Valleys of despair: willing a marketplace from zero to one (million net revenue)

In the past six years, I’ve been fortunate enough to work on two marketplace businesses that scaled from $0 to $1 million net revenue run rate in under a year and a half.

For each, it was far from smooth sailing to get there. Both companies went through at least a consecutive quarter with negative or nominal growth, a valley of despair.

I’d like to normalize some of the challenges that early-stage marketplace teams face as they push to reach repeatable growth. Even those companies that end up making it typically go through extended periods of anguish. It’s important to understand that nascent marketplaces are fragile and that it’s okay if things aren’t always up and to the right.

But first things first: why is the goalpost $1M net revenue run rate in under 18 months? Two basic factors:

• $1M net revenue run rate is generally the hurdle that Series A investors are looking for
• Most seed rounds are designed to last 18–24 months

With that in mind, below are the growth curves of two marketplace businesses I’ve co-founded:

If you zoom way out, these businesses do have the expected hockey stick shape. Looking more closely, however, they nicely capture two very different valleys of despair.

Pre-Liquidity

For the blue line, InstaEDU, an online tutoring marketplace founded in 2012 & acquired by Chegg in 2014, the period between months 1 and 5 represents a pre-liquidity valley of despair. In this stage, supply receives an underwhelming experience due to lack of qualified demand on the platform, and vice versa. The pre-liquidity period can be a death spiral, as new users on both sides are as quick to churn as they are to sign up.

For a marketplace where significant technology investment is made in advance of onboarding supply & demand, it is a gut-wrenching phenomenon. We spent 6 months building the v1.0 product for InstaEDU before public release. In the first 5 months thereafter, we generated a total of $3,200 in net revenue.

The problem, of course, is that only a small minority of marketplaces have access to a kick-start powerful enough to launch with meaningful engagement on both sides. If a simple TechCrunch post or ProductHunt feature isn’t enough (99.9% of the time it won’t be), how does a company get out of this valley as soon as possible? I’ve seen two paradigms work:

1. Stabilize supply and focus exclusively on building demand

As a derivation of ‘if you build it, they will come,’ I subscribe to the less catchy mantra, ‘where there is money being spent, sellers will follow.’ Exactly how to do this will depend on the nature of the business. Two examples:

GOAT: For the sneaker marketplace to get off the ground, at launch, the founding team themselves provided 100% of the supply, going so far as to stage their office to look like many different sellers’ homes. This enabled them to build a consistent buyer experience and grow demand before layering in real suppliers.

InstaEDU: Instead of attempting to get tutors & students online at the same time, in the early days, when we onboarded a tutor (supply), we had them connect their Facebook chat so that, when we did acquire students down the line, we could easily reach back out to get them on the platform in near real-time. This allowed our team to focus all of our energy on solving the student-side problem, knowing we could loop the tutors back in later.

2. Buy your way out of it

Yes, investing heavily in dual-sided acquisition while your unit economics are upside down can feel wasteful. It’s more wasteful, however, to tinker around with product & engineering investments when you don’t have the user base required to know whether or not something is working.

In hindsight, we would have achieved our goals significantly sooner at InstaEDU if we had spent more liberally on early acquisition to beat the pre-liquidity valley. It took our first external board member, Mamoon Hamid, spelling out for us what percent of revenue and gross margin other successful companies at our stage were spending on sales & marketing for us to get comfortable with the idea of loosening the purse strings.

This tactic may necessitate raising more upfront capital than a SaaS or direct-to-consumer counterpart. On the plus side, marketplace winners provide outsized returns and deep pools of capital are consistently available to enable rapid scaling when the business clicks (obvious example, today’s example).

Turbulence

For WorkStep, an industrial labor marketplace founded last year, months 8 through 11 on the red line represent a different kind of valley of despair: turbulence. This period is encountered after it feels like product-market-fit is reached due to rapidly increasing transaction volume, but before the systems are in place to monitor leading indicators, adjust business drivers, and effectively scale.

In this stage, it’s possible that the experience of supply or demand is impacted, but the more serious impact is on team morale and confidence.

Compared to the pre-liquidity valley, turbulence causes a different kind of pain. From personal experience, it feels more like you are failing, as opposed to that the business is failing. Customers have shown they want to buy, sellers have shown they want to sell, yet the marketplace as a whole is struggling to make it all come together. Two suggestions when in the midst of turbulence:

1. Focus on one (and only one) growth constraint

During a period of turbulence, it’s usually the case that all core KPI’s are shaky or down. This direct relationship between core business drivers is what makes an early-stage marketplace so fragile, and a late-stage marketplace so powerful. That said, beware of trying to fight a war on multiple fronts with an early-stage team. Pick one number and orient the entire team on blowing that out of the water.

At WorkStep, when the turbulence began, we divided the already small team’s focus across the full array of problems and opportunities. This led to less measurable progress and decreasing alignment, which can be a dangerous cycle.

To right the ship, we aimed 100% of the team’s attention on one KPI: making the end-to-end journey from lead to revenue faster by an order of magnitude. The number you pick isn’t nearly as important as making a single selection within the control of the team. This instills confidence and focus at a time when both are desperately needed.

2. Reign in acquisition; focus on product and experience for current users

It’s tempting to try to spend your way out of trouble, but during turbulence, it’s the exact wrong time to do so. The fire that is burning is not one you want to pour gas on.

During this period, the marketplace has enough accumulated data and active usage that the team has the measurement levers available to iterate and optimize.

When I asked Joe Gebbia, co-founder of Airbnb, what his team focused on during the early-stage period, he replied (paraphrasing from a conversation in 2013): We asked ourselves: what would make our current users fall even more in love with us?

By centering on this question again and again, a marketplace team is able to get to the root of what will drive a consistently high-quality experience on both sides. With this, even on flat acquisition, the business will begin growing again, which signals it may be time to start adding fuel to the fire.

Final Thoughts

Most marketplaces don’t make it. Even those that do typically go through quarters when it looks like they won’t.

When core metrics flatten or decay, the best course of action is to first step back to categorize the type of challenge being faced, and then align the team on a single action plan to bulldoze the constraint.

The good news is that it gets easier. In the case of InstaEDU, it took 18 months to get to $1M, and only 2 more months to get to $2M. While the future is unknown, as WorkStep matures, our growth curve is also accelerating.

If you’re able to make it the other side of these valleys of despair, success compounds quickly as network effects take hold.