How to Kickstart and Scale a Marketplace Business – Part 4: Cracking the Chicken-and-Egg Problem 🐣 - Growing Initial Demand (plus a Bonus!)

Rare insights from today's biggest marketplaces, including Airbnb, DoorDash, Thumbtack, Etsy, Uber and many more

“We worked with restaurants who didn’t have websites, or had really poor websites, and helped them build a site. We ensured that every restaurant website would implement a booking module that used OpenTable. It introduced the concept of online bookings to consumers, and introduced them specifically to OpenTable. That’s where they landed when they clicked to reserve a table, and even the confirmation email they got was from us — so why not look at OpenTable in the future? This became the #1 driver of customer acquisition, and is even now.”

— Mike Xenakis (ex-SVP of Product at OpenTable, Lecturer at Kellogg School of Management)

Welcome to part four of our limited series on marketplace growth — a deep dive into early demand growth. A marketplace business, or any business for that matter, is nothing without demand (a.k.a. customers), so I’m very excited to dive into how today’s business marketplace businesses drove their early demand.

If you’re new to this series, don’t miss the previous posts in Phase 1: Cracking the chicken-and-egg problem:

As planned, this will be the final post in “Phase 1”. In the next phase, I’ll explore how these companies scaled their marketplaces — including which growth levers continue to be most effective at scale, how they maintained marketplace quality, and how these companies know if they are supply or demand constrained. Though there are many more things you need to get right in the early days of a new marketplace business (e.g. hiring, positioning, getting to PMF), and building a successful marketplace business is never going to be as easy as following a few steps you read in a newsletter, I zeroed in on capturing the learnings that are most unique and essential to building a marketplace business. That being said, if there’s anything else that you would love love love to learn more about, just hit me up! Replying to this email or DM me. If there’s enough demand 🤪, I may investigate a few more topics in future posts. Until then, enjoy!

P.S. If you’re finding this content valuable, consider clicking the little gray heart below the headline at the top of this post, and/or sharing this newsletter with friends. 💛


Step 4: Drive initial demand 👋

At this point in our story, you’ve constrained your early marketplace (probably by geo or by category), picked which side to first concentrate on (probably supply), and have started building your initial supply. At some point, you will need to invest in driving demand. How soon you need to invest here depends significantly on the strength of Product/Market Fit (PMF), where growth is coming from, and how easily you are acquiring supply. Some companies, like OpenTable, Lyft, Uber, DoorDash spent very little of their early resources on driving demand. Others, like Zillow, Rover, and TaskRabbit quickly shifted to prioritizing demand growth. Here are a few signals that tell you to shift your focus to demand:

  1. Supply growth is coming easily — people are signing up without much convincing.

  2. Your supply is heavily underutilized — they have a ton of availability and few bookings.

  3. You have yet to prove that you are solving a problem for people — have you seen that potential customers actually find value in your “supply”? This alone is a deep topic that deserves its own post, but a simple heuristic you can use here is to compare your offering to what else is out there (marketplace or not). If you offer a product that is cheaper (i.e. Airbnb), more convenient (i.e. Uber), or just better (i.e. Etsy) — you’re on your way to PMF. If not, consider spending more time validating that you are solving a real problem for people. Read this and listen to this for excellent advice on this topic.

With this in mind, let’s dive into how to drive your early demand.

1. Word of mouth

For me, one of the most fascinating learnings from this phase of the research was how impactful word-of-mouth was for early growth of most of today’s biggest marketplace businesses — it was the most important growth channel for over half of the companies. Though this isn’t actually a growth “lever”, it was an enormous growth driver for these companies, and was a strong early signal of Product/Market Fit. Pro tip: If you don’t know what share of your growth is coming from word-of-mouth, you should find out.

Lyft:

WOM was huge early on. That was the reason behind the ‘pink mustache’, it got people's attention whenever Lyft entered a new market. Even ‘pink mustache’ related keywords in search were a significant source of our organic traffic.”

