Koo goes bankrupt: Why startups can’t join the ranks of big tech companies

Koo’s collapse highlights the fact that social media platforms are “natural” monopolies due to network effects. In this sense, they are like public utilities. Electricity and gas utilities are natural monopolies, with little room for multiple players in a given geography. Social media platforms, despite being fundamentally different businesses in all other respects, share some characteristics:

When a social media platform becomes a dominant player, network effects increase its dominance and erect defensive walls. If you and your friends are on Facebook, you’re less likely to sign up for a rival platform, and you’ll probably encourage even more of your friends to sign up for Facebook. The same network effects are at work for Instagram, Twitter (now renamed X), and LinkedIn. Meaningful rivals to these platforms only exist in places like China, where Facebook and X are explicitly banned.

As for TikTok, no meaningful equivalent has developed in the country since the short-video platform was banned in India. A number of local startups have tried to fill the void created by the ban, but none seem to have been successful. Indians prefer to access TikTok through cumbersome virtual private networks (VPNs) and cross-post TikTok content to WhatsApp (another platform that has gained an advantage due to network effects).

What works?

Established social media platforms are very hard to dislodge. Facebook was able to overtake MySpace and Orkut thanks to a number of innovative features, which it has not been able to overtake since. X, Instagram, Snapchat, TikTok, etc. have expanded their base by offering new services and features, and each now enjoys a moat built by network effects.

Elon Musk may have made a wise decision to buy the market leader instead of trying to build a rival. Networks like Mastodon and Blue Sky, which offer roughly the same features as X, were unable to significantly undermine X’s dominance in microblogging. Donald Trump tried to build a rival to X with Truth Social, but without much success. The same was true of Koo.

Koo’s unique selling points were that it was an Indian company, offered users the ability to post in multiple local languages, and had support from ruling politicians after X’s relationship with the Indian government hit an impasse during the farmers’ protests. But this alone was not enough to drive adoption or create a network effect.

Despite raising at least $70 million in several rounds of funding between 2021 and 2022, Koo spent heavily to drive app installs. According to an Entrackr report, advertising and promotion accounted for nearly 60% of the company’s operating expenses. By comparison, in Twitter’s early days, when it was focused on building its user base, it spent less than 6% on advertising and promotion.

Koo entered the market when X was still confined to India. Local language content alone is not enough of a USP. Providing real-time translation of a language is easy and getting easier every day as large scale language model AI enters the public domain.

The implications of this disruption are crucial for startups: you can’t compete with the network effects of existing social media platforms if you’re just copycat. It’s not about technology, it’s about coming up with features that other social media platforms don’t offer.