How to build a successful marketplace based startup? And why would one want to focus on building such a startup in the first place? What are the most promising segments in the space today?
To tackle these questions, I draw on:
- A recent conversation with the world’s top seed investor and expert in marketplaces, Fabrice Grinda
- A recent conversation with Romain Serman, Head of BPI in the US
- A reading from David S. Evan and Richard Schmalensee, Matchmakers, the New Economics of Multisided Platforms
A/ The first step in building a successful marketplace startup is finding the right market segment to disrupt
During our conversation with Fabrice, we looked at how to uncover market segment mature for disruption. Fabrice considers several criteria:
Seek poor market segments offering a subpar experience
First, entrepreneurs should look for woeful user experiences in the soon-to-be disrupted market segment. Fabrice invested in Alibaba. Jack Ma’s company started out in the late 1990s in a situation where China was still a developing country with poor communication, low Internet penetration, and a difficulty for B2B suppliers to find clients outside their neighborhood. And trust was also an issue as working with people one has never met is not easy. To tackle this matter, the founder of Alibaba, Jack Ma, took advantage of China’s growing Internet capabilities and built a marketplace to connect businesses with one another. He introduced social scoring to assess partner trust. Finally, he added multiple communication innovations such as biz mail, chat rooms to facilitate interactions between would-be business partners, as David S. Evan and Richard Schmalensee mention in their book Matchmakers, the New Economics of Multisided Platforms.
Today, old marketplaces such as Craigslist, Le Bon Coin in France and Upwork provide opportunities for disruptions. The problem is not so much one of trust or communication (as it was for Ali Baba) but rather an abundance of offerings making client selection harder. Fabrice mentioned the case of Upwork where corporate customers could be looking for engineer specializing in Python. He would probably receive over 200 applications and would have to sift through each one of them to find the one that meets his need. No one has enough time for such a selection. So, Fabrice is investing in companies that offer curated partners with a shorter supplier list. Clients see no more than two or three professionals with superior matchmaking capabilities. Indeed, Fabrice added that a startup like COMET is not only testing their suppliers technical abilities also providing psychometric assessments to evaluate whether one individual would work well with a customer.
Look for clients willing to pay
Romain Serman, Head of BPI in the US, believes that entrepreneurs and marketplaces need to target clients that:
- 1/ face permanent problems;
- 2/ show a willingness to pay, and
- 3/ feel an urgency to get their matter addressed.
Ideas solving relevant social and economic issues are enough to build a promising startup. As an example, we talked about improving the energy grid with cities as clients. Fabrice mentioned that although the need seems real, local communities don’t make for the best customers. Their decision-making process appears complex and their willingness to pay, considering countless priorities they’re grappling with, remains uncertain.
B/ The second step in building a successful marketplace startup is creating a functional marketplace
Before looking into successful marketplaces, Fabrice touched upon the generic challenges facing this type of venture. The most important thing is probably to be able to grow both sides—the supply and demand—simultaneously. One would not want to add 10,000 suppliers without commensurate demand. If you did, suppliers would feel let down as they would see no need for their services. Alternatively, growing the demand side too fast is dissatisfying to clients as they struggle to find solutions to their problems. So, building both sides synergistically—where supply should equal demand—proves crucial. In many ways, Uber has succeeded at this beautifully. Its pricing algorithm changing the cost of trips based on demand shows how it’s always adapting one side to another. In rush hour, demand exceeds supply: prices increase only to decrease when demand outstrips supply.
Sometimes, both sides pay to use a marketplace. American Express is charging cardholders and shops to use the service. But oftentimes, marketplaces get one side fund the other side. For example, Google doesn’t invoice its users for queries and yet, building a search engine is an expensive venture. Advertising is covering the search engine costs: one side is subsidizing the other.
Fabrice is helping entrepreneurs figure out how fast to grow each side and who should pay for whom.
D/ The fourth step in building a successful marketplace startup has to do with targeting a segment mature for disruption
Finally, we talked about the most promising segments. Today, Fabrice is working in three spaces:
First, Fabrice believes in verticalizing incumbent marketplaces, as shown in the graph below:
Second of all, Fabrice believes in reinventing marketplaces. He’s funding “monplombier.com” to disrupt Le Bon Coin.
Finally, Fabrice is also investing in new B2B marketplaces offering superior curation. Fabrice mentioned Meero a marketplace specializing in photography.
Assume you’re putting up your apartment on AirBnB. The first thing you have to do is taking eye-catching pictures. Considering the quality of many competing apartments, going for a professional is probably the more efficient route. Yet, digging up a professional photographer is like finding a needle in a haystack. That’s when Meero comes in handy: it will connect you with the right people. In the end, you get to post dazzling pictures; AirBnB enhances its offerings and, photographers enjoy a new revenue stream.
Fabrice also talked about a company that is the delivero of pizza. Most pizzaolo don’t want to spend their time answering the phone, taking on orders, building a website, and delivering the pizza. They’re just interested in cooking great pizza. So the delivero of pizzas is helping them focus on what they do best while managing everything else. In the end, they get no more than 10% of the order. And, considering that they enjoy very low-cost structure. They’re making handsome profits while introducing efficiency.
E/ The future of work
On a more general note, Fabrice believes that the future of work is outsourcing everything that isn’t core to one’s passion. Improved communication capabilities and more efficient marketplaces in numerous industries increase the living standard globally: technology stand as an equalizer.
Building a successful marketing place startup begins with :
- finding a market segment ready for disruption,
- creating a functional operating model,
- getting the pricing right