At NextView Ventures, we have a number of companies in our portfolio which are “marketplace” businesses, where buyers and sellers meet to exchange a good or service. And along the way we’ve met with or observed a larger number of seed-stage startups attempting to start them. All of these companies face the challenge of the marketplace cold-start problem: simultaneously attracting both sellers and buyers to generate enough liquidity so that meaningful transactions can result. Without enough buyers in the system, it’s not worth it for the sellers to show up; without enough sellers present, buyers don’t have anything to purchase.
What are the best practices for going from zero to sixty with a marketplace startup? I’ve observed a couple of strategies and approaches for overcoming cold-start inertia:
- Offer supply side value for being present beyond just buyers. One way to jump-start a marketplace with sellers is to attract them to a platform with carrots other than buyer demand. The most often I’ve seen this approach work is through a fostering community of sellers, where these sellers find benefit in just interacting with each other. Communities like those of uTest (software QA testers), as well as NextView portfolio companies GrabCAD (mechanical engineers) and thredUP (parents), which resulted in marketplaces had origins in this approach.
- Attract would-be buyers with research/learning about purchasing… suppliers will follow. Even if the supply isn’t there yet, it’s possible to capture buyers’ attention earlier in their purchasing process. If a web service provides content which helps a person or organization learn more about what and how to buy, then it becomes a trusted source for later in the buying process. And with an audience of hungry buyers circling, supply is much easier fill. It’s perhaps an older example, but Bitpipe (sold to TechTarget in 2004) did just that in becoming the largest distributor of IT white-papers which attracted CIO buyers.
- Brute force a mini-market and expand. Rather than create a broad market at the outset, another approach is to concentrate deeply to create very specific marketplace liquidity and branch out from there. Often this focus can be on a specific geography or vertical. Some startups which have started in Boston with this strategy are TaskRabbit (personal assistance in particular location), Zintro (experts in particular domain), and Care.com (caregivers in a specific vertical and geography) have utilized this methodology.
- Piggyback off an existing marketplace. Often there are more generalized marketplaces that a focused start-up can utilize as an initial launching-point for acquiring liquidity. For instance, I know of a couple startups which are successfully posting as both buyers AND sellers on a vertical category on Craigslist to siphon an initial base of traffic for their service (though they probably don’t want to admit it publicly).
- Develop/leverage meaningful relationships so sellers are patient during an initial phase. Sometimes even the promise of would-be buyers is so enticing that suppliers are willing to work with a startup in joining a marketplace early. This situation can be further facilitated if some of the founders have an existing relationship with the suppliers prior to starting the company, or they are able to develop a meaningful relationship with them once they’ve initially bought into the idea given the innovative offering. (This approach is especially effective when the supply-side is concentrated in a smaller set of players.) As an example, the management team of NextView portfolio company Mojo Motors came from the automotive industry, so they were able to forge new and leverage prexisting relationships with car dealers in getting the company off of the ground. And our portfolio company TurningArt immediately after starting fostered meaningful relationships with artists (by offering a new channel to gain exposure) to build their own supply of art.
- Some combination of the above. The above approaches aren’t mutually exclusive, and utilizing more than one in a combination results in an even greater opportunity to begin turning the flywheel.
As a general rule, once a true market is going, I’ve observed that the supply-side often increases in step-functions, while the demand-side grows incrementally. Typically, there are factors (sometime external) which “switch on” the supply side so that a rush or influx occurs spurring quick and meaningful growth. Whereas on the demand side, it usually grows organically in a smooth fashion as the service expands. In either case, there’s continually a challenge in matching the right levels on both sides so that there is a stable enough balance for a service to grow. But the most difficult challenge is starting the marketplace engine in the first place, which can be sparked with one of the techniques above.
Your office space is the face of your startup.
Not only does it communicate an outward message, but like a face, a startup office provides insight into what’s going on underneath the surface.
