a16z Partner Four Major Fundamental Theories that Will Impact the Future Development of the Creator Economy

Original author: Andrew Chen, General Partner at a16z, Manager of Games Fund One

Original translation: Luffy, Foresight News

In the past few years, with the gradual rise of social media platforms, content creators have become the focus of consumer participation, and start-up companies in the creator economy have experienced a wave of growth. These start-ups promise creators that they can help them better monetize their audience on social media as long as they promote their products. So we often see creators promoting start-up companies’ new products through links and videos in their profiles, and then attracting their fans to a login page that allows them to use new interactions or features. Initially, these products were mostly based on the “tip” model, but over the years, many creative products have emerged, from e-commerce to current affairs newsletters to Q&A platforms, and so on. These products all promise a win-win situation for creators, so when their fans make a purchase, the company only takes a certain percentage of the revenue (usually around 10%), and the rest goes to the creators.

Some creator economy companies have achieved tremendous success, paying creators billions of dollars in revenue, while others have struggled. Successful start-ups have strong moats, making it difficult for newcomers to break through. After a few years, what new insights do we have about this industry? Why have some creator economy start-ups succeeded while others have failed?

Here are some of my theoretical conclusions:

  • Power law of creators: A small number of creators have the majority of the audience, which leads to the potential vulnerability and dependence of creator economy start-ups.

  • Bio link battle: Creator economy companies acquire their audience from larger social media platforms, which usually have only one place (the bio link) to promote a company. This is a zero-sum game where winners take all.

  • Graduation problem: Start-ups typically charge a certain percentage of fees, and if creators acquire their own customers, they will pressure you to lower costs. The biggest creators often “graduate” from a platform and build their own platform.

  • Algorithm feast: Creator traffic is driven by social feedback algorithms, which can cause traffic to peak and then disappear – contradicting the stable, sustained growth that start-ups seek.

The above concepts are what I have learned from communicating with dozens of creator economy companies over the past few years. With the emergence of the next generation of creator economy start-ups, they must figure out how to deal with these dynamics. Let’s continue to delve deeper.

Power Law of Creators

Do you want to start a creator economy company? The biggest motivation you must grasp is the power law of the creator class itself, in terms of audience and revenue.

The chart below shows the percentage of income that the top-ranked creators on platforms like LianGuaitron account for, while the income of the second, third, and fourth-ranked creators decreases (source: Power Laws in Culture).

Imagine if you were to plot all millions of creators on this axis, you would see that it eventually flattens out and approaches 0%. There are many reasons for this phenomenon, but one of the main reasons is that these creator platforms are built on top of social media, which itself follows a power law distribution of fans and content contributors. As a result, due to algorithmic discovery, social media platforms exhibit power law curves, with a few social butterflies knowing even more people than what the power law curve would suggest.

Therefore, any creator economy product built on social platforms inherits these power law curves. OnlyFans creators provide free content on many social platforms and then drive traffic to their login pages. The chart below shows creator income, displaying a similar curve distribution. While some creators earn as much as $100,000 per month, the median income is only $180 per month.

Although power laws naturally occur in social media platforms, they also appear in other creative works, including TV, movies, music, etc. The image below is an example from television (source: Power Laws in Culture).

A small number of popular shows attract all viewers. The same phenomenon occurs in video games, movies, novels, directors, writers, etc.

Power laws are ubiquitous, so a core question is that the distribution of creative skills in the world is not even. Top writers or film directors are indeed much better than the 100th.

So, what does this mean for creator economy companies?

– When creator economy companies are first launched, the long-tail creators they initially attract have little impact.
– In order to scale, platforms need to attract top creators.
– Even if there are a large number of creators on your platform, income tends to concentrate on a small number of people. Therefore, if top creators leave, the finances may suffer significant negative consequences.

These dynamics indicate that the initial stages of a startup company launching can be full of crises. The best companies can gather a large number of small creators to the point where quantity starts to matter, or attract large/mid-sized creators organically. If a startup company acquires/controls many creators itself, it indicates that the product may not be solving a large enough problem and cannot solve the problem on its own.

Battle of the Bio Links

Social media platforms like Instagram and TikTok have commercial advertising models, so they don’t want to give people “too much” organic traffic. Instead, they prefer you to pay for sponsored posts, creators, and ads. One way they achieve this is by offering a single link to drive organic traffic, known as the infamous “link in bio”.

For creator economy startups, the bio link is significant. If you can convince creators to include your startup in this link, then organic traffic will follow. By combining some monetization mechanisms, startups can benefit from it. In the early stages of the creator economy cycle, startups are competing against non-commercial links – either links to other social media profiles or personal websites. But over time, people started filling their bios with high-profit links like LianGuaitreon, Substack, Twitch, intensifying the competition.

