Parking One Side of a Marketplace

Building a marketplace is hard. It’s difficult because you’ve got two different customers: buyers and sellers who are typically two different people (exceptions include classified ads and dating apps).  Two different customers implies:

  • Two different value propositions
  • Two different routes to market
  • Two different products
  • Two different support structures
  • Two different EVERYTHING!

Marketplaces are two businesses running simultaneously and both have to succeed for the overall operation to prosper.  This results in marketplace failure rates that are much worse than a normal startup, however they have the benefit of being able to scale wildly if they are successful.

I’ve dealt with a lot of marketplaces over the last year. Everything from a private tutoring market in the Middle East, rental accommodation in Ireland to dog boarding in Europe. After ten years in WhatClinic, people think I’m some sort of expert. I don’t have any secret sauce, however I do know a lot of the pitfalls.

The first pitfall is trying to build both sides of the marketplace before you have sufficient resources / team. Even in a successful marketplace with teams supporting both sides of the business, it’s hard for the CEO to wear two hats; it’s nearly impossible when resources are very limited. Focus your resources on one side of the market first.

Recognise who your primary customer is. In general, this is the side that has fewer problems finding the other party . This is the side of the market that you have to crack. It’s where the real risk is in the business – if you can crack this side of the market, the other side is simple in comparison.  

So for WhatClinic the primary customer was the consumer not the clinic, for Google Ad Network it’s the advertiser not the partner website, for Amazon it’s the consumer not the seller. Uber, HostelWord, Hotels.com & Opentable all built supply first, parking the consumer side until they were ready [Note some edits made here from original posting thanks to comments from Ronan Percival)

  • If Amazon has has loads of consumers it is safe to assume they’ll be able to sign up vendors
  • If Google Ad network has loads of advertisers then partner websites will flock to them.
  • Uber reckoned that if they sort out supply that demand would exist

But it’s a chicken/egg (horse/cart) problem. It’s difficult to build one side without the other because no value is being delivered. What’s the answer? Try and park away the second side of the marketplace by directly addressing the primary side’s value proposition without building a market on the other side. 

Can you park away one side of the market?

  1. Offer the service directly yourself. So if you are an online babysitting marketplace you can directly hire a few babysitters in your first city. Once you have proven the value proposition for the parent and have more demand than supply, you can switch your attention to building the other side of the market, targeting the sitters.  Amazon was an online store before it became a marketplace.
  2. Seed the market. Get one prestigious name on the secondary market that will drive large volumes from the primary market. For example if you are a jobs board then a job for Ferrari or Dolce & Gabbana can drive tens of thousands of CVs.
  3. Build the supply without the relationships. For example if you are a real estate marketplace you can simply list properties without developing the paying relationships with the real estate agents. Once you have the primary audience you can start to build the relationships
  4. Build the primary audience for a directly related informational need. If you are an investment real estate marketplace you could build your primary customer audience by publishing research information before building the market.

My final thought is try and recognise when the marketplace exists because of a customer need for a market or because of internal business requirements. Uber’s riders & drivers don’t want a market (the rider just want a ride and the driver a fare) but Uber does. They don’t want the hassle and legal liability with directly employing drivers. However the consumer clearly wants a marketplace for homes to buy as they want to compare lots of options.  Having clarity on exactly who the marketplace serves should give you insight on how to get it started.

Investor & Founder Alignment is a Myth – Maintaining the Fantasy is Important to Both

It’s a common refrain among professional investors that founder and investor interests need to be aligned. The theory is sound – as long as the investor’s interests are also in the founder’s interests then the investor is protected by the self-interest of the founder. The problem is that this theory ignores reality. An investor’s success is only partly dependant on the success of the company whereas the founder’s success is solely dependant on it.

An investor’s success depends on the blended return of a number of investments. While they are generally over exposed to a market segment, they have their risk diversified within that segment. The founder’s return, on the other hand, can be thought of as binary. They either lose or they win, and there isn’t much of a middle ground.

