GenuineVC David Beisel's Perspective on Digital Change

January 23, 2012

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:

  1. 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.
  2. Attract would-be buyers with research/learning about purchasingsuppliers 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.
  3. 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.
  4. 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).
  5. 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.
  6. 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.

  • http://jonathanmarcus.tumblr.com jonathanmarcus

    Excellent post David!

  • http://supplydemanded.com David Haber

    Really like this post – I love thinking about marketplaces.

    I was curious if you had any thoughts regarding the characteristics of historically successful vs. unsuccessful marketplaces.  In practical terms, how can I, as an entrepreneur gauge whether or not a marketplace model will be successful in a given space?

  • http://twitter.com/L1AD LIAD

    Great post. Tons of insight thank you.
    We run Shoply.com a social shopping marketplace which brings together small brands and local businesses with people looking to support and nurture them

    Running a marketplace is incredibly hard work but super rewarding. The joy of helping bring about new relationships and value to both sides of a transaction is incredibly fulfilling.

  • http://twitter.com/shobhitchugh shobhitchugh

    Love the post. Wrote a blog post on Marketplaces recently at http://shobhitchugh.blogspot.com/2012/01/on-internet-marketplaces.html

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