People Don’t Understand Marketplace Models & Their Timelines

I’m currently the founder of a mobile marketplace app.  And one of the most surprising things when I talk to people — businessmen outside tech, entrepreneurs in different tech verticals, you name it — is how little they understand about how to build and scale an online marketplace.

I constantly find myself in conversations with people, having to explain to them why the frameworks that work to build say SaaS companies are different than what it takes to build a marketplace.

If I could name the single most important takeaway in regard to building a successful online marketplace, I would say it is “patience as it relates to time.”  Here’s why…

A lot of marketplaces have what’s called the “chicken and egg problem.”  While I am generalizing in that there are all sorts of hybrid models out there (like Airbnb in which both sides of the marketplace can be both buyers & sellers), in general, there is a buy side and a sell side.

The general thinking is to build up the sell side, aka the supply side, and then open up the app to the buy side.  This is called building marketplace “liquidity.”

And this is where “patience as it relates to time” comes in.  You can’t just onboard a handful of the supply side, open up the app to the buy side, and expect magic.  Nor should this be indicative that you approached your marketplace incorrectly.

You & your investors need to exercise patience & give yourself time to onboard your “magic #” of vendors in a specific area (density) and then go from there.

This is why I believe that marketplace models should have much longer periods of time “in the field” listening to customer feedback and the current problems in the market you are attacking.

Then once you have spent that time in the field, you should see if you can onboard your sell side.  Once you have proven that you can onboard your sell side and you have spent extensive time in the field listening to the needs of the buy side, then you should raise your first round.

And here’s the rub: the mistake are people who have the mindset that you should wait to see monetary conversions in the marketplace as indicative that said marketplace is worthy of an investment or is solving an actual problem.

The key metrics that should be focused on prior to a seed round are to make sure that you can onboard a certain # of vendors in a specific geographic area & that you have spent time in the field listening to the buy side and validating that they want less friction via technology being able to discover and book the sell side (hint: film videos of your buy side conversations and show those to investors).

A marketplace takes time to build.  And you are going to have to build features that remove friction & onboard your sell side, usually with some sort of vetting process (another hint: don’t just aggregate Yelp reviews, you need a proprietary system unique to your marketplace that ups the level of trust and safety for your platform because that should become a core competency and competitive differentiator for your company –and one you should trumpet in your marketing messaging).

Once you have validated you can onboard the supply side and you have validated that the buy side really needs a solution — your solution — to getting to aforementioned supply side, then you need to raise a round for the reasons outlined below…

  • Engineers beyond your cofounder CTO so you can move faster through fast cycle iterations because…
  • Once you start onboarding via your onboarding team (hired after your seed), you are going to need to pattern match what is necessary to build next in order to continue to remove friction in your marketplace
  • You need that onboarding team — your vetting process for who you let into your marketplace is very important and needs to engender trust & safety on the part of your buy side so they know that if they book, they are ensured quality
  • You need a publicist

The last point is going to be the most surprising of my bullets but here is the reasoning.

I believe that online marketplace should give themselves a 3 month “level up” period post seed infusion — your CTO has an expanded engineering and design team, so with $, now allow him to level up over this 3 month period.

Then  you need to engage the services of a publicist to start doing hyper-local press (you don’t need national press attention yet, you should be growing your marketplace at the hyper-local level).

The reason is that you need to switch your onboarding process from one where you are “reaching out,” which is what you were doing prior to the seed infusion, to one where the messaging on the part of the publicist starts to educate the market about the value of your company and the trust & safety of your brand…

You need to start shifting your onboarding to a process that is a mixture of both inbound and outbound vendors coming to you in order to be vetted and if they pass, then put on the platform.

And this relates to my ultimate point, you need to find investors who understand that marketplace models require raising more capital at the seed round than say SaaS companies or social networks.

To review:

  • Spend more time in customer development before you raise your seed round if you are building an online marketplace than you would with other internet models
  • You have waited too long to raise a seed round if you are trying to prove out revenue at this early stage — prove you can onboard your supply side & film your customer development journey to validate the buy side really needs friction removed in your vertical to get to the sell side
  • If you find investors who push you hard on bullet 2 to focus on revenue, find other investors who understand the uniqueness of marketplace models more.  By the time you have onboarded enough liquidity to start to generate any meaningful revenue, you will have waited too long to raise.
  • Do not just aggregate Yelp reviews or simply rely on past customer reviews, you need to generate a system that is unique to your marketplace that will enhance the trust & safety you offer to the buy side — this is mission critical and will be something that will in perpetuity be part of your marketing messaging
  • Raise more $ in the early rounds than you would for other types of internet companies — Fred Wilson himself said that even VC’s constantly underestimate the amount of capital it takes to get a company going & this could not be more true than for marketplaces.

Do NOT let an advisor/board member/fellow entrepreneur/investor try to put a framework around your marketplace that may work for a different type of internet company, or even a different marketplace.

Just like you should analyze market size by bottom up, or you should raise an amount of money by backtracking what is necessary to achieve the milestones of the next round — you need to know the uniquenesses of your marketplace and find investors who have strategic alignment because they buy into the vision via the fact that  you’ve validated you can get the sell side onboarded & that the buy side needs this bridge to the sell side and needs friction removed…

And the journey you are agreeing to go on together are the 1,000 iterations to make sure that “bridge” that your marketplace provides is as seamless as possible for your customers.

There’s plenty of thought leadership out there — from Version One’s marketplace write up to Bill Gurley over at Benchmark — but it seems that most people just haven’t mentally connected the dots about the uniquenesses of this type of model.

As always, and I know it’s hard to do because I’ve had to do this myself, do NOT take $ from people who are not strategically aligned with the vision of your company.  BUT always always entertain the notion that someone else may have a better idea than you, and when they do, then instantly mentally pivot because it does not matter who has the best ideas, it matters that the best idea wins because then the Company wins.

Make your company great.  Make your marketplace great.  And heed the above advice.

 

 

 

Advertisements
People Don’t Understand Marketplace Models & Their Timelines

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s