A startup’s space tells a story to everyone who is involved with a company spending time there: founders, employees, investors, and (potential) customers. The physical environment in which startup employees work (should) match the company’s story and culture. It starts at the beginning of a startup’s life, when both the company and the space it resides is extremely early & raw… a sparse space with minimal (read: cheap) furnishings speaks to the frugality required when it’s in pre-funded bootstrapping mode. In an older post from a few years ago, I recount how all of us co-founders at our startup Sombasa Media initially built our own desks out of necessity (they were much cheaper than having someone else assemble them), but then building a desk became a rite of passage for any new employee beyond when it was required for monetary reasons – this physical act translated into a symbolic one of everyone in the company building a company together.
As a startup grows up, there are (relatively) more resources to select furnishings and pay attention to layout and design. Then even more so, since the company is in the position to make some choices (rather than just take effectively whatever is available for free/cheap), the top-level selection of the space itself and the subtle choices in implementation speak quite a bit to the values of the company – what’s (and who) is important and why.
And startup office is not just about inside, but as any real estate person will tell you – location, location, location. At the end of the day, where a startup is located is a balance between cost and the optimal place to attract the best employees. So it’s not just about proximity for commuting, but also ready access to after-work camaraderie (read: bars) and community events. In Boston area, it’s no secret that there’s been a trend over the last few years of startups moving to Cambridge, and even more recently to the Innovation District in downtown Boston, because of these very factors. VCs’ office locations are a lagging, not leading, indictors of where the startup activity is… I’ve explained why we at NextView chose our office space in a previous post. But it largely comes down to we want to be where entrepreneurs are.
As general rule, when a VC emerges from their own office to visit a prospective portfolio company, it means s/he is really serious about possible new investment. Here at NextView, we like to visit offices of startups earlier in the process than a typical venture firm because it’s a useful way for us to understand the “vibe” of a company and see first-hand if the story which is told in a pitch syncs with the reality of what’s happening. (I recall a specific moment once when I heard a pitch from an entrepreneur about how efficiently they were using the capital they’d already raise, but was completely surprised at the lavishness when I’d visited the offices.) Visiting startup’s offices is a good reality check and validator in a diligence process, as well as a way to build a meaningful relationship with everyone at a company, not just the CEO/Founder(s).
There isn’t one “right way” that companies’ offices should look, regardless of how establish they are. In fact, since startups are unique, so should their offices be. Prior to writing this post, I tweeted out, “Writing a blog post about how a startup’s office space reflects its personality/culture. Send me a pic of your startup’s office and why,” and I received some pretty cool responses which fit into my thesis – these startup faces are a reflection of themselves:
- Coach Wei and the team at Yottaa literally “built their own office” from moving in the refrigerator, to assembling furniture, to building shelves. To me, it’s clear they have a very team-oriented atmosphere.
- CustomMade, a NextView portfolio company, embodies their whole company’s purpose – connecting creators of custom good with people who want them – in furnishing their office with all sorts of custom furniture. As co-founder Seth Rosen said, “All of this stuff helps people remember how cool custom stuff is.” They have a great blog post detailing how their logo was custom woven onto a rug for the entrance in the office. Also, they took a page from Google and work on doors and sawhorses as desks, which are extremely cheap to setup, and very easy to move. The company is always changing around the layout setup to keep things fresh and people collaborating, which is reflective of their fluid organizational structure.
- Dharmesh Shah from HubSpot emailed me a link to a post which detailed the thinking behind their office space move last year. Although growing quickly, they did not want to lose their “entrepreneurial start-up aesthetic” and “wanted to engage and be respectful of the post and beam mill structure aesthetic [of the location], yet simultaneously have a contemporary palette of materials that spoke to their avant garde place in the technology industry.” I think the outcome reflected those values which I know are true to the company.
- Lastly, Co-working center Intrepid Labs in Cambridge has a vibrant space resembling an open canvas. As it fills with occupants, Ty Magnin commented “we hope it will evolve rather organically” along with the culture.