Now, replacing another startup’s bio link is a zero-sum game. The only way to obtain organic traffic from creators’ profiles is to monetize better than older, more established competitors. It’s not enough to simply match what incumbents might bring you. You must find something different, whether it’s within the creator’s content itself, whether it’s video, text, or other forms. Regardless, new entrants will encounter a major barrier, as they may initially try to use investor funds to subsidize revenue growth, but this may not be enough to achieve meaningful scale.

Graduation Problem

The graduation problem refers to what happens when your best creators scale up and eventually “graduate” – both they and their fans will leave your platform. Why does this happen? Creators provide obvious value to startups, driving traffic, creating content, and generating revenue through users. But as creators’ influence grows, they often start to feel “too” attractive. They begin to question why they should share profits with you when they’ve done all the work. This problem is especially severe due to the power law curve, where a few whales often dominate the revenue. If whales start wondering if they can replicate your product by hiring agencies to build their own platforms, they will eventually want to “graduate” from your platform and establish their own.

The creator economy is often compared to marketplace startups. In this field, companies like Airbnb or Uber independently aggregate both sides of the network. These marketplaces achieve the best results when both sides are highly fragmented, which is why the biggest successes are C2C or consumer-to-SME markets, rather than B2B. In the initial formation process, creator economy startups look more like B2B networks, and they may even be SaaS platforms – their customer base (creators) is highly concentrated, and creators bring in consumers.

In order to solve the graduation problem, creator economy startups must provide significantly higher value than payment and other commercialization technologies. They need to have a moat, not only for external companies, but also for creators who want to graduate over time. The best way is to create network effects themselves and bring them to every creator, forming a bidirectional network with all the usual advantages. The best additional features created by startups should ideally be proprietary. If a creator economy company supporting artificial intelligence develops a very good basic model that allows creators to commercialize themselves ten times better than before, creators are less likely to leave.

Algorithm Feast

Creator economy startups often find themselves highly dependent on the viral content of social media platforms. If a video goes viral on TikTok, the user acquisition of the creator economy platform may increase significantly. However, startups are always trying to achieve stable growth, which is different from SEO, recommendation programs, or paid marketing, as it is difficult to sustain 20% MoM growth. In contrast, marketplace startups increase value by aggregating market participants – often spending billions of dollars to build buyer and seller systems. In the high-growth years of Uber, the annual marketing budget for acquiring passengers was $1 billion, while for drivers it was close to $2 billion, in addition to diversification in SEO, brand marketing, paid programs, partnerships, etc. This added a lot of value to connect buyers and sellers.

What sets creator economy startups apart is that they use creators to find consumers, but in doing so, they are highly dependent on a single channel. Dependence on a single marketing channel is always risky, as we saw in the previous years when changes in SEO algorithms wiped out many SEO-dependent content websites. Dependence on social media is even more fragile, as content is naturally more transient and subtle. I think this is also one of the reasons why subscription has become the dominant business model for successful creator economy companies – it allows creators to receive long-term, sustainable income from each fan.

Algorithmic recommendations are also a competitive factor. In recent years, we have seen platforms like YouTube, Twitch, Twitter, and others attempt to directly pay creators and play a more vertically integrated role in the creator economy.

Of course, the best solution is to establish additional marketing channels to increase predictability. Combining social media channels with traffic from recommendations, search engine optimization, mobile installations, etc. will make the growth curve more sustainable. However, in the early stages of creator economy startups, they often focus entirely on the social sphere, and only after success can they choose to invest in other channels.

Advantages and Future of Creator Economy Companies

The creator economy has evolved into its second and third generations. The barriers to entry have become higher, and start-ups no longer offer flashy tipping features but instead build mature products that support multiple platforms, new forms of interaction, and provide creators with new ways to engage with their fans. Start-ups are no longer launching products endorsed by celebrities and expecting them to succeed; instead, they are building real technology and combining it with broad market strategies.

The advantages of the creator economy lie in the use of mobile devices and the continued rapid growth of social media platforms, which have reduced the time people spend watching TV:

Of course, this movement is largely driven by the younger generation:

By the way, can you believe that most people over 18 still watch 4-5 hours of TV every day?

The key is that social media continues to play a huge role, and creators are emerging as new participants in the economy, gaining power in both cultural and economic aspects. The products and tools they use to achieve their goals will continue to be attractive. Because ultimately, creators do not want to rely on a single social platform. If they excel in videos, they want to create podcasts and have a large Instagram following. Compared to large social platforms, start-ups are always more friendly towards creators.

Therefore, I believe that the future of the creator economy is still full of hope, but the path has clearly changed, and the standards have been raised. Start-ups need to provide new features, create new business models, and adopt new technologies to make themselves more resilient against competition. Personally, I am more interested in AI or video-first start-ups in the creator economy, as their behavior is more market-like and provides highly managed solutions for both parties. I am more optimistic about start-ups that can charge $1000 from a smaller user base rather than companies that rely on $2 tips from everyone. In the coming years, we will see more viable changes, and considering potential consumer trends, I believe the creator economy will continue to be the cradle for high-value start-ups.

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