Yesterday, at a pitch to a Boston angel group, the subject of whether our marketplace was a “lifestyle” business (translation: non-investable) was brought up. I invited it, by not projecting financials, probably because I was too lazy/distracted/preoccupied with running our business, but also because I take as self-evident this:
If you invest—early—in a successful online marketplace, you’re going to be very, very happy with the outcome.
Our company launched a residential snow management marketplace in the Boston area (our beachhead). We link property owners/managers with snow contractors, aka plowguys. It’s a big, unsophisticated segment, representing a big customer acquisition + route optimization problem for residential contractors, and we have the world’s top domain expert on our team.
It can’t be a lifestyle business.
Online marketplaces have a binary outcome. They either:
1) crash & burn, because they fail to solve a problem in a big enough market (or fail to achieve two-sided liquidity before founders get zapped). Or,
2) rocket to the moon.
There’s no in between.
But hold on, can’t you have a marketplace which “puts food on the table?” One which addresses a super-tight niche, or is regional?
No.
I’m not saying you can’t have a successful lifestyle startup, only, by the time it’s successful, yours won’t be a marketplace (i.e. a venue where you bring buyers and sellers together).
If your market is small, and yet you’re profitable, you’ve probably changed from a marketplace model. The reason? Transactions are going to take too long or be too infrequent. (An exception may be high-priced or rare goods, but even then, you’re likely better off acting as a trader/broker.)
If your goal is regional success (e.g. if we aim only to be Kings of Snow in Boston), you’re cooked—stick a fawk in ya!— either because you won’t be big enough to sustain yourself, or you’ll achieve enough success that a competitor will replicate in another region … then come your way.
The marketplace business DNA is designed for disruptive, rapid, hockey-stick growth. When buyer-seller transactions happen in sufficient quantity, quickly, under a model that’s repeatable and scalable, assuming you’re properly capitalized, buckle up!
Clearly, marketplaces are very difficult to pull off—more probably than most other startups. They start with a chicken-egg problem, and if yours requires a physical-world interaction (e.g. car sharing), the problem propagates everywhere you want to do business, that is, each location will have its own chicken-egg (which suggests perfecting your model in only one).
The silver lining is, if successful, the yield will be very high for an early marketplace stakeholder (and you don’t need a slide to tell others that, though you shouldn’t be lazy/distracted/preoccupied either, so make one). How high? Who knows—10x wouldn’t surprise—but the point is, higher than most winning startups. The prudent startup investor spreads his bets. Assuming it’s in ones wheelhouse, a marketplace bet deemed as likely to succeed as another startup—undeniably low still—has a higher expected value.
Online marketplaces can’t be small, at least not for long. They can’t be lifestyle businesses.
