Hurdles in building a marketplace
What tech investor doesn’t like a marketplace? I wish you could just pair up buyers and sellers in any industry and have an instant startup hero. The reality is that the marketplace model isn’t always a fit. Here are the major factors I think about:
The chicken or the egg issue. For buyers and sellers, each party only cares about the marketplace if the other party is there too. Step one is figuring out which side to onboard first. Typically, it’s the supply side. The supply side is more patient and can tolerate hanging out for a while believing that the demand will come. Meanwhile, you don’t get many chances with buyers. If they try something once and are disappointed, it’s harder to bring them back to the table. Thus, if the supply won’t commit, this could be a serious hurdle. There are exceptions, of course. I think the most interesting, demand-side first marketplace is Postmates. As opposed to spending months signing up retailers, they’ve spent months capturing consumer’s appetite for on-demand deliveries. Now that they’ve made over 1 million deliveries, they know which retailers are the most popular and can onboard them with the data to back it up.
Leakage. A marketplace can generally be considered a broker (“an individual or party that arranges transactions between a buyer and seller for a commission when the deal is executed”). Everyone knows that it’s cheaper to go directly to the buyer or directly to the seller because you avoid the broker/middleman fees. This is why many marketplaces leak and is especially the case when buyers and sellers have the opportunity to meet in-person. For instance, a supplier can get their start on a marketplace, build up direct relationships with their buyers, and then collude with them to save money by moving off the platform. This is a fear whenever I hear about babysitting and tutoring marketplaces. I could probably write a whole blog post about avoiding leakage. The key here is for the marketplace to provide a real value beyond just connecting the dots that encourages the paying side to stick with it.
Product Market Fit. This can be elusive but is something every business needs to find. I’ve been spending time lately looking at the wholesale apparel market. I’ve learned that most fashion buyers find and pre-order their inventory at trade shows. To change behavior from visiting trade shows to completely transacting via an online marketplace is a big leap. The human element just can’t be replaced. The LA company, Joor, smartly saw that the way to modernize the industry was by working with this behavior and building software for brands to record transactions at the trade show. It’s this type of thinking that works.
These are the three main things I think marketplaces need to solve in order to be successful. Then, once a marketplace “works”, it takes off.
With that, does anyone have any good proofreading marketplaces to recommend? That’s something I could use right now…