The expression on a person’s face is always telling, and the same is true for a startup’s space. I think all of the above instances are proof that’s the case.
I recently received a email from an entrepreneur who I know with a genuine question about terms of his financing: “How do you guys at NextView feel about one of our investors holding super pro-rata rights for the next round?” We at NextView Ventures have more recently seen super pro-rata rights introduced by other investors in a couple of the rounds which we’ve participated, and have started to see a pattern emerge of the consequences of this insertion.
On the subject of super pro-rata rights, a couple months ago Brad Feld wrote a blog post “Just Say No” and Mark Suster (after detailed explanation of both pro-rata rights and super pro-rata rights) summed up that the reason not to take them is “you might make it difficult for you to get your company funded in the next round.” Mark’s argument is essentially that they make the entrepreneur’s next fundraise more difficult because of the signal value associated with whether or not the existing VC investor is going to exercise those pro-rata rights.
But the reason that super pro-rata rights aren’t super goes beyond just how that VC with those rights acts as the next round approaches. These rights fundamentally misalign incentives on how the company is operated, which is bad for both an entrepreneur and the VC. The rationale for the negative effects of super pro-rata rights comes down to VC math in which the latter of the three dimensions for the next round – valuation, amount raised, and dilution % – already becomes artificially fixed. So in order to successfully raise at a higher $X valuation, the resulting math requires the round size to be larger. An entrepeneur can be forced to raise more capital (which the business may or may not need) if s/he is going to be rewarded with a higher valuation.
This scenario presents a number of troubling incentives. Prior to the next round, the startup risks being run at a higher burn-rate so that it looks positioned to need the larger financing. Second, an entrepreneur is more likely to be compelled to put a larger dollar-amount “ask” on the cover of his next round’s pitch deck, which can hurt his chances of a successful fundraise if the business isn’t ready yet for a large financing (but would be for a successful smaller one). With super pro-rata rights in play, if an entrepreneur is going to give up a specific % of his company in this round anyway, he’s motivated to make that as large a round as possible – which might not be the right thing for the business as well as decreasing the chances for a successful fundraising process. And then, lastly, even if the larger amount is raised, again, it can over-capitalize the company, which changes the dynamics about how the business is run subsequently. All of these scenarios are not just detrimental to the entrepreneur/startup, but also to the VC funders themselves who want to eagerly invest in a company which is doing well.
I see super pro-rata rights as another VC term-sheet bell & whistle which stem from genuine and legitimate intentions (allowing a VC to own more of a company it likes a lot) that result in misaligned incentives between an entrepreneur, investor, and what is “right” for the business. As a general rule, deviation from a simple and elegant term sheet (especially in early rounds of financing) can cause strain, and super pro-rata rights is just another (new and emerging) example.
Over the past fifteen years on the internet we’ve seen a few waves of e-commerce innovation. From the initial humble beginnings of simply selling books online, to shopping/pricing comparison engines for electronic and other feature-laden items, to this current wave of “social commerce” which includes local merchants’ deals propagated by friends’ recommendation-driven purchases. We’re now at a point where the average consumer is not only comfortable buying all sorts of things over the web – they’re happy to tell their friends about it too.
We at NextView Ventures believe that one of the next waves of online shopping is the accelerating trend of consumers purchasing high-consideration goods: “considered commerce.” In other words, people are now buying things online which take more than a few (dozen) minutes of reflection. And not surprisingly, the most salient reasons that these items are given more consideration are that the cost are higher, they often take up more space in a person’s life/house, and they’re experienced over a longer duration. In many cases, there were already cases of these types of products already being purchased online, but given a new wave of innovation and greater acceptance, I think we’re at an inflection point where an increasing number of high-ticket, larger, enduring goods will be bought on the web.
