a16z Partners: 4 Theories Driving the Creator Economy

Author: Andrew Chen, General Partner of a16z, Fund Manager of Games Fund One

Compilation: Luffy, Foresight News

The past few years have seen a wave of creator economy startups, as social media platforms have taken off and content creators have become a focal point for consumer engagement. These startups promise creators to help them better monetize their audiences on social media as long as they promote their products. So we often see: creators promote new products of startups through links in bios, videos, etc., and then attract their fans to a landing page that allows creators to use some new interactions or functions. Initially, almost all of these products started as a “tip” model, but over the years, many innovative products have been born, from e-commerce to newsletters to Q&A and more. These products all promise a win-win with creators, so when their fans spend, the company only takes a certain percentage of the revenue (usually around 10%), and the creators keep the rest.

Some creator economy companies have been hugely successful, paying creators billions in revenue, while others have struggled. Successful startups have strong moats that make it difficult for new entrants to break out. A few years on, what new insights have we learned about the dynamics of the industry? Why Do Some Creator Economy Startups Succeed While Others Fail?

Here is a summary of some of my theories:

• Creator power law: a small number of creators own the vast majority of the audience, which leads to the potential vulnerability and dependence of creator economy startups
• The battle of bio links (links included in profiles on social platforms): creator economy companies gain audiences from larger social media platforms, which usually only have one place (bio link) to promote a company. This is a zero-sum game where the winner wins.
• Graduation problem: Startups typically charge a percentage of the fee, and if creators acquire their own customers, they put pressure on you to lower your costs. The biggest creators usually "graduate" from a certain platform and then build their own.
• Algorithmic Feast: Creator traffic is driven by social feedback algorithms, which can cause traffic to spike and then disappear — the opposite of the steady, sustained growth startups seek.

These are concepts I’ve learned over the past few years talking to dozens of creator economy companies. As the next generation of creator economy startups emerge, they must figure out how to navigate these dynamics. Let's go ahead and dig deeper.

Creator Power Law

Do you want to start a creator economy company? The biggest dynamic you have to master is the power law of the audience and income of the creator class itself.

The chart below shows the percentage of revenue earned by the #1 creator on a platform like Patron, while creators ranked #2, #3, and #4 all the way down (Source: Power in Culture law).

Imagine if you plotted all the millions of creators on this axis, you'd see it eventually flatten out closer to 0%. There are a number of reasons for this, starting with the fact that these creator platforms base themselves on social media, which itself records a power-law distribution of fans and content participants. In turn, a small number of social butterflies know even more people than a power-law curve does, as algorithms have discovered that social media platforms have power-law curves.

Therefore, any creator economy product built on a social platform will inherit these power law curves. OnlyFans creators offer free content on many social platforms and then drive traffic to their landing pages. Below is a graph of creator revenue showing a similarly curved distribution. While some creators earn as much as $100,000/month, the median is just $180/month.

While the power law pops up naturally in social media platforms, it also shows up in other creative endeavors, including television, film, music, and more. The image below is an example from TV (from "Power Laws in Culture"):

A handful of popular shows appeal to all audiences. The same phenomenon occurs in video games, movies, novels, directors, writers, etc.:

Power laws are pervasive, and a central problem is that creative skills are not evenly distributed in the world. A top writer or film director is indeed much better than a 100th.

So, what does this mean for creator economy companies?

• When creator economy companies first launched, the long-tail creators they initially attracted didn’t do much
• In order to scale, the platform needs to attract top creators *Even if you have a large number of creators on your platform, revenue is often concentrated among a small number of people - so if top creators leave, financials can suffer a significant negative impact

These dynamics all mean that the initial stages of a startup launch can be risky. The best companies can amass so many small creators that numbers come into play, or organically attract large/medium creators. If a startup acquires/masters a lot of creators on its own, then that's a sign that the product may not be solving a big enough problem, nor will it be able to solve it on its own.

The battle of bio link

Social media platforms like Instagram and TikTok have an advertising business model, so they don’t want to give people “too much” organic traffic. What they want more is that you pay for sponsored posts, creators, and ads. One way they do this is by providing a single link to drive organic traffic, the infamous "ink in bio".

For creator economy startups, bio link means a lot. If you can convince creators to put your startup in this link, organic traffic will follow. Combined with some monetization mechanisms, startups can get a share of it. Early in the creator business cycle, startups were competing with non-commercial links — either to other social media profiles or to personal websites. But over time, people started filling their bios with highly profitable links from Patreon, Substack, Twitch, etc., and the competition intensified further.

