October 27, 2021
Since starting Scribble, we’ve had the opportunity to work with and invest in some amazing marketplace businesses including Whatnot, NCX, Verto Education, Frontier, Canal and others. And while it’s still early days for most of them, there are some similarities that made them stand out as unique marketplace businesses. This doc summarizes some of the key insights we’ve seen and learned from these companies.
Insight #1: Your #1 goal is liquidity. This usually means deprioritizing revenue and growth.
It’s very hard to increase the price for a product once a customer is already using it. This is probably true for all companies except marketplace companies. In the beginning, your main goal should be to build a thriving ecosystem on both sides of the marketplace, even if that means not charging or charging a very small amount. Once you’ve built this ecosystem, then you can layer in a transaction fee or raise the price. By that point, you should be providing a 10x+ better experience and customers will be willing to pay for this value.
Insight #2: Keep your initial focus as narrow as possible (side note: this often means investors will underestimate your market size).
By having a very narrow initial focus, you are more easily able to build up both sides of the marketplace. Whatnot did an incredible job of this by focusing only on Funko Pops to start. Once you have this initial engaged user base, you can begin building out from there based on adjacent categories. For example, Whatnot expanded from Funko Pops to Pokemon and Magic cards — both of which have a somewhat similar audience so it was not a giant leap in terms of their target market. And both Pokemon and Magic cards are bigger markets than Funko Pops, which means they were also able to grow their user base on both sides.
Insight #3: Technology should be at the core of your business and should dramatically improve the experience for both the supply and demand side.
While this may seem obvious, it’s something that is missing from a lot of marketplace businesses. Without technology at the core, the two sides of the marketplace will eventually just go around you. If you are going to take a cut on the transaction that your marketplace is enabling, you must make sure that your customers think you’re worth that price. Simply bringing the two sides together is not enough. We’ve seen hiring marketplaces argue that sourcing candidates is their core value prop but I don’t think this alone can be the foundation for a thriving marketplace long-term. It can be a good initial wedge to build up liquidity but eventually, there needs to be something that enables both sides of the marketplace to do something they either weren’t previously able to do or weren’t able to do as well. In the case of the hiring marketplace, this might be technology to help with screening, scheduling, conducting the actual interview, giving the offer, etc.
Insight #4: Invest heavily in managing the marketplace in the early days.
This means many different things depending on what your marketplace is doing — it might mean making introductions between the supply and demand side or heavily curating the content on the supply side. Whatever it is, the ultimate goal is to build trust and ensure liquidity. Eventually tech should be able to take care of this “managing” but when you’re just starting out, it’s ok to do things manually that you can automate in the future!
Insight #5: As the founder, you should have an earned secret that makes you aware of this opportunity in a way others have overlooked. And ideally, this secret is coupled with some unique macro tailwinds.
Marketplace businesses have to find Product Market Fit twice (sometimes more depending on how many sides to the marketplace there are). Because of this, the founder’s expertise and experience is even more important. The founder should be intimately familiar with the needs or problems facing both sides of the marketplace so that they can address these in the early days. A great example of two founders who know their market better than anyone are Max and Zack, the founders of NCX. For over 10 years, they had been building technology that enabled them to count trees from space. Then, when corporations started making pledges to go carbon neutral, Max and Zack realized they could use this data to unlock new carbon offset supply and create a marketplace to sell these offsets. Their prior experience meant they were already able to get extremely detailed measurements from space and had built deep relationships with many landowners across the country. Without having worked on this technology and been in this market for a decade, they likely wouldn’t have been in a position to capitalize on the shift to a marketplace business as quickly or successfully. The founders of Whatnot, Grant and Logan, are another great example of founders who bring a unique insight and experience to the table — they had previously built a sneaker bot to buy Yeezys. Over time, they saw the sneaker market becoming more crowded with eroding margins. So, they looked beyond sneakers and found Funko Pops. They decided to buy a few Funko Pops to resell on eBay but found it more difficult than it should have been. They had an initial bias that this wasn’t a market — they thought it was just people collecting stamps and coins, but when they started looking more closely, they realized a new generation of collectors had emerged (Magic Cards, Pokemon Cards, Funko Pops) and no one was serving them, which is how Whatnot came to be.
These are 5 insights we’ve seen in working with our portfolio. But there are many more unique aspects to marketplace businesses and a lot has been written about the subject. If you’re interested in learning more, I recommend listening or reading anything by Sarah Tavel. Andrew Chen also compiled a bunch of essays on marketplace businesses. And if you’re interested in talking more with me about this subject, my DMs are open (@AnneliesGamble) or email me (firstname.lastname@example.org).