— Benjamin Lauzier

Airbnb:

“If you look at the composition of growth of Airbnb, WOM was by far the biggest driver early-on. Way over 50% on the guest side, and way over 70% on the host side.”

— Gustaf Alströmer

OpenTable:

“On the diner side, it all started out with WOM. We launched the site, and people start to discover it. They liked to talk about.”

— Mike Xenakis

Uber:

WOM was huge. The end state was like 50% paid, 15% referrals, 35% WOM. Early days the mix was closer to 30% referrals, 50-60% WOM, and the rest PR and other random things.”

— Andrew Chen

AngelList:

Demand growth was mostly word of mouth. We had a lot of credibility with entrepreneurs from our work on venturehacks.com.”

— Babak Nivi

TaskRabbit:

Word of mouth was a huge driver of our business in the early days. In fact, in those early days, 90%+ of customers came in through WoM (that includes customers telling other customers as well as press).”

— Jamie Viggiano

Instacart:

A third of our demand was WOM early on. Maybe more.”

— Max Mullen

2. Supply driving demand

Just as interesting as the prevalence of word of mouth is how many companies DIDN’T have strong word of mouth early on and still succeeded (also about half). In those cases, companies found other channels to drive demand.

The second most common growth lever (effective for over 40% of marketplaces, and also a big surprise to me) was the marketplaces’ supply directly driving its demand. This is the primary reason these companies focus almost exclusively on supply growth — the supply created the demand.

DoorDash:

Restaurants did a lot of the marketing for us. They would actually print placards and stickers and put it up in the restaurant, without our help, and often without us knowing. Stickers on the windows worked extremely well. Restaurant owners are enterprising entrepreneurs and are super creative at driving demand.

— Micah Moreau

GrubHub:

We did in-store signages, but we copied it from Yelp who was the first with their ‘People love us on Yelp!’ stickers. We did Open/Closed signs, sandwich boards, printed menus, business cards with promos on it, delivery bags. You name it - we tried it.”

— Casey Winters

Etsy:

Sellers were doing their own grassroots marketing and that became a big growth driver. Etsy pushed sellers to promote their shops to their communities in order to drive growth of their shops, which in turn drove growth of the marketplace overall.”

— Nickey Skarstad and Dan McKinley

Eventbrite:

“Due to the nature of organizing events, most event organizers had some built in demand that they brought with them

— Tamara Mendelsohn

Patreon:

“Patreon's growth model is that we acquire creators who already have established, passionate followings (which they incidentally built on attention marketplaces like Youtube etc.) and they then market their page to their patrons.”

— Tal Raviv

3. SEO

SEO, unlike on the supply side where it was only impactful for one company, was a vital early demand growth driver for over 40% of marketplaces.

Thumbtack:

“One day my co-founder Jonathan was in a bar in San Francisco and by chance sat down next to one of the world’s top SEO experts. They started chatting about Thumbtack. At that point, we had never even heard of SEO, but he soon became a board member and helped architect much of our SEO strategy, which ended up being 80-90% of our growth. We did a number of things that were scaled and unconventional at the time. For example, we surveyed tens of thousands of businesses around the country, asking how ‘business friendly’ their local government was and then ranking every state and city. This was a huge bet — I worked on it full time for about seven months — but it turned into a very successful program. There was such useful information that it ultimately went beyond SEO and turned into a big branding event for us.”

— Sander Daniels

GrubHub:

SEO was 30% of all new users (our #1 lever), e.g. ‘Thai food near me’, and 10-15% SEM. We spun up landing pages for each restaurant, essentially creating websites for every restaurant, as most restaurants didn’t have one. Even integrated into Google Local.” 

— Casey Winters 

DoorDash:

We did SEO quite a bit. To this day, a large percentage of restaurants don't have an online presence, in any real capacity. For us, visits from search to individual restaurants pages is quite large. Today, people come to us for the restaurant. People come to us because we got the food.”

