+ how to build a marketplace startup
Hey hey 👋,
I am bringing back one of my favorite posts from a year ago. Enjoy!
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Today’s topic is marketplaces - more specifically, the tactics, key metrics, and challenges involved in starting a marketplace company. To accomplish that, I reached out to one of the biggest names in the game, Fabrice Grinda, and had a blast while learning a ton on the topic.
Fabrice is the co-founder of FJ Labs, a global venture firm with a focus on marketplace startups. He’s co-founded several companies, including OLX, one of the largest websites in the world with over 300 million unique visitors per month. He has over 200 exits on 650 angel investments (e.g. Alibaba, Flexport, Delivery Hero, etc) and was named the #1 Angel Investor in the world by Forbes.
🚀 Marketplace trends
1. Verticalization of multi-category sites
“Every multi-category horizontal site is being verticalized. It’s happening to eBay, Craigslist, Upwork, Thumbtack - you name it. Even Uber Eats & Seamless Grubhub are being verticalized. We are investors in Chowbus, an Asian food delivery app.
You verticalize because you can create much better experiences for both sides of the marketplace. You could create SaaS tools that you can give away to one side or the other and build a platform that makes more sense than something that is trying to do a little of everything.
Building extraordinary experiences can grow the market, dramatically. Sublets existed on Craigslist before Airbnb, but it took online reviews, insurance, a calendar, and integrated payments for it to really take off.”
(Image credit: FJ Labs)
2. Marketplace pick model
“Another trend is a reinventing of the ‘old school’ marketplace model where the buyer and seller need to talk, to a new model where the marketplace picks the supplier. The marketplace can and should help you pick a photographer, transcriber, etc. We are an investor in a company called Advisable, where the marketplace picks the marketing content for you.
Contentfly is another example of content creation. In the old days, you had to go to Upwork to look for content creators. Now, you go to Contentfly and they just pick the writer for you. This model improves NPS for users.”
“A lot of innovation over the last 20 years has been consumer-focused. We're still in the infancy of price transparency, discovery, and online transactions in B2B. We're investing in Knowde, the petrochemicals marketplace, and Rigup (recently renamed to Workrise), a labor marketplace for oil services workers. A lot of these businesses that don’t necessarily come first to mind are now going online.”
(Image credit: FJ Labs)
🤔 How to start a marketplace startup
“The key is to get your unit economics right and find product-market fit.
[Step 1 - start with the supply then match the demand]
“99% of the time, I started with the supply. This is a good way to deal with the chicken and egg problem because the supply side is financially motivated. There’s a catch though, you only curate the best supply possible. Once you have the supply, you go ahead to find demand to represent at least 25% of the income or 25% of the sell-through rate for that supply. Then, you scale supply and demand in parallel.
[Step 2 - make unit economics work]
The next step is to make sure that the unit economics work, which means after six months, you recoup your fully-loaded CAC (customer acquisition cost) on a net contribution margin basis, and after 18 months, you 3X your CAC.
If you're pre-launch, I want you to test those unit economics to make sure they are true. Then you can make assumptions like the average order value in the industry, the contribution margin of your business, or the recurrence. I expect you to have similar numbers to the industry before you do testing on CAC using Google, Facebook, or a landing page.
You want to answer, what are the CPCs, what percentage of people sign up, and the percentage of those you think might buy based on industry averages. Moreover, you want to understand if there is enough density in your keywords such that the acquisition channel is scalable, because sometimes things work at $50K a month in marketing, but they don't work at $500K or $5M. Obviously, if that's true, you've built a small business but you haven't built a venture-backable business.”
🔢 Key Metrics for fundraising
Below is a metrics matrix to use when you are thinking about fundraising, milestones, and what to focus on at each stage:
(Image credit: FJ Labs)
🔑 What does Fabrice look for in a startup
Oftentimes, Fabrice makes the investment within one or two 60 minute meetings with a founder. He has an investment framework that he uses to evaluate a startup:
Team - visionaries who execute
Metrics-driven and analytical
Grit and tenacity
Business - $1B+ potential enterprise value
Total addressable market
Market leader potential
Salable and capital-efficient
Attractive unit economics (actual or theoretical)
Terms - Fair price relative to team, traction, and market opportunity
Verticalization of horizontals
Marketplace pick marketplaces
*check out this post to learn more about his framework
😅 Common mistakes that marketplace founders make
1. Trying to scale GMV before achieving working unit economics
“Many founders try to scale the gross merchandise value (GMV) of the business before they have unit economics that work. It is important to get your unit economics right and have a scalable, profitable acquisition channel before you push the pedal to the metal. They often spend too much too quickly before they get the unit economics to work, and as a result, waste a lot of time and money.”
2. Infinite supply problem
“It's very easy to get infinite supply in your marketplace because sellers are financially motivated. I could create a marketplace tomorrow for locksmiths. I don’t know any locksmiths in New York, but I could call 100% of them within a month and convert almost all of them because there are only a few thousand.
The problem is that even if you have all those suppliers on the platform, you have no demand. Suppliers will not reply to bids when they get them, they're not going to treat you as a priority, and they're going to churn. Therefore, it's very important that you acquire only the highest quality suppliers - just enough so that you can fulfill the demand side. You keep the suppliers engaged and keep them updated on where you are and where it’s going. You do not want to have an infinite supply problem when you curate your earliest supply.
There are a few exceptions to that rule because some marketplaces do need 100% coverage, but that’s not the case for most.”
That’s it for today. See you soon 👋