I’ve seen this innate misalignment between investor and founder cause problems several times. Generally it only happens at the extremes – when the company is going very well or very badly. These are the moments where alignment matters most, as misalignment can come at a huge cost to the founder or investor.

Where the company is doing very well it often makes sense for an investor to increase the company’s chances of failure but also increase the potential returns. For an investor managing a portfolio this is a sensible action. As long as they increase the potential return by more than the chance of failure then the value of their portfolio improves. For the founder, with a binary outcome, this makes little sense – they should be more focused on minimising the chance of failure.

Example: Company ABC is worth €20M and the investor and founder own 50% each. The founder has no other notable assets whereas the investor has 30 identical investments (obviously a very contrived example). It is in the investor’s interest to try and 10X the company’s value even if there is an 80% chance of failure. Ideally the investor would do the same with every company in their portfolio.  However, for the founders, introducing an 80% risk of failure into their only asset of value is clearly a foolish thing to do.

This is a real problem. Investors have blocked the sale of companies that would have made their founders very happy because they thought a better sale was possible, and founders have pushed through sales that aren’t in investors’ best interests. Investors have encouraged and promoted courses of action to ‘pour fuel on the fire’ of promising companies even when doing so increased the chances of bankruptcy.  

When companies are doing extremely poorly and the only way forward is for the founder to continue spend more of their time in the venture, it’s in the investor’s interest for the founder to continue. The investor doesn’t suffer the cost of the founder’s ongoing investment, but gets to keep their investment ‘live’. Meanwhile the founder suffers the full brunt of the cost of continuing to work at the enterprise. From the founder’s perspective, a dispassionate analysis frequently suggests that shuttering the company would be the best course of action. Once again, different investment exposure results in misaligned interests.

It’s nice to think we stand together and together we fall/succeed but both investors and founders should be working on a different set of calculations and assumptions and recognising that they have different interests.  

Even though investor and founder interests aren’t aligned, it is still in everyone’s interest to pretend that they are. Founders want potential investors to think their interests are aligned so that the investor will put money in the company. Investors want founders to think they’re aligned so they can convince founders to take a course of action that is not in the founder interest.  Normally everyone maintains this fantasy for as long as possible but when things go very well or when the shit hits the fan, make sure you know what your interests are and don’t rely on the other party.   

Your Company isn’t ‘Alive’ and it can’t ‘Die’ – But You Can

I recently advised a young entrepreneur to shut down his two year old business. This was despite being able to raise enough money to ‘survive’.  His company was generating revenue but was in a very small sector and the available financing wasn’t going to be enough to pivot his way out of it. It was only going to lead the entrepreneur back to the same situation in 6 – 9 months, except this time he’d be that much older.  It was the very essence of surviving for survival’s sake.

What struck me the most about our conversation was our use of language and how it didn’t serve us well. We talked about the company as if it were a living, breathing entity. We used words like ‘alive’, ‘survive’, ‘keep alive’, ‘time to live’ and ‘die’. This use of emotional language automatically put us in place where talking dispassionately about the business was difficult and if ever there was a time where dispassionate analysis was needed it was then.

I particularly remember the entrepreneur’s response to me telling him that the small amount of money he could raise wouldn’t get him anywhere except back to the same place he was. “Well it’s better than being dead” was his response.  

This anthropomorphizing of his company was automatically leading him to the wrong conclusion and if we continued to use language that suggested his company was ‘alive’ it was going to be close to impossible for him to accept that his company should be shut down. As humans, we find the ‘death’ of something to be tragic. However shutting a company that’s not going anywhere isn’t tragic – the founder continuing to expend more of his limited human capacity on it is.   

A business isn’t alive – it’s not even a natural thing, like rock or stone. It’s an artificial construct and it can’t be alive, dead, surviving or any of the other things that are the primacy of living things.  The only thing that’s alive about a company is the entrepreneur and the people working there. Use of language that suggests otherwise doesn’t serve founders.

It may serve investors but more on that later.