Selling high-consideration goods online is not just about publishing a web product catalog with features, specs, and reviews. It’s about helping foster consumers though a rich buying experience. Sometimes it’s a trial or another way to experience the good before its purchased. The innovation happening in this space now is centered around the way vendors present, inform, and consummate a sale. Whether it’s offering membership into a perceived exclusive club or utilizing a renting-to-own scheme, these new e-commerce services provide enhanced comfort around a purchase and ensure confidence about making the right decision without actually touching it in a physical store. In our NextView Ventures’ portfoiio, we’ve already invested along these theme in backing Mojo Motors (changing the model for used automobile purchases online) and TurningArt (empowering consumers in making meaningful artwork more accessible).
Continuing this thesis, yesterday it was announced that we at NextView made an investment in Cambridge-based CustomMade along with Google Ventures, First Round Capital, Founder Collective, Launch Capital, and angels. CustomMade founders Mike Salguero and Seth Rosen have already built a truly exceptional service – their web marketplace connects consumers interested in purchasing custom goods with thousands of custom makers who can specially create them. On CustomMade.com, you’ll find makers of everything from wood furniture craftsmen to metal jewelry artisans and everything in between. The startup’s offering has solved many of the pain-points which consumers face when purchasing not only a higher-priced luxury good, but a unique and custom one at that. The user experience provides for the enhanced discovery of skilled artists, the browsing of example items within a maker’s portfolio, the ability to receive numerous proposals from many talented craftspeople for their potential piece, and the trust in a payment process intermediated by the CustomMade as a fair and independent third-party. All of these features (among many others) by necessity empower consumers to not only secure comfort in purchasing a high-consideration item, but also enjoy an optimal experience with the whole process of a personalized item being created solely just for them.
Our decision-making process at NextView for new investments always boils down to weighing three primary factors – team, market, and product. We are delighted in this case because CustomMade already excels in all three dimensions and has the potential to grow into so much more. We’re very excited to be working with Mike and Seth to be a small part in helping them build a company that is riding a megatrend in the next wave of e-commerce.
When is the right time of the year to fundraise for a venture round? There’s a lot of conventional wisdom disguised as insight which entrepreneurs follow about optimizing the timing of their fundraising. It’s correct in principle, but in reality should be used as a guide rather than as a rule.
I hear all of the time that “you shouldn’t fundraise in the summer (especially August) because VCs are all on vacation.” Or that “you shouldn’t begin fundraising prior to the winter holidays because they interrupt the flow too much that the conversations will lose momentum.” Or even “you shouldn’t fundraise when ‘everyone else’ is fundraising” (like right after Labor Day or immediately after New Year’s) because there will be too many other companies coming in the pipeline spinning VC’s cycles. All of these statements have merit to truth in them – many VCs are distracted during end of the summer, the holidays can disrupt an ongoing dialog, and too many other inbounds will cause a VC to be distracted.
But I think that these fundraising rules of thumb are only truly useful all other things being equal – and in reality, all other things aren’t equal. Frequently there are more important factors which trump this conventional wisdom. All of the above are naturally occurring events which happen every year. And if an entrepreneur is VC fundraising during those seasons, things may perhaps proceed slower. Yet, if a company is going to successfully fundraise, it will happen regardless of timing, and it won’t happen if wasn’t going to anyway. At the end of the day, I believe it will just a bit tougher to push the process forward at an accelerated pace during these and other non-ideal seasons.
The situation which I think is worse is doing something unnatural – fundraising when the business itself isn’t ready for it because the timing is purely dictated by the calendar. This approach can happen when a startup is raising capital too early, waiting too late so that it puts itself into a potential cash crunch, or in between milestones which would warrant a better valuation… all just to avoid these seasonal fluctuations.
Surely, it makes sense to take the calendar into account for fundraising, but don’t let the calendar take you somewhere you don’t want to go. And if your company is ready to start VC fundraising just a few weeks here before Thanksgiving, then that’s when it’s the right time to start reaching out to schedule a few pitch meetings.
leehower: 
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