How to Build and Grow Marketplaces

Building marketplaces is hard. Amazon, eBay, Gilt, Airbnb are all successful marketplaces but their success is far from trivial, as many startups will tell you. Last week i spoke to a startup founder struggling to scale their marketplace. Some of my suggestions to her can be applied and are useful to any marketplace startup so here they are:

 
  • Think global. Start local – Early traction is easier when you target a specific geography (city, neighborhood) and expand from there. People in a given territory many times share similar demographic and interests. They have a relationship and a network that can help you scale. If one has something he thinks is worth sharing, many of the individuals he is likely to share that with are likely to be his neighbors, his co-workers, his friends and other parents from his son’s school, most of which are likely to be in close proximity. These are the people we frequently interact with. I personally find that during many of the conversations i have with my neighbors and friends i share services that i know they might find interesting or might even address a specific need they just mentioned. Sometimes it gives me topics to talk about as we share an elevator.

     

  • Focus on communities – In a similar manner, communities gather individuals with similar interests. They share the same passion and, when relevant, will share information with one another. They are also easier to target as they present similar behavior. If I’m targeting foodies, sport fans, Jazz lovers, extreme fans  or graffiti artists, i’m likely to find them consuming content through the same channels.

     

    Facebook is a great example: Facebook’s initial traction was at Harvard, just by the virtue of Mark Zuckerberg posting the site on Harvard discussion boards he had access to. Remember the scene where a bunch of Harvard students crowd around one screen, tagging female students as hot or not ? That’s the power of local communities. Those students liked it so much they shared it with their other classmates. How did Facebook then scaled ? by targeting other colleagues, initially in the East Coast and then Stanford and the West Coast. Why ? Students share the same interests and consume content in a similar way through the same channels. Scaling inside campuses was, again, based on local proximity. 

 
  • Pick one application – Amazon started with books. Stubhub started with sports events. Focus on one application, optimize the experience and learn what are the key metric to replicate the service to other applications. Focus helps target new users as well as for users to easily grasp what you are doing. When you’re forced to generalize, you have to compromise on user experience. Think for example about the steps currently required to register a car for sale or an apartment for rent on Craigslist. Wouldn’t the experience be much smoother if Craigslist was just focused one or the other ? It would definitely be easier for Craigslist if they were to start today.

     

    Exec, a company funded by SV Angels, was a marketplace for errants. Homejoy is a home cleaning marketplace. Six months ago Exec announced it was going out of business. Homejoy, around that time, announced closing a $38M funding round. The difference: Homejoy is focused on one application, while Exec was trying to cater to a broader need. Think how many use cases can be categorized as errants from cleaning one’s house to grocery shopping delivery and dog-walking. The economics and characteristics of each varies.

 
  • Transforming a two sided marketplace into one – The main reason marketplaces are hard is it’s a two sided marketplace. Many times startups have to invest in acquiring and satisfying both the supply side as well as the demand side.Finding a formula to grow one side of the marketplace can offer great returns. Airbnb and Flightcar are great examples: Most of the people renting a property on Airbnb are members who are likely to sublet their home by the virtue that they are away during that time. Flightcar is a marketplace that allows a person flying away to lease his car to a person landing in that same airport. The person flying away might need a car at his destination location and is likely to use Flightcar, this time on the demand side. Airbnb and Flightcar created businesses that optimize life-time value (LTV) and increases frequency of usage. 
 
So again, marketplaces are hard to scale but here are some ways to think about initial growth. 
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About shanishoham

After 14 years of General Management and incubating/scaling new businesses & organizations for enterprises (established a $55M mobile business and a $100M/400 employees global division), I became an investor Today I’m a board member/mentor with 5 incubators & micro-VCs and involved with many other private & public incubators around the world. I also founded a VC firm named 2020 and I'm a member with a number of angel groups so i get to see & work with many startups, innovation centers and other parties across the ecosystem. I’m an alumnus of the Stanford Graduate School of business - Sloan Master in Management program, a 10 months intensive program for 57 carefully selected experienced Executives and leaders from all around the world.

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