Good to know when starting a marketplace startup

Last week I spoke with several startup founders. A few of them are working on marketplace startups. Having worked on marketplace startups before, I shared with them some lessons we learned from that experience.

Marketplace startups

First, what makes a startup a marketplace startup?

A marketplace startup attempts to connect two separate groups and help them complete a valuable transaction.

Airbnb connects travellers with people who have a spare room or property. Uber connects people looking for transportation with drivers. Deliveroo connects hungry stomachs with restaurant owners.

A marketplace attempts to become the middleman between the two groups(supply & demand) and take a part of that value(fee, commission) when doing so.

What makes marketplace startups hard?

Marketplace startups have to potential to be huge. If you get them to work. The tricky thing is to jumpstart a marketplace and match demand with supply before you get the flywheel going.

When you first start, you will have neither demand nor supply. Your first job will be to convince people to join your marketplace and provide demand or supply. This is, however, very difficult to achieve, as you need one side to convince the other.

Restaurant owners won’t join Deliveroo if there aren’t any people ordering food. People won’t use Deliveroo when there are no restaurants to order from in their neighbourhood.

It’s this “chicken-or-egg problem” that poses the most significant challenge. I highly recommend the blog series from Lenny Rachitsky on this topic.

How to start a marketplace startup?

My advice is always to focus on your supply and demand problems. Figure out a way to jumpstart either supply or demand, so you can more easily attract the other. It would be best if you showed you can do this, which will make other challenges easier.

Technical risk is not the most significant risk when building a marketplace startup. There are sufficient examples that prove that such a platform can be created. Off-course, your execution matters, but there are no technical leaps to be taken.

Don’t start building your platform before you figure out a way to solve the “chicken-or-egg problem”.

Further reading