Marketplaces are notoriously hard to get going because of the chicken-and-egg problem at the start. You need supply in order to get demand and you need demand in order to get supply. In most the money comes in through the demand side of the equation and thus are considered to be demand-led. However, I would argue that in embarking on setting up a marketplace business one can be more rigorous in their analysis on the supply side.
These are the factors I would consider if I were to set up another marketplace business (or invest in one):
My first company was a business called Arcarnus which promised to broker the world’s ‘arcane’ places and services – secret gems as it were- to a discerning people.
That business didn’t do very well when it came to scaling but the notion of the ‘arcane’ was certainly carried forward to my next (and current) business PeoplePerHour.com and is without a doubt a big reason for its success.
Amassing inventory – of whatever kind – that has an element of exclusivity or scarcity is key to getting initial traction. It’s not always a must, but if your inventory is too easily discoverable elsewhere it will be harder, and although not impossible (as Amazon has proven) you need to innovate in different ways like price, the speed of delivery or simply having a huge breadth to become a ‘one stop shop’ destination. Whilst doable that’s without a shadow of a doubt a much more expensive endeavour.
Arcane or not, my next question would be “is that inventory looking for a new home?”. Some things – like second-hand collectables, much to eBay’s delight, were craving to migrate from the street fair to the world wide web. Others like grandma’s hand-knit woollen cardigan also did, finding a home on Etsy.com.
Here too, timing is everything. A category seeks a new home when a) there’s enough inventory within it and b) when their current home gets crowded. If you’re selling hand-crafted inflated Baboons who pop a caramel-infused marshmallow out of their backside every time you squeeze them (now why didn’t I think of that idea before!) and you can only make a handful a day, you may find that walking up the street is all you need to sell them all. Why pay a marketplace a % of that? But if you find that your whole neighbourhood or town rip off your baboon-trade, then you may well need a bigger home for your boons.
Given an infinite amount of dollars, any business can turn into a success (even my fabulous baboon idea above). But given finite dollars, having scarce supply, that’s ripe for a new home, and, a story that others are willing to share, will almost certainly act as viral agents and catalyst for distribution and growth.
In the end, people don’t relate to facts and figures, or shapes or forms, or tastes for that matter, as much as they relate to ‘storytelling’. Even the sensation of taste is instantly followed by a story, and it goes like this “Yumm…” You instantly can’t wait to share the delight with others!
Everything that precedes it, therefore, is a means to an end. What propagates are not the facts, the smell, the taste, the form or the function. It’s the story they inspire.
Every great company has at some point planted storytelling in their customers’ mouths one way or another. For Uber it was something like ‘look at me and my own personal chauffeur aren’t I cool’ … for Airbnb, it’s the personal experience of staying in someone’s own home, and the things that hooked you. In my last stay, it was the host’s sound system and how he came over to personally show me how to hook my iPhone to it.
Sadly, success and effort are not symmetrical. If Newton’s 3rd Law of motion was translated into the world of business dynamics it would be this: “for every micro, there is an equal and opposite macro”
In other words, for every one thing, you get right internally there is some external force that opposes that success and acts as ‘friction’ point (no wonder we borrow terms from physics in marketplace lingo).
Macro is your tailwind. You need it acting in your favour otherwise, it will be much harder – if at all possible – to get there, at least without running out of fuel!
Is onboarding of the supply you are amassing helped by some macro forces?
Again, in our case, that was clearly the case. Be it out of ‘need’ (e.g., rising unemployment during the recession forcing people to seek alternative sources of income) or by choice underpinned by socio-economic drivers, such as work-life balance, freedom and the aspiration to be your own boss, it remained unquestionable throughout our journey that people’s yearning for independence was no short-term fad.
Similarly for other categories: travel’s tailwind is the long-term declining cost of travelling; the health food’s sector is people’s ever-increasing health consciousness (or paranoia of premature death), renewable energy is buoyed by people’s delusion that we are running out of energy sources (when in fact, it’s outstripping consumption) and hypocritical rhetoric on saving the planet when they destroy it in equally or more ways than the rest of us; and so on.
Delusional or not, having a friendly macro helps!
Peter Thiel argued in his book ‘Zero to One’ that for a start-up to be a big success it needs to be 10x better than that of the incumbents. In marketplaces, businesses that criterion is almost always a supply-side criterion.
The Uber experience is certainly 10x better than waiting in the rain to hail a cab which will – in most cities – also be more expensive, a lesser quality car and a driver who may have just got off the wrong side of the bed that morning, or had an argument with his wife and doesn’t give a sh*t, is rude and scares the crap out of you because he’s behind the steering wheel and you’re inside locked doors with what looks and moves like a loony on steroids.
On Airbnb, you will find amazing homes to stay in which are (for a certain category of people at least) 10x better than hotels in terms of cost (per square foot at least) and the homeliness factor.
