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Why do marketplaces make great businesses?

Illustration of a laptop with charts popping out of it and a man standing on the keyboard.

Why do marketplaces make great businesses?

Marketplaces are big business! In fact, many are now household names - just look at the likes of Airbnb, Uber and Etsy. They seem to be everywhere, solving problems for people around the world.  

Marketplaces are also catching the eye of investors. In recent years we’ve seen mega-rounds of investment and sky high valuations. One of the highest we saw in 2020 was Ke.com, a Chinese platform for buying and selling properties. They raised a whopping $2.4 billion Series D round giving the company a valuation of about $14 billion!*

It’s looking equally good for the bootstrapped and indie-funded marketplaces too. The rise of no-code and low-code tools, means it’s never been easier to set up and build an online business.

However, for a first time founder, the prospect of building a fully-functioning marketplace can feel quite daunting - you’re building a product for two different audiences (buyers and sellers) as well as facilitating sales between them so there’s a lot more complexity than building a simple e-commerce website. But don’t let that discourage you. There are big opportunities in marketplaces and I’m here to explain why I think they make a great business. 


Reason 1: Marketplaces can be applied to almost any industry 

From hairdressing to hotels, from events to engineering jobs, from racehorses to robots, there seems to be a marketplace in every industry. Just when I think everything has been covered, I see another marketplace pop-up in a super niche industry, solving a very specific problem for a very specific group of people. 

The ones we often hear of are the big ones. They’ve usually been around for a few years and have established themselves as market leaders. By this stage their offering is broad, with lots of choice for all different kinds of people . For example, Airbnb offers all kinds of accommodation, and StockX offers authentic goods. But they didn’t all start off that way. 

My big tip here for any new marketplace founder is to go niche. Find your vertical and stick to it (for a few years at least). The more focused you are on one specific location (e.g. London) and category (e.g. Wedding photographers), the easier it will be for you to get started. Applying these constraints will focus your efforts on building concentrated supply. Otherwise, you risk having few suppliers scattered across many cities and categories. This makes for a poor user experience. The beauty of marketplaces is providing customers with options to compare and choose from. No customer wants to land on your site and only find one option (if they’re lucky) in their chosen city. 

A lot of founders worry that by constraining their marketplace, they will limit their growth and opportunities. But don’t worry, you can always scale. And if you don’t believe me, take a look at the more established marketplaces. When Uber started out, they focussed solely on hailing black cabs in San Francisco. It took them two years to expand to their next city, Chicago. 

If there’s one point to takeaway here it’s prove the concept in one location and/or category. Get traction and then expand by one location or category at a time. If you can’t make it work in one market, chances are you won’t make it work in 10.


Reason 2: Easy to scale

There’s no way around it, proving the concept in your first market will take you a while. But once you’ve proved the model works, you can take your learnings and apply them to the next location/category. You’ll get quicker and quicker each time you do it, and soon your reputation will precede you due to pent-up demand from buyers and sellers. 

By building a blueprint for rolling out to new cities/locations, you can accelerate the speed at which you expand. Take Homejoy for example, a marketplace for finding house cleaners. Through their learnings, they created an automated process that they were able to rinse and repeat for each city. At their quickest, they expanded to 30 cities, across 2 continents in 6 months.** Impressive stuff! However, two years later they closed their doors when they ran out of cash, so don't try to expand too quickly.

If you’re setting out on your own marketplace journey, be sure to learn everything you can from your first market and apply it to your next. I promise, you’ll get quicker each time. However, keep growth steady and don't expand beyond your means.


Reason 3: Cheap to get started

The third and most exciting reason I love marketplaces is because they don’t require you to purchase any inventory or stock. Not only does this mean that you don’t need as much up-front capital, but you also don’t have to store it, maintain it, ship it or deal with dodgy manufacturers. 

Let’s take Airbnb for example. Purchasing a hotel, employing staff, stocking mini-bars etc. would have required a huge cash injection that the founders simply didn’t have at the time. Luckily, they didn’t need to. Instead, they leveraged assets that already existed (spare rooms in people’s homes) and simply advertised them to people going to an industrial design conference. 

In fact, Sharetribe, a marketplace builder, estimates that your first year costs could be as low as $2,000 and 20 hours of work per week***. This includes the cost of a domain name, a logo, some development work. 

The low costs to entry mean that many marketplace founders are able to start their business as a side-hustle and take it full-time once they’ve built some traction. In fact, that’s exactly what I did myself. So what are you waiting for? 


Reason 4: You can get up and running quickly 

The complexity of building a marketplace has become so much easier with the rise of low-code and no-code marketplace builders such as Sharetribe, Bubble and Arcadier. You no longer have to spend a year defining and building a bespoke solution - simply lift one off the shelf and apply a few customisations. Their simple functionality means you can get up and running within a weekend!! Trust me, I did, and I know plenty of others who have done the same.

The best advice I can share here is to launch fast and learn. Keep it simple. Don’t add a thousand features right at the beginning. Just launch with the absolute bare minimum features that you need in order for it to function. Your users will very quickly tell you what’s working for them and what isn’t. So don’t spend time and money building features that your users won’t value. Listen to them, find out what their biggest problems are and solve them. You might discover a whole different feature set that you would never have considered yourself.

So get cracking! I can’t wait for you to find out for yourself why marketplaces make such great businesses!


References:

*https://news.crunchbase.com/news/largest-funding-rounds-of-2020/

**https://review.firstround.com/This-Startup-Launched-in-30-Cities-in-6-Months-Heres-How-They-Did-It 

***https://www.sharetribe.com/academy/how-much-does-it-cost-to-start-a-marketplace-business

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