into lesson plans. As discussed earlier, Litnerd is a great example of targeting a vertical where regulatory constraints would prevent TikTok from penetrating K-5 education. It is also a good example of leveraging niche content and functionality to differentiate. The educational content that exists on TikTok is targeted at informal consumers in the “edu-tainment” space. The focus on offering additional vertical tools to teachers and contextually tying content into curriculum is a strong vertical differentiator. Moreover, while the SAM is large here at $20B+ in the US, there are strong long-term opportunities to a) penetrate other subjects outside of SEL and literature and b) eventually expand on the B2B offering to sell supplemental products in a B2C model
To learn more about Litnerd’s vision, I caught up directly with Anisa Mirza, CEO & Founder:
“There are 37M elementary school students in America. Schools spend $20B on reading and supplemental education programs. Yet 42% of 4th grade students are reading at a 1st or 2nd grade proficiency level! The #1 reason students aren’t reading? They say it’s boring. We change that by streaming live actors into the classroom to bring books to life. Think your favorite book turned into a tv-show style episode-by-episode reenactment, coupled with a complete curriculum and lesson plans.”
Trading.TV - fintech platform purpose built for the creator economy which lets creators develop and share financial education content directly with retail trader audiences who can execute on investment decisions from that livestream / content. As mentioned, this model benefits from the fact that regulatory compliance makes the ROI for TikTok to enter this vertical seem less attractive vs. other potential investment opportunities. The business is also building barriers to entry through a strong integration network with trading platforms across asset types (crypto, collectibles, stocks, bonds, art, etc.) and through content controls to ensure creator and investor alignment of incentives. From an ancillary benefit perspective, Trading.TV can also leverage existing “fin-fluencers” and TikTok content both as a user acquisition tool for its starting beta creators and to more efficiently onboard content onto the platform.
Trading.TV is well positioned at the intersection of tail winds in the creator economy, social commerce, short form video and explosion in retail trading. To learn more about their mission, I spoke with Tobias Heaslip, Founder & CEO:
“By building a platform that is digitally native (including via engaging short form video), values diversity of interests and assets, and puts inclusion at its center, we hope to unlock financial wellbeing for millions of people that haven’t previously felt welcome in the financial conversation.”
FinZi - provider of digital banking solutions for Gen Z and teens in Latin America starting with debit cards, depository accounts and payments in Colombia. Interestingly, FinZi has the potential to disintermediate banks in the region by targeting Gen Z and younger cohorts and onboarding them from an early age. They can then build subsequent products to grow and age with their cohorts into banking functionality that gets more important as one ages. While FinZi’s core product is banking functionality, they are leveraging games and short form financial educational content as a means of building a strong brand and catalyzing demand for FinZi across the region. Z1 in Brazil is another player I am tracking closely in the space:
I caught up with Juan Zavala Aleman, CEO & Co-Founder of FinZi, to learn more about his strategy to reach Gen Z with engaging gamification and short form video content:
“Gen Z is such a disruptive generation and in order to capture them, you need to be as disruptive as they are and need to find innovative ways to deliver your product. At FinZi we are combining financial services with something that teenagers love to do which is playing video games, but we are creating a meaningful video game that will teach them about finances so they are able to apply the knowledge into their real bank account within the same platform. Delivering the service to this generation by speaking their language and capturing their everyday activities are key elements to be able to capture, retain and mature them as customers. Gen Z is a unique type of generation that are looking for a unique approach on the way they do things and at FinZi we are focusing on doing just that.”
Akudo - India’s first learning-focused neobank combining personalized debit cards, savings control, gamification and short form educational video content to provide banking services to teenagers. Through gamification and video content, Akudo can better boost engagement and brand-building with Gen Z and will likely also benefit from a cost advantage by being able to leverage its short form financial educational content as a customer acquisition tool through Youtube and other key social channels.
I caught up with Sajal Khanna, CEO & Co-Founder of Akudo, to learn more about the large opportunity to engage Gen Z with financial content to drive banking engagement:
“200M Indian Gen-Z are at the forefront of consuming digital payments, not just for themselves but also for their families. The key driving force for increasing their involvement is combining financial education and creating awareness about money. This will drive financial inclusion in the largest way possible and Akudo is at the helm of bringing about this change.”
Playhouse- TikTok meets Zillow: Playhouse lets users scroll through beautiful short form videos of real estate listings in a TikTok style format combining the entertainment aspect of real estate content with the practicality of a site like Zillow to actually execute real estate transactions. While real estate is a compelling entertainment content vertical, it is a relatively small percentage of content on TikTok compared to other categories, so this category is likely further out on TikTok’s prioritization roadmap. There is likely also incremental value to add to brokers with additional backend software and content tools that help them better engage with potential buyers / renters.
CoLearn - Indonesia-based educational technology platform that offers live online classes to students across Indonesia. While the classes themselves aren’t necessarily short form video, what is interesting about CoLearn’s model is that it uses short form pre-recorded videos with homework help as a customer acquisition tool to engage students and parents before signing up for live classes. In this way, CoLearn is leveraging the Core Accelerant model and using engaging content to increase conversion rates for Gen Z that comes across its short form content.
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