“I have a marketplace business idea”

This usually goes as follows:

There is a group of people that buy a specific good or service. There is another group of people that sell this specific good or service. My idea is to put them both on an online marketplace and make money off that.

For example:

  • Guitarists want to buy guitars. Other guitarists want to sell their guitars. I will create sellmyguitar.com and take 5% off each sale. Used guitar sales are a $100M a year business. I can make $5M a year. Siri, find me a Porsche dealership.
  • People want to buy computer games. Game creators want to sell their games. I will create sellmygame.com and take 5% off each sale. Computer games are a $10B a year business. I can make $500M a year. Siri, buy me 10 Lamborghinis.

If you’ve been around the Internets long enough, you remember an old Slashdot meme from when people were still honestly surprised about Silicon Valley business plans and hadn’t started making sitcom parodies about them. Here’s how the average marketplace idea sounds like in that format:

1. Setup online marketplace
2. ????
3. PROFIT!!!

If you are thinking about a marketplace business, the important question is not whether the marketplace you are thinking of can make money once it’s established. The important question is: How do you establish this marketplace to begin with?

Build it and they will come

I guess “build it and they will come” worked at some point, and could possibly still work for good enough ideas. Don’t count on that. If there is such intense demand for a specific marketplace, chances are it already exists in some shape or form.

How you picture your marketplace is going to be

I built it, but they didn’t come

That’s hardly surprising. A marketplace is a two-sided equation: you need people to sell, and you need people to buy. Therefore, here are the questions you need to answer:

  • How are you going to get sellers/providers?
  • How are you going to get buyers/consumers?

Hint: If the answer to both questions above is that they are going to come because you have the other half figured out, you haven’t figured out squat.

Once a market is established, network effects take over. Buyers shop in your marketplace because that’s where the good sellers are, and vice-versa. But that is not true when your marketplace looks like the beer aisle on Superbowl weekend (no beer, and no people).

How your marketplace tends to be

Here’s some good news: In most scenarios, markets are asymmetrical to begin with. This means either the sellers or the buyers are easy to find (let’s call this the easy side), and you only need to figure out how to get the other side (which we’ll call the difficult side). For example, if you want to create an online marketplace for cocaine, you will find getting the buyers to be the easy part, and that you need to focus on getting the sellers. On the other hand, if you want to create an online marketplace for custom watercolor paintings, you can probably find 10 art students that will gladly provide their services, but you need to figure out who is going to buy art from them.

To bootstrap a marketplace, you need to get the difficult side going.

The Uber approach to this problem (difficult side: drivers) was to become a player in the marketplace. They bought the cars, hired the drivers and provided the first drives.

The AirBnB approach to this problem (difficult side: hosts) was to provide free professional photography and listings to people willing to rent their places on AirBnB.

From personal experience

Here’s how this framework works out in two marketplaces that I have been personally involved with.

WebDivan

WebDivan was a marketplace for people to hire psychotherapists via video conference that two of my now cofounders worked on a few years ago. That marketplace never got substantial traction because a lot of effort was spent on the wrong side of the equation. The hard side is getting people to hire a therapist online. The easy side is getting pyschotherapists to offer their services on the platform. They usually have gaps in their schedule and don’t mind having their name featured on a web page.

WebDivan went full AirBnB on the therapists, visiting them at home and taking pictures of them to post on the website. Few people hired them. Takeaway: don’t confuse the sides.

Sherpals

Sherpals is a marketplace that connects shoppers with travelers that deliver items for them from abroad. The easy side is the buyers. We knew demand existed for this service because people are constantly asking for friends and family to bring stuff for them. The hard side is the people that deliver items to them. How do you get travelers to sign up?

In our case, two of our founders had extensive airline industry experience and had access to the most frequent of all travelers: flight attendants and airline pilots for both passenger and cargo airplanes. This meant whenever an order came through, we could count on finding a person for it fairly easily, even if they had not signed up for our service beforehand.

How to tackle the hard side

Figuring this question out comes down to figuring out the first phase of the business, so there are no easy recipes for this, but here’s a list of things that have worked or could work, including those mentioned above:

  • Provide the service yourself (aka “the Uber”)
    Is it feasible to become the first consumer or provider of your own marketplace?
  • Give something away (“the AirBnB”)
    Is there something that your consumers or providers want and you could provide effectively?
  • Leverage personal connections to recruit users (“the Sherpals”)
    Do you personally know a lot of your consumers or providers?
  • Buy users (“the PayPal”)
    Do you have enough cash that you can give free credit to your consumers or providers to attract them?
  • Advertise ( “the duh”)
    Can you advertise to your target audience of consumers or providers in a cost-effective way?

In short (TL;DR)

When analyzing an online marketplace idea, the number one concern is how to get the marketplace going when there are no users in it. Usually, this entails identifying which side of the marketplace is more scarce and focusing on supplying that.

Entrepreneur, investor and advisor.