Our typical investment process involves tackling the previous two bodies of work — mapping the experience and charting a course — so we understand the marketplace and its goals for the seed phase. With those pieces done, the round closed, and money in the bank, it’s now time to get building!
But the chicken and egg problem can make the choice of where to start a challenge. There are some good pieces out there about this (see for example, here, here, and here); our view is that people will only shift their behavior to try your platform if it is more convenient and cheaper than the status quo. So let’s examine those two concepts as levers for jumpstarting growth, and then the role of balancing the marketplace as a strategy for carrying growth forward.
Convenience & friction
One of our favorite marketplace stories comes from the launch of Urbansitter. It started at a time when mobile payments were still a pain, which they used as a wedge into the market. Imagine how annoying it used to be to have to stop at an ATM to take out the cash to pay a babysitter before coming home. Simply offering a way to pay with a credit card was enough of an improvement in convenience to compel people to give it a shot. They then used that early adoption to begin growing their communities of parents and sitters.
Uber’s launch followed a similar storyline of improving convenience. Back then, the experience of booking a taxi in San Francisco was awful. You would call all four taxi companies in hopes one might show up. You had no way of knowing when, or even if, they would arrive. The routes drivers chose often felt like a scam. And despite having credit card machines, drivers usually either insisted they didn’t work or would try to shame you into using cash. In a simple mobile app, Uber offered solutions to all of these pain points; unsurprisingly, demand growth exploded as a result.
In economic terms, what we’re describing is friction. Friction in the status quo is your wedge into the market. An added benefit of constructing the experience map is it serves as a blueprint for where to find the wedge. Seek out the strongest point of friction for supply or demand and begin building from there.
Pricing & subsidies
An alternative approach to cracking the chicken and egg problem is to find a way of reducing prices. If you can make an experience cheaper than the alternatives, you have a wedge.
Here, Airbnb is a good case study. Too few stories of its founding consider the role of the 2008 recession. Behind the airbeds and hipsters and Obama O’s was a severe recession affecting nearly everyone on the planet. Travelers were suddenly much more price conscious, so they became open to the idea of booking a room in someone else’s home if they could do so at a fraction of the cost of a hotel. On the host side, people were desperate to pay their bills and hold onto their mortgages. The benefits of a new income stream outweighed the fears of a stranger staying in their home.
In Airbnb’s case, the economics worked out on both sides of the market, translating to intense early adoption. But this is rarely possible. More often, there’s an opportunity to compete on one side of the market, which can be used as leverage for attracting the other side once you’ve generated some traction. In the meantime, however, subsidies can serve as a growth shortcut. To this day, Uber and Lyft subsidize prices for riders in hopes of winning market share, while squeezing drivers to shore-up revenue. Airbnb’s fee structure was set with the opposite subsidy structure — fees for hosts were significantly lower than those for guests because it was harder to convince hosts to sign up.
Using revenue from one side of the market to subsidize adoption by the other is therefore a useful short-term strategy, but in the long run can be dangerous. If demand is relatively elastic, users may rebel against future price increases. This is a slippery slope toward the business developing a permanent addiction to venture funding. Our view is that subsidies are a powerful tool that can be used judiciously, as long as there’s a clear plan for recovering unit economics or building value in the not too distant future.
Build & balance
With your wedge into the market identified, it should be clear what to solve for in v1 of your product. This is one of the few moments in a marketplace’s existence where the path is as straightforward as any other tech company. There are many great resources for how to get people to love you on one side of the market — see for example, Rahul Vohra’s PMF framework.
But a one-sided marketplace is a service. To become a true two-sided marketplace, you have to walk back through the process of identifying a source of friction, developing a hypothesis for a cheaper/more convenient alternative, and building a service that attracts an early cohort of adopters on the other side of the market.
While the software of the platform can attract early adopters, the true product of the marketplace is the people. We love this about marketplaces, but it’s also what makes them so hard to get going. These two services you’ve constructed may resolve the needs of supply and demand effectively, but the marketplace only works if those needs are symmetrical. In other words, the true product of the supply side of the marketplace is demand, and vice versa.
This is both a challenge and an opportunity. At Airbnb I built the company’s first growth model and it was dead simple. The philosophy behind it was to let supply and demand tell us what they want more of, and then go find it. If a guest searched for a trip in Paris and didn’t wind up booking, we had a supply growth opportunity in Paris. If a host’s place in Tokyo went a month without a booking, we had an opportunity to grow demand. Through this lens, network effects naturally took root because the community guided our growth, market by market. By winning Paris, we became more likely to win smaller French cities like Lyon. From Lyon, we could move into even smaller towns on the French riviera. But the point is that no one ever said they loved Airbnb because of its website; they loved it because of the people they encountered on the other side of the transaction.
In some future post, we’ll dig into the factors that take product market fit to the next level. As a marketplace grows, technology and data become ever stronger levers. With enough breadth of supply and demand, matching and personalization become the key to winning. And while we have both an interest and deep experience in solving those problems, our swim lane remains the seed stage. We love the challenge of bootstrapping new marketplace platforms and the process of iteration toward product market fit. We hope the frameworks we’ve shared in these posts are as useful for you as we’ve found them to be in our portfolio.