Three Marketplaces Walk Into A Bar: The Tiny, The Massive And The Walking Dead
Pick your poison: venture- backed hyper growth or regional premium niche
There are only two ways to build a marketplace: a hyper-growth intensive, venture-backed marketplace which has to grow really fast and reach enormous volume and build an everlasting brand, or one in your region only focusing on a niche with premium pricing, with ideally no venture funding.
These marketplace business models could use some disrupting.
At-scale online consumer marketplaces have fascinated the world. And for good reason: these have been some of the most successful startups ever, and have had an enormous and direct impact in the life of people around the world. These include eBay, Airbnb, Uber, among others.
Who wouldn’t want to create the next one ?
I do, and have been trying. Then I did some analysis which convinced me that no matter how good the idea/team/market opportunity, a marketplace which is dependent primarily upon a % of the transaction as its business model is not a viable business unless it reaches scale.
The only way it works is if it expands rapidly and is able to generate a massive amount of transaction value, which would involve multiple rounds of funding at increasing valuations to fuel that growth.
It is a battle for building a brand as rapidly as possible and squeezing out competitors.
There is a fundamental need to explore and leverage alternative business models. Most marketplace brands we know of today which haven’t reached scale will not last beyond another 5 years if they are dependent only on the % of the transaction value — if the venture funding dries up.
Marketplaces also don’t tend to get acquired — either you go really, really big and become a brand which people love, or you go bust.
The Go Big Or Go Home Marketplace Scenario
Let’s look at a hypothetical example. Let’s say you started a marketplace for connecting pool instructors with people for at-home lessons.
You did some funky pre-launch activities, and at week 1, you are at 1000 members (pool instructors) signed up and ready to go.
Lets say you were also fully tuned in to the best growth advice available, and you are able to grow your instructor signups by 7%, week over week, which in itself is a fantastic growth rate, as I wrote about here:
Each hour costs $15, and your take is 10% of that for the value you provide.
How do the numbers look after Year 1 of phenomenal growth ? About $7 million in GMV, and $700k in revenue. Deduct from this $700k revenue the amount it costs you in salaries, office space, server, marketing and other costs — and there is no way you get to this level without being in the red.
As a viable business in itself — this doesn’t make sense. Who is funding your operations ?
You can fine tune the various variables: amount charged per transaction, your take, frequency; and attempt for built-in network effects and virality — still I am not convinced this sort of a business can be built at-scale without venture capital or a highly innovative business model.
You can’t bootstrap your way to glory here. You can’t rely on the % take alone.
Pick A Niche + Geographic Area, Deliver Value And Price It High
Alternatively, it may be feasible to pick a niche — geography and other factors based, price your product at the higher-end of the range and provide an exceptional value.
HopSkipDrive in LA and AquaMobile are on to something interesting.
Marketplaces are fabulous ventures but there are only two viable choices:
A hyper-growth intensive, venture-backed marketplace which has to grow really fast and reach enormous volume and build an everlasting brand
or
One in your region only focusing on a niche with premium pricing, with no venture $$. There are a lot of good ideas you can take from here from the various venture backed on-demand services/marketplaces which shut down in recent years, and build a viable lifestyle business.
