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Are investors wising up about platform-specific startups?

The platforms offered by companies like Facebook, Twitter and Apple
offer entrepreneurs some very compelling features. They often bring to
the table built-in audiences, and, in some cases, established business

For reasons like these, it’s no surprise that a growing number of
entrepreneurs are building entire companies on top of a specific
platform. And it’s no surprise that investors have flocked to back them.

But are platform-specific startups all they’re cracked up to be? While some have achieved wild levels of success, there’s a lot to dislike about trying to building a business on top of somebody else’s platform. For one, the ease with which one can usually develop on these platforms means that there’s a lot of competition. That makes building a viable business a bit tougher. But even more important is the fact that being dependent on a third party’s platform is an inherently risky business proposition.

It appears that investors may increasingly be less willing to turn a blind eye to the negatives of platform-specific startups. According to CB Insights, investments in ‘pure-play‘ Twitter startups have dropped by 50% in a year’s time. From June 2008 to May 2009, investors poured nearly m in “companies whose product or platform is predicated wholly on the Twitter platform.” From June 2009 to May 2010, that amount was cut to just under .5m.

CB Insights notes that the decrease in investment might have something to do with the uncertainty about Twitter’s changing approach vis-à-vis developers and the role they’ll play in Twitter’s future. It might also have something to do with the fact that building a viable business around Twitter looks a lot tougher than building a cool startup around Twitter.

Is the reduced investment in pure-play Twitter startups indicative of a broader trend affecting all platform-specific startups? Perhaps not. According to CB Insights, investments in companies focused on the iPhone and iPad rose 220% in the period June 2009 to May 2010 from the same period a year earlier. Obviously, when it comes to the bottom line, the iPhone/iPad ecosystem arguably has a much more compelling profile for investors.

But increased investment in iPhone/iPad startups over the past year doesn’t mean that the reduced appetite for Twitter-focused startups should be ignored. While this may partially be the result of trends specific to the Twitter platform, there is some common wisdom in the notion that building a business that is wholly dependent on another company’s platform isn’t the best pathway to long-term success. Platforms come and go, and the best still evolve and devolve. Even the slower investors will eventually recognize that. And the smartest will understand this: savvy entrepreneurs think multi-platform. In other words, they know how to tap into powerful platforms, but they don’t necessarily want those platforms to serve as the foundation for their entire business.

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