PeoplePerHour grew very quickly when we started because getting a logo or any piece of work done on the site was – and still is – 10x cheaper than the old-fashioned way (say going to an agency or hiring someone in-house).
Platform stickiness comes from both sides, albeit in different ways. However, more often than not, a marketplace is not just an exchange mechanism but also a suite of tools for the supply side to build up a regular source of income. It’s more than a one-off ‘hit’ or strike of good luck for the Sellers.
Tools, such as the ability to get paid fast, securely and seamlessly, exchange files, communicate in real time, integrate with your calendar, trusted reputation systems, and a raft of other admin tools like collating all your invoices in one place, perhaps even integrating with your accounting software – not to mention getting customers in the first place – are invaluable tools for Sellers that would otherwise be a nightmare to put together individually themselves. And very expensive!
A newer breed of marketplaces, which I am a big believer in, takes that one step further and builds deep workflows tailored exactly to the vertical they are serving. They essentially become mini ‘ERP’ systems for micro-businesses who don’t have the scale to do that themselves and overlay the transaction on top. Newer business models are arising to support these, often licensing the software hosted in the cloud (SAAS) and in other cases, a dual model where they charge in part for the transaction or in part for the software. Wahanda (now Treatwell) is one such example in the UK, as is Zocdoc.
These are powerful marketplaces as they can migrate upscale to serve larger enterprises once they prove the model for SMEs by tailoring their software and workflow to serve larger organisations. This is a big part of our strategy in the next 1-2 years at PeoplePerHour.com as well.
Once you crack the chicken-and-egg problem and get going, marketplaces turn the corner and become both highly scalable and defensible businesses. That’s because ‘network effects’ kick in.
Simplistically, network effects means that the value in a marketplace is a function of how many participants are in the marketplace. So every new user you get makes the entire marketplace more valuable, for other buyers and sellers alike.
Sounds obvious. But what’s not obvious is how to get that flywheel going. In practice, it comes down to understanding why Sellers on your platform could benefit not just from getting Buyers (and hence sales) but from other sellers. Often it’s to do with complementarity. They can find other products or services that strengthen their selling power. This then gives them an incentive to promote your site and bring others in their network to the site so as to collaborate. Hence, network effect.
In certain marketplaces, this happens de facto in an unstructured way. On Etsy.com example, many Sellers turn to Buyers and then resellers of the things they bought. On PeoplePerHour.com we see the same dynamic: a graphic designer may need to work with a Videographer for a project they are doing for a client. Or a voice-over artist or copywriter.
Other marketplaces do this in a more structured way or design in their DNA from the start which has considerable advantages. For example, if you are building a marketplace for lawyers, and say you know they work with paralegals, you design the flows such that when a lawyer creates her profile she can then invite her paralegals – or other lawyers they collaborate with for that matter – and integrate all of that into their profile. To encourage that behaviour one could allow discovery of lawyers based on the size of their team, or feed that into their reputation system. These type of marketplaces can get exponential growth as each participant will be inclined to bring numerous more with them (their network), which in turn will make it more attractive for Buyers and build critical mass faster.
Very few successful marketplaces are built by design. Most just happen. Most even happen despite bad design, not because of it. There are so many variables needed for success that probability overtakes calculus. Which is why VCs take 10 bets for 1 to succeed. Given how many businesses they see (and a biased sample set at that skewed towards the best of the crop), if there was a predictive formula for success surely they would apply it and have 100% hit rate?
That said, one can conduct a rigorous analysis, especially – as I argue above – on the supply side, to consider whether the marketplace they are about to create has the necessary qualifying criteria for success. ‘Qualifying’ is the operative word here. Meaning: if you do tick the above boxes, you’re off to a good start. But it’s certainly not the end and definitely not a foregone conclusion.
Unfortunately, entrepreneurs get bad advice all the time. There are many misperceptions around success and the journey of building a company, such as ‘entrepreneurs take big bold risks’ (they, in fact, take very calculated risks) or ‘failure is good’ (there’s nothing good about failure, but sure you can learn something from any experience). I can’t address all of them here but the one I’d like to focus on is ‘never give up’ (we’ve all heard it before).
True, in theory, if you never give up, you technically can’t fail. But you can end up spending a lifetime pursuing the wrong dream or being blinded from the stark reality of what it is you are doing.
Entrepreneurs – or worse yet, people giving advice to entrepreneurs, like investors – often like to present themselves as heroes or villains. The ‘macho’ daring people who had the guts to do what others couldn’t. Hence, they like to keep hammering this ‘we never give up’ mantra while drinking their own cool-aid. It boosts their ego.
The reality is that knowing when to quit is super important and quitting sometimes just makes absolute sense. ‘Quit while you’re still ahead’ is much better advice, in my opinion. And here’s why: everyone is capable of having bad ideas. Even the best entrepreneurs, like Richard Branson, did and still do. Virgin Cola was not a success, so he shut it down as one should. Would it be smarter to spend the rest of his life and valuable dollars trying to beat Coca-Cola just so that he could save his own ego?
