Buyer , User , Startups , Scaleups — 03.07.2023

Building a Marketplace? Here’s What You Should Know

Recently, we hosted a group of early stage founders with New York Startup Guild. Almost every founder we met is building some version of a marketplace, either consumer or business-oriented. 

Everyone’s building marketplaces. Why?

For founders, creating a marketplace feels like the low hanging (and sometimes high potential) fruit of innovation. 

Andreeson Horowitz has been embracing the marketplace category for years now, and smaller markets between the coasts are following suit. For investors, marketplaces seem like a no-brainer. The promise of “easy money” profited from transactions skyrockets marketplace valuations. While other B2B SaaS models struggle to earn monthly contracts, marketplaces simply skim off user transactions. Brilliant! 

But I often see these models break down in practice. 

Building marketplaces isn’t innately flawed. But people are doing it wrong.

A year ago, I would have ranted that investors should stop pushing marketplaces, and founders should quit deluding themselves into thinking it’s possible to build a demand and supply-side product with $2M in seed capital. TLDR: Quit trying to churn out marketplaces with the sole intention of making a quick buck. 

While I still have strong opinions about marketplaces, I propose a solution — stop ignoring value and market needs.

When we romanticize unicorn marketplaces like Uber and Lyft, we forget that the concept of ride-sharing was decades old. Their rise to fame was accelerated because their value was normalized, and their solution wasn’t that far outside of the norm. The market was ready for Lyft and Uber.

But what happens when the market isn’t ready? 

Look at the online dating industry. In the early 2000’s, online dating was highly stigmatized and, as a result, rarely adopted. But as the concept became more normalized, we saw a proliferation of successful apps like Tinder, Bumble and dozens more that I don’t know about because I’m happily married. 

We’re working with a startup that began as a marketplace for white-collar workers and construction firms. While the product offered unique value, the market wasn’t ready for such a radical approach to sourcing engineering talent through a marketplace.

Most B2B marketplaces may make sense on paper: connect a buyer with goods or services to perform essential tasks. But even if the founder can create sufficient supply (in this case, engineers) this approach won’t work if the demand side (construction firms) isn’t ready for it. If the success of this company was determined as a binary — is the marketplace working or not? — then the company would be deemed a failure. But that’s short-sighted. 

In our client’s case, the founder was able to supply the engineers. But the marketplace wasn’t working because the construction firms weren’t psychologically ready. While buyers weren’t ready to solve their pains with a marketplace, they were more than willing to pay for a service+tool that helped them source engineers. 

Rather than giving in to the temptation of low-hanging marketplace fruit, the founder is building a SaaS product that provides more measurable results. 

They’re working the strings behind the product as a service-enabled product. As they add more customers, they’ll automate more of the service, transforming it into a self-service product.

Marketplaces are no longer restricted to consumer products. But as you invest in or advise founders embarking on marketplaces, take a closer look at your playbook. Historically, the playbook has been to heavily invest in marketing and sales to build supply and demand. A more effective approach, though, is to service the demand side with a product that solves immediate problems. Then, invest in more targeted product messaging and top-of-funnel marketing activities to educate the remaining market. The path may be a little longer, but it will generate revenue sooner and create longer-term value for the market, founder and investor.

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