Startup Analysis

Aussie startup Stackla is taking Facebook to court: Is this a cautionary tale of over-reliance?

Stephanie Palmer-Derrien /

Stackla

Stackla co-founders Semin Nurkic, Peter Cassidy and Damien Mahoney.

Aussie-founded startup Stackla is taking Facebook to court, claiming the intense scrutiny of the social media giant following the Cambridge Analytica scandal has lead to over-zealous restrictions of outside apps and is destroying its business.

Stackla filed a lawsuit with the US District Court in San Francisco last week, claiming Facebook is “destroying Stackla’s business and Stackla’s survival is now in question”.

Stackla compiles user-generated content from social networking sites, integrating them as marketing touchpoints. The complaint alleges that, in the wake of the Cambridge Analytica scandal, as well as US state and federal antitrust investigations, Congressional inquiries and a Federal Trade Commission investigation, Facebook and Instagram have been restricting companies’ access to their data “without any rhyme or reason” or warning.

“They are systematically using their power to pick winners and losers among companies whose business is based on the social interactions of people,” the complaint states.

Facebook and Instagram are “the epicentre of online social media”, it continues.

“To lose access to Facebook and Instagram is essentially to lose access to social media altogether.”

Previously, Stackla was an official partner “in good standing” with Facebook, the complaint states. It adds the startup only collects data that is publicly available on the platforms.

It adds that Facebook’s actions amount to a violation of its contractual obligations to Stackla.

“Stackla is a good actor in the marketplace, but became a casualty of [Facebook’s] relentless scorched-earth approach to belated reputation protection,” the complaint states.

In a statement, Facebook said data scraping is an “industry wide problem that threatens people’s privacy”.

It also stresses that scraping violates its policies, suggesting that restricting Stackla’s access was not a random move, but a reactionary one.

“We have, and will continue to, take action against these companies when we find them scraping,” the statement said.

“We will continue developing more proactive data scraping detection methods. We know these efforts won’t catch every violation, but they will help.”

The pendulum swing

The David versus Goliath clash echoes the plight of Aussie startup Unlockd, which took Google to court after the search engine giant threatened to pull its app from the Android store, claiming it fell outside of the terms of use.

Unlockd’s products could only operate on Android operating systems, and the lawsuit ultimately led to the collapse of the startup.

Speaking to StartupSmart, Right Click Capital partner Ben Chong says he’s happy to see Stackla sticking up for itself in this situation.

However, he notes it’s an indictment of platforms such as Facebook and the “monopoly power” they wield.

“Some of their decisions can have very, very strong consequences,” he warns.

Having a business model that is absolutely reliant on any one platform is something “any startup founder needs to be cautious of”, he adds.

It’s the same as having just one large customer, he suggests, or just one supplier. If your customer changes direction, or your supplier goes bust, “then you could be in big trouble”, he says.

“If there is too much dependence on a particular platform, and especially if the owner or operator of that platform has designs to perhaps build their own empire into that area, that is where there can be sad consequences,” he says.

We have seen Facebook go through various iterations and phases. Sometimes it’s more open with its data, sometimes it closes it off.

Currently, the concerns about Cambridge Analytica, as well as the privacy debacle, and the government scrutiny the platform is seeing means “this has been swept up, unfortunately, into this pendulum swing”.

Not all bad news

That said, tapping into the massive market of social media users is understandably tempting. And, while growing a startup based entirely on someone else’s platform may be risky, it has been lucrative for some.

Cloud accounting startup Float launched in 2011 and was, for some time, only available to clients operating in Xero’s cloud accounting environment.

Now it has multi-national reach and more than 600 accountants and small businesses using the platform.

Speaking to StartupSmart earlier this month, Float founder and chief Colin Hewitt noted that being based within the Xero ecosystem set the stage for early expansion. The startup was listed on Xero’s website and featured in its top-10 apps list, meaning the startup spent very little on marketing.

At the same time, as Xero has grown, more and more apps are launching, and a change to the company’s app store wasn’t kind to the startup.

“There are so many apps now. New people coming along might not hear about us,” Hewitt said.

“It’s been very painful for us.”

The founder also faces questions from potential investors about the vulnerability of Float’s situation. What would happen if Xero decided to create its own product doing the same thing, for example?

In the social media space, Aussie startup Linktree, which allows users to feature multiple links in their Instagram bios, has bootstrapped its way to 2.8 million users and annual recurring revenues of $3 million — all for a product that, by definition, relies on the good grace of Instagram allowing it to exist.

Speaking to StartupSmart in August, Linktree co-founder Alex Zaccaria explained he and his brother and co-founder Anthony kept the startup as a side-hustle to their digital agency business for “quite a while”.

They were concerned Instagram might take the product down, ban it or create their own version.

However, with a strong customer base, a wealth of consumer-generated content on the product, and a slew of celebrity users, “we’re far less concerned about that these days”, Zaccaria said.

Equally, the Stackla furore also follows a ruling on a case in the US. Back in 2017, hiQ Labs, a data science startup focused on talent management, filed a complaint with the District Court in the Northern District of California, after LinkedIn issued it with a cease and desist letter, ordering it to stop scraping data from people’s public profiles.

The court reportedly issued a temporary restraining order, stopping LinkedIn from blocking hiQ, and just weeks ago, a federal appeals court sided with the startup, saying it had the right to access the platform, and the data shared on it.

A balancing act

With any business strategy, we like to focus on the upsides, Chong says.

“But with every type of upside, one needs to perform a risk assessment,” he says.

If you’re reliant on one customer, one supplier or one platform, you have to consider your level of sensitivity and your exposure to risk.

“What a risk manager would say is that you need to quantify what is the financial or monetary impact of the risk, along with the chance of it occurring,” he explains.

Chong cautions that, in their early days, startups will likely have customer concentration. In fact, if they don’t, they may be doing something wrong.

“You want to know who your customers are, you want to get close to them and really work with them.”

But, over time, that’s something you should consider changing. If any concentration remains too great, you could be exposing yourself to risk.

“Particularly if there are alternatives to you.”

Stackla did not respond to a request for comment.

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Stephanie Palmer-Derrien

Stephanie Palmer-Derrien is the editor at StartupSmart. You can contact her at [email protected].

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