Equally, even the best ideas may simply be attempted at the wrong time, or with the wrong group of people. There are so many ingredients that are needed to make a start-up work that no one (however smart) can predict or be in control of them all.
So the question then is when does one throw in the towel? For me, the acid test is these two questions:
A big misperception about the sharing economy is that it’s totally substituting the incumbent way of doing things. In other words it’s a ‘zero sum game’. Turns out that in most it’s cases it’s actually growing the pie considerably.
Take hotels for example. Despite the unquestionable success of Airbnb, the hotels business in big metropolitan cities like London and NYC is booming. They can’t build hotels fast enough. Try booking a hotel in either and you’ll see -you’ll be lucky to get a room. Mean time Airbnb has captured a mere 5% of the inventory in NYC and less so in London.
An analogy outside the sharing economy is low cost Airlines. If you’ve ever flown on EasyJet or Ryanair in Europe you will know that there’s a distinct difference in the passengers to traditional airlines. When was the last time you saw men dressed as peacocks getting drunk and rowdy in the corridors of a BA or Virgin flight? Do they just flip and change pending on what airline they’re on? No. Many of those people would previously not travel or travel much less. With a drop in air fares now they do (unfortunately!). Low cost airlines undoubtedly increased the total pie of travellers.
It’s the same with Airbnb. People who would seldom book a hotel before – possibly for a myriad reasons, cost being one of them but also the comfort factor(many people don’t feel ‘homely’ in a hotel to the point where it would put them off travelling) – now have an alternative.
We see the same in the Gig economy in which we operate in. Numerous stats now show that 1 in 3 people in the working population are freelancers. In smaller companies less than 20 people in size 50% of the headcount are temporary / contract staff, and even in larger companies now HR managers foresee that as much as 20% of their head counts in the future will be freelance staff (a figure which I believe is grossly understated). Does that mean that Employment as we know it is over? Is it the death of PAYE? Many of our peers keep pushing that message to get more PR and buzz but I question whether they truly believe i. It would be the equivalent of Airbnb saying Hotels will die, completely and forever.
If there’s one sentence that summarises the past year for me it’s this: everything happens for a reason, and mostly for the best!
My key lesson of the year, cliché as it may sound, is, once again, that our ability to turn a negative into a positive in a split second, to drive instant and radical change in our lives when something doesn’t go our way, is potentially one of the most powerful forces in life and a key determinant of success and happiness.
A lot has happened in 2015, including moving my base from predominantly New York back to London in September, opening up offices in Berlin and New York, becoming a British citizen, appearing on BBC World news to talk about the sharing economy, hiring some amazing people to grow our team at PeoplePerHour, and having had the luck to travel to some incredible places and meet some truly great people.
2015 reminded me that short of our health and time with our loved ones, one’s best investment is in new experiences. They really enrich our lives so much more than anything we could possibly buy. My best ones for the year were: skiing in St Moritz where I started off the year, visiting Art Basel in Miami, (definitely going back!), skiing in Deer Valley (my first time skiing in the west coast of the U.S.) and staying in the super-cute Salt Lake City which I totally loved, visiting Santa Monica, Beverly Hills and the gorgeous Malibu in L.A. (where I managed to find myself – involuntarily- dining at a cute Greek restaurant called Tony’s), followed by San Francisco and Silicon Valley for a tech. power-shot, a rainy yet magical Costa Rica, Montauk, the beautiful Greek islands of Skiathos and Mykonos, Ibiza in Spain, the breath-taking island of St. Lucia in the Caribbean, attending Summit @ Sea on the world’s 8th largest cruise ship with a group of some of the most prominent and inspiring tech entrepreneurs on the planet, attending SXSW in Austin Texas for the 4th time in a row, attending European Young Leaders 2015 forum in Dublin, celebrating my b-day in Vegas and watching what was supposed to be the fight of the century between Manny Pacquiao & Floyd Mayweather, watching Klitschko – the worlds Boxing heavyweight champion- fight in Madison Square gardens, and ending the year with a fabulous family Skiing trip to Val Thorens in France.
Things that almost happened and thankfully didn’t: I came a stone’s throw from extended my stay in NYC for another year. On the 1st September I was due to move to a new apartment which I totally fell in love with, whose lease fell through in the final hour. My gut instantly told me it was a sign that my time was up and I literally planned my relocation back to London within hours and left a few days later. I shipped my apartments contents to Athens where I had decided – and again came a stone throw’s away – to buy a place to take advantage of the plunge in real estate prices. That too fell through, or rather I walked away, when the owners – in typical Greek fashion- kept moving the goal post and made signing a deal near impossible. Looking back it was a blessing in disguise, for more reasons than one. Again, a negative turned to a positive.