Close the skill gap with the Financial Modeling & Valuation Analyst (FMVA)® Certification >> Enroll today and save!

Platform Company

The initial acquisition made by a private equity group in a specific industry or marketplace

What is a Platform Company?

A platform company refers to the initial acquisition made by a Private Equity Group in a specific industry or marketplace. The acquisition acts as the starting point for other acquisitions in the same industry. Platform companies create value by facilitating exchanges between consumers and producers of goods or services. For the exchanges to happen, the platform company creates large networks of users and resources that can be accessed on demand.

 

Platform Company diagram

 

A private equity group may create up to six platforms for each fund, and they are grown organically before bolt-on acquisitions are added to each of the platform companies.

 

Characteristics of a platform company

Generally, a platform company comes with the following characteristics:

 

Strong and experienced management

A platform company must employ a strong and experienced management team that can steer the company forward. Private equity firms look for executives with a proven track record in a specific industry and who possess the ability to direct the operations of the company effectively. Some of the management team members may be retired executives of large companies who sit on the board and act as advisors on some issues such as regulation, expansion, and acquisitions.

 

The top player in its industry

Private equity groups prefer investing in platform companies that are top players in their specific niche markets. Most often, these companies employ innovative systems that give them an advantage over their competitors, which helps them maintain top performance in the industry. After the purchase of such companies, the private equity group finds complementary add-in acquisitions that can make the company more profitable and dominant in the industry.

 

Well defined systems

When a private equity firm is looking to acquire a platform company, it analyzes the potential companies against predetermined investment criteria. Typically, the investment criteria may comprise geographical location, EBITDA, industry, positive cash flows, and potential for growth. The identified companies must have well-defined systems that match the acquirer’s investment criteria.

 

How platform companies work

Platform companies function by creating value for their users. The success of the value creation process determines if the company will succeed in turning potential connections into transactions. Once the users have joined the system, the platform matches them together in a way that is beneficial to both parties.

The platform must establish the rules that govern how users relate and interact with each other. The users also require tools and services to facilitate the transaction and ensure both parties are treated fairly. If the users are satisfied with the process, they will use the platform over and over again to generate and exchange value.

 

What a platform company is not

The term “platform” is commonly used to describe technology or pieces of software that are synonymous with websites and mobile apps. However, these technologies do not have the characteristics of a platform company that creates value by allowing exchanges between consumers and producers.

Instead, non-platform companies are linear business models because they follow the typical linear supply chain. The operations of these businesses involve creating value in the form of products and services that are then sold to customers in the lower classes of the supply chain. Linear enterprises have a different cost structure and economics from platform companies.

 

Types of platform companies

Platform company models are categorized based on the value that is exchanged as part of the company’s core operations. The following are the main types of platform companies:

 

Payment platform

Payment platform companies offer peer-to-peer (P2P) or business to consumer (B2C) payment services. They use online technologies that allow consumers to transfer funds from their account to other individuals’ accounts through the internet. Consumers can also use these platforms to receive payments from abroad, as well as to pay for goods and services.

 

Social networks

Social networks allow friendly interactions between friends, colleagues, workmates, etc. Users are allowed to register on these platforms so that they can be allowed to interact with other users who are also registered on the platforms. Apart from friendly interactions, users also share rich media content like videos and photos on the site.

 

Product marketplace

Product marketplaces allow sellers and buyers to exchange physical products through the platform. The involved parties also make and receive payments through the platform. It allows buyers and sellers from different geographical locations to transact without requiring face-to-face interaction.

 

Service marketplace

Service marketplaces operate in the same way as a product marketplace, except that they involve the exchange of services between sellers and buyers. They allow consultants to offer their services to buyers without geographical limitations. Some of the services provided on these platforms include legal services, architectural designs, bookkeeping and taxation, interior design, graphic design, academic research, etc.

 

Social gaming platform

Social gaming platforms allow participants to participate in online gaming interactions. They allow two or more users to engage in common games concurrently.

 

Elements of a platform company

The following are the elements of a successful platform:

 

Matchmaker

Platforms serve as matchmakers in marketplaces by facilitating connections between consumers and producers. The matchmakers collect relevant data about the participants and use it to enhance the connection between the interacting parties. For example, Amazon collects data about buyer purchasing behavior to facilitate the relationships between sellers and buyers on its platform.

 

Infrastructure

A platform company must provide an infrastructure that supports interactions between participants. The infrastructure includes storage for products, hosting online videos, libraries, etc. For example, Apple Inc. allows its developers to use its operating system and code libraries to enable them to develop apps that consumers will love and buy. The infrastructure is vital in ensuring smooth interactions between producers and consumers.

 

The magnet

When designing a platform, promoters must create an environment that attracts participants to the platform. It will require developing attractive incentives, pricing models, reputation systems, quick payment solutions, etc. For example, for sellers to be attracted to the eBay business model, the system must be efficient to allow smooth transactions. Similarly, buyers want to transact on a platform with a good reputation, fair pricing, and efficient purchasing process.

 

Additional resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Capital Structure
  • Corporate Venturing
  • Mezzanine Fund
  • Venture Capital, Private Equity, and Angel Investors

M&A Modeling Course

Learn how to model mergers and acquisitions in CFI’s M&A Modeling Course!

Build an M&A model from scratch the easy way with step-by-step instruction.

This course will teach you how to model synergies, accretion/dilution, pro forma metrics and a complete M&A model. View the course now!