Now, replacing another startup's biolink is a zero-sum battle. The only way to get organic traffic from creator profiles is to monetize better than other older, more established competitors. It's not enough if you're simply matching what the incumbent might bring you. You have to find something different, whether it's within the creator content itself, whether it's video, text, or something else. Either way, new entrants will find a major hurdle, and while they may initially want to use investor money to subsidize earnings for growth, that may not be enough to achieve meaningful scale.

Graduation Questions

The graduation problem is what happens when your best creators scale up and eventually “graduate” — leaving your platform with themselves and their fans. Why does this happen? Creators provide obvious value to startups, driving traffic, creating content, and monetizing users. But as creators grow in influence, they often start to think they're "too" attractive. They start thinking, they did all the work, why share the profits with you? This problem is especially acute due to the effects of power law curves, where a small number of whales tend to dominate revenue. If whales start asking, will they be able to replicate your product by hiring an agency to build a website. They will eventually want to “graduate” from your platform and build their own.

The creator economy is often compared to marketplace startups. In this space, companies like Airbnb or Uber independently aggregate the supply and demand sides of the network. These marketplaces work best when the parties are highly fragmented, which is why the biggest outcomes are C2C or consumer-to-SME marketplaces, not B2B. In their initial formation, creator economy startups look more like B2B networks, and possibly even SaaS platforms—they have a highly concentrated customer base (creators), and creators bring consumers.

To solve the graduation problem, creator economy startups must provide much higher value than the utility of payments and other monetization technologies. They need to have a moat, not just for outside companies, but for creators who want to graduate over time. The best way to do this is to create network effects yourself and bring them to each creator, forming a two-way network with all the usual advantages. Additional functionality created by startups should ideally be proprietary. If an AI-enabled creator economy company develops a really good underlying model that allows creators to monetize 10x more than before, then creators are less likely to leave.

Algorithm Feast

Creator economy startups often find themselves highly reliant on social media platforms for blockbuster content. If a video goes viral on TikTok, the creator economy platform could experience a massive increase in user acquisition. But startups are always trying to achieve steady growth, and unlike SEO, referral programs, or paid marketing, it's hard to consistently achieve 20% month-over-month growth. In contrast, marketplace startups add value by aggregating market parties—often spending billions of dollars building systems of buyers and sellers. During Uber's high-growth years, the annual marketing budget for passenger acquisition was $1 billion, and drivers' side was close to $2 billion, in addition to diversifying in SEO, brand marketing, payments, referral programs, partnerships, and more. This adds a lot of value and connects buyers and sellers.

Creator economy startups are different in that they use creators to find consumers, but in doing so, they rely heavily on a single channel. Reliance on a single marketing channel is always dangerous, as we have seen in previous years, changes in SEO algorithms wiped out many SEO-dependent content sites. Reliance on social media is more vulnerable because content is naturally more ephemeral and subtle. I think this is one of the reasons why subscriptions have become the dominant business model for successful creator economy companies — it allows creators to receive a long-term, lasting revenue stream from each fan.

Algorithmic recommendations are also a competing factor. In recent years, we've also seen YouTube, Twitch, Twitter, and other underlying platforms attempt to pay creators directly and play a more vertically integrated role in the creator economy.

Of course, the best solution is to build additional marketing channels to increase predictability. Combine social media channels with traffic from referrals, SEO, mobile installs, and more, and the growth curve becomes more permanent. But in the early days of creator economy startups, they tend to go all-in on social, and only after they succeed can they choose to invest in other channels.

Advantages and future of creator economy companies

Creator economy companies have grown into their second and third generations. The bar has become higher, and startups are no longer offering fancy tipping features, but building mature products that support multiple platforms, new forms of interaction, and provide creators with new features to interact with fans. Rather than launching a single celebrity-led product and expecting it to succeed, startups are building real technology combined with a broad go-to-market strategy.

The advantage of the creator economy industry is that the use of mobile devices and social media platforms continue to grow at an alarming rate, reducing the amount of time people spend watching TV:

Of course, this movement is largely driven by younger generations:

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

The point is, social media continues to play a huge role and creators end up being new players in the economy who continue to gain power both culturally and economically. The products and tools they use to achieve their goals will continue to be attractive. Because at the end of the day, creators themselves don’t want to be dependent on a social platform. If they're strong in video, they want to create podcasts and have a huge Instagram presence. Startups can always be more creator-friendly than larger social platforms.

So I think the future of the creator economy is still promising, but the path has clearly changed and the bar has been raised. Startups need to offer new capabilities, create new forms of commercialization, and adopt new technologies that make them more resilient to competition. Personally, I'm more interested in AI or video-first creator economy startups that behave more like marketplaces with highly managed solutions for both parties. I'm more bullish on startups that can collect $1,000 from a smaller user base than companies that charge $2 per tip. We will see more actionable changes in the next few years, and given the underlying consumer trends, I think the creator economy will remain the cradle of high-value startups.