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.

 

 

 

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People Don’t Understand Marketplace Models & Their Timelines

Magic #’s

The business world is so complicated.  #’s are everywhere…

  • In social, it’s critical to understand your DAUs, WAUs, MAUs & their corresponding ratios to assess engagement
  • In SaaS, churn is one of the critical metrics
  • And so on & so forth – as the above are just the tip of the iceberg in regard to #’s

And then all of these #’s eventually have to translate to value across your financial statements, which are the ultimate determinants of what your real valuation is.

While passion has to be the driver of your process throughout company-building, you are a foolish manager if you don’t also have the ability to “put on your CEO cap” & view your business through the lens of building actual monetary value.

Great businesses catalyze from passion, but in order to achieve sustainability, must ultimately at the end of the day have the metrics that translate into $.

Here’s the rub though:  if you’re an early stage company, then becoming overwhelmed by ALL the #’s can do you more harm than good.  An early stage company that is spending too much valuable “time capital” researching public company comps & their corresponding trended P&L’s is probably not optimizing.

That’s why I think that it’s best to condense all a company’s #’s into an “order of operations” of priority, so that your focus is on the #’s that will “level you up” for the next 12 – 24 months.  Then adjust your “priority #’s” for the next set of milestones (or throughout as more information becomes available).

You need quantifiable #’s to assess your progress, as well as guide you where you need to make adjustments throughout the journey.

But there are only so many hours in the day & the human brain can only concentrate on so much before its focus is stratified across too many things in order to “execute” progress.

The above was a precursor to the point of this post which is:  I believe all companies should pick a handful of #’s as objectives to focus on, have managers communicate these #’s broadly, & with an “internally public narrative” continuously hammer home the importance of achieving them across all departments.

I call these #’s the “magic #’s” because they are the critical metrics that will “level up” the company in regard to its medium term goals.

To the above end, I will use the “magic #’s” of the internet marketplace that I am building now by way of example.  We are early stage & our magic #’s are: GMV, take rate, & buyer-to-seller ratio.

At scale, there is no question that for a marketplace, GMV & take rate are the most important.  But at our stage, it’s the last of those 3 that we are truly focused on because it relates to the daily executable process that we are focusing on right now & how it relates to our medium term goals.

The buyer-to-seller ratio is important because we need to discover the # of sellers we need to onboard in order to have sufficient liquidity to start catalyzing the “buy side” & then we need to increase both the “sell side” & the “buy side” simultaneously.

As we move across our lifeline, we then want a repeatable & highly local go-to-market strategy so we can scale across other cities in the U.S. & eventually globally.

But the point of this post is that it connects a bunch of different concepts as expressed by a handful of #’s:

  • You need to have an ultimate vision of where you see this business 7-10 years down the line & that vision has to include some practicalities, such as how you see the business ultimately monetizing or further monetizing
  • But the above is the end-game & you have to be focused on “daily/weekly/monthly victories” in order to inspire a team to get to that ultimate end-game
  • Metrics are your guides to getting there but you can’t focus on all metrics at once, nor can you as a manager communicate broadly within an organization to people with different skill sets the commandment to focus on ALL metrics at once
  • So you need to prioritize & focus on the “metrics that matter most for the medium term” & then communicate those broadly within the organization, as well as update everyone consistently on the company’s progress or lack thereof toward them

Also, it’s important to celebrate the incremental milestones on your way to building sustainable company value.  In this regard, you cannot be “binary”

  • “We’re on the journey” (a.k.a. no reason to celebrate yet)
  • And ultimately “we got there/did it” (a.k.a. aha, only now do we celebrate).

No.  Process-oriented success as judged by quantifiable measurements is just as crucial to company morale as to investor confidence.

Your magic #’s are a great way to both make sure you have metrics to evaluate company progress & to remind the team that when you hit them, you should all take a moment to reflect on the accomplishment.

What are your company’s magic #’s?

 

 

Magic #’s

“Services” Marketplace Metrics

In an internet marketplace, there is a “buy side” & a “sell side.”  The following are some important metrics to monitor for a “services” marketplace (note that if this were another type of marketplace, there would be other metrics such as # of listings etc.)…

SELL SIDE:

  • What is the Total # of Sellers
  • What is the Seller Growth Rate (%), both M-o-M & Y-o-Y?
  • What % of Sellers are still active after 1 Month?  After 1 Year?
  • What are the common characteristics of the most successful Sellers?
  • What is the Average Revenue Generated per Seller?
  • What % of Revenue is generated by the Top 20% of Sellers?

BUY SIDE:

  • What is the Total # of Buyers?
  • What is the Buyer Growth Rate (%), both M-o-M & Y-o-Y?
  • What is the Average # of Orders per Buyer?
  • What is the Average Amount purchased per Buyer?
  • What % of Buyers have purchased more than once?
  • What is the time between 1st & 2nd purchase?
  • What % of Buyers whose purchase is in a different category?

Use cohort analysis to monitor both financial & engagement metrics over time.

And crucially, since marketplaces take more time to build than other types of internet businesses (due to building “liquidity”), you need to monitor the “magic #” — which is the requisite # of Sellers needed in a given geographical area (“liquidity”) to “open up” the marketplace to the “buy side.”

Ultimately, as stated in the last post on marketplaces, the 2 most critical metrics in a marketplace (especially at scale) are the GMV & take rate (the revenue line on your income statement).

And most importantly, the #1 reason to use metrics is to utilize them to optimize the business throughout its lifeline, in order to create a sustainable marketplace that provides real value for both sides of it.

“Services” Marketplace Metrics

What’s an Internet Marketplace?

It’s a type of e-commerce site that acts as a “middleman” between those looking to sell a product/service & those looking to buy a product/service.

In the public markets, examples of marketplaces include Amazon, eBay, Alibaba, & Etsy.

In the private sector, examples of marketplaces include Uber, Airbnb, Lyft, & Instacart.

What a digital marketplace does is eliminate friction & engender trust in a sector(s).  Also, a key defining characteristic of a digital marketplace is that it usually handles some, if not all, of the transaction process between the sell side & the buy side.

A deep dive on marketplace metrics is a few posts unto itself, but the two key metrics to discuss right off the bat are:  (1) Gross Merchandise Volume a.k.a. ‘GMV’  ;  (2)  Take Rate.

  • GMV = total $ transacted through the marketplace in a particular period of time
  • Take Rate = the % of the transaction that the marketplace “takes” in fees

So if you are a digital marketplace, in your P&L, your “top line” (revenue/sales) is actually your take rate, NOT your GMV.

To repeat, GMV does NOT equal revenue!

The pricing model of a marketplace is one of the most critical factors in both its defensibility & sustainability.  If you charge too much, you leave yourself open to be overtaken by a lower-cost competitor.

In summary, marketplaces are some of the most exciting businesses being built in technology these days.  The proliferation of mobile globally & the consumer demand for instant gratification are a perfect “soup” for the marketplace model to flourish.

Above being said, it’s crucial for investors to understand that in contrast to SaaS businesses or social networks, digital marketplaces take more time to build & see results from.  We can dive deeper in a future post as to why this is, but it has to do with building marketplace “liquidity” (need enough sellers/buyers).  And executing liquidity requires a very thoughtful approach on the part of the marketplace.

 

 

 

What’s an Internet Marketplace?