January 26, 2012
Start Your Marketplace Engines

At NextView Ventures, we have a number of companies in our portfolio
which are “marketplace” businesses, where buyers and sellers meet to
exchange a good or service.  And along the way we’ve met with or
observed a larger number of seed-stage startups attempting to start
them. All of these companies face the challenge of the marketplace cold-start problem: simultaneously attracting both sellers and buyers to generate enough liquidity so that meaningful transactions can result.
Without enough buyers in the system, it’s not worth it for the sellers
to show up; without enough sellers present, buyers don’t have anything
to purchase.

What are the best practices for going from zero to sixty with a marketplace startup? I’ve observed a couple of strategies and approaches for overcoming cold-start inertia:

  1. Offer supply side value for being present beyond just buyers.
    One way to jump-start a marketplace with sellers is to attract them to a
    platform with carrots other than buyer demand. The most often I’ve seen
    this approach work is through a fostering community of sellers, where
    these sellers find benefit in just interacting with each other.
    Communities like those of uTest (software QA testers), as well as NextView portfolio companies GrabCAD (mechanical engineers) and thredUP (parents), which resulted in marketplaces had origins in this approach.
  2. Attract would-be buyers with research/learning about purchasingsuppliers will follow.
    Even if the supply isn’t there yet, it’s possible to capture buyers’
    attention earlier in their purchasing process. If a web service provides
    content which helps a person or organization learn more about what and
    how to buy, then it becomes a trusted source for later in the buying
    process. And with an audience of hungry buyers circling, supply is much
    easier fill.  It’s perhaps an older example, but Bitpipe (sold to TechTarget in 2004) did just that in becoming the largest distributor of IT white-papers which attracted CIO buyers.
  3. Brute force a mini-market and expand.
    Rather than create a broad market at the outset, another approach is to
    concentrate deeply to create very specific marketplace liquidity and
    branch out from there. Often this focus can be on a specific geography
    or vertical. Some startups which have started in Boston with this
    strategy are TaskRabbit (personal assistance in particular location), Zintro (experts in particular domain), and (caregivers in a specific vertical and geography) have utilized this methodology.
  4. Piggyback off an existing marketplace.
     Often there are more generalized marketplaces that a focused start-up
    can utilize as an initial launching-point for acquiring liquidity.  For
    instance, I know of a couple startups which are successfully posting as
    both buyers AND sellers on a vertical category on Craigslist
    to siphon an initial base of traffic for their service (though they
    probably don’t want to admit it publicly).
  5. Develop/leverage meaningful relationships so sellers are patient during an initial phase.
    Sometimes even the promise of would-be buyers is so enticing that
    suppliers are willing to work with a startup in joining a marketplace
    early. This situation can be further facilitated if some of the founders
    have an existing relationship with the suppliers prior to starting the
    company, or they are able to develop a meaningful relationship with them
    once they’ve initially bought into the idea given the innovative
    offering.  (This approach is especially effective when the supply-side
    is concentrated in a smaller set of players.) As an example, the
    management team of NextView portfolio company Mojo Motors
    came from the automotive industry, so they were able to forge new and
    leverage prexisting relationships with car dealers in getting the
    company off of the ground. And our portfolio company TurningArt immediately
    after starting fostered meaningful relationships with artists (by
    offering a new channel to gain exposure) to build their own supply of
  6. Some combination of the above. The above
    approaches aren’t mutually exclusive, and utilizing more than one in a
    combination results in an even greater opportunity to begin turning the

As a general rule, once a true market is
going, I’ve observed that the supply-side often increases in
step-functions, while the demand-side grows incrementally
Typically, there are factors (sometime external) which “switch on” the
supply side so that a rush or influx occurs spurring quick and
meaningful growth. Whereas on the demand side, it usually grows
organically in a smooth fashion as the service expands. In either case,
there’s continually a challenge in matching the right levels on both
sides so that there is a stable enough balance for a service to grow.
But the most difficult challenge is starting the marketplace
engine in the first place, which can be sparked with one of the
techniques above.

David Beisel is a Co-Founder & Partner at NextView Ventures.  You can find this post, as well as additional content on his blog called GenuineVC.  You can also follow David (@davidbeisel) on Twitter by clicking here.