— Micah Moreau

Eventbrite:

SEO was one of our main early growth levers. We actually found overlap between efforts that were intended to be purely demand-focused, and those efforts actually attracting supply as well. For instance, our local SEO pages (ie: "San Francisco events") drove demand, but these pages also accounted for approximately 20% of our SEO-acquired supply.”

— Tamara Mendelsohn and Brian Rothenberg

Etsy:

“With millions of product listings getting indexed by Google, search traffic was very real even early on. ”

— Nickey Skarstad

Zillow:

“We didn’t start out focusing on SEO, but as we were growing via PR and word of mouth we noticed a competitor with no brand awareness growing almost exclusively via SEO. We knew at that moment we needed to be best in class at SEO and we put a lot of effort into building that skill. You don’t necessarily need to start with SEO as a small company, but as a huge free traffic source, you want to make sure you are positioning yourself to get that traffic as you grow.

— Nate Moch

OpenTable:

We were a little late to the game on the SEO front, but once we understood its importance we invested fairly heavily. We brought in an outside expert who helped launch our SEO program. Within a few months we had tripled our SEO referrals and it quickly became a big source of new users.”

— Mike Xenakis

4. Performance marketing

The next most common early demand growth lever, instrumental for about a third of marketplaces, was performance marketing — Google, Facebook, and Twitter ads.

Breather:

“We got good at this by hacking the Twitter ad platform. We relied on something Twitter didn’t expect people with Twitter ads to do. Most people who ran Twitter ads wanted follows or RT’s — instead we designed it to onboard people onto Breather. I created a Twitter ad from my own personal account, with a friendly face and a personal message: ‘Breather is launching in NY! Reply to me if you want to try it out.’ They DM’d me and I manually ended up onboarding thousands of people, walking them through a seven-step funnel over email. It was very labor intensive, but this hockey-sticked growth for the company.

— Julien Smith

Airbnb:

Had we not done online marketing early on, we certainly wouldn’t have been as big as we were today. It was people googling things related to staying in homes and apartments, and we just bought those keywords. It was a way of being strategic about where we wanted to grow.”

— Gustaf Alströmer

Rover:

Most of our customer acquisition was through Google Ads. We targeted people searching for dog-boarding, and searching for a kennel. Later DogVacay and we started clobbering each other in spend, which partly led to us later merging.”

— David Rosenthal

GrubHub:

“We bought AdWords for restaurants once we had 4+ restaurants for a specific cuisine type. SEO was our #1 lever, and SEM was #2.” 

— Casey Winters

Lyft:

Performance marketing was very significant early on. It also allowed Lyft to fine-tune our messaging throughout the product, we could see what values resonated best for people who were new to the brand.”

— Benjamin Lauzier

5. PR

PR was impactful for about a third of the companies I spoke with. For companies like TaskRabbit and Zillow, it was their primary growth lever.

TaskRabbit:

Early on, our marketing strategy was mainly focused on driving positive WoM and press. Back in 2009-2011, the sharing economy was in its infancy (if a thing at all) and there was a fair amount of hesitancy and reluctance on the part of customers to invite strangers into their homes to complete tasks. As a marketer, it was our #1 job to get customers over that hesitancy. The best way to inspire trust and confidence is through word of mouth and press.

— Jamie Viggiano

Zillow:

“Zillow is a unique story in that we started our growth with PR. We created a controversial product (putting values on homes and showing aerial images) and shared a lot of housing data and stats. We made public data accessible that was previously hard to find and empowered people with lots of data and information. It helped create a lot of brand recognition and generate traffic. Our timing was also incredibly important because we had created a single source of truth on housing market data when home values were dropping during the Great Recession. Data about home values was crucial for the media to cover, so we were able to bolster awareness and trust of our brand and get into the news cycle because people wanted to know what was happening in the housing market.”

— Nate Moch

Airbnb:

“In the early days, we targeted a lot of events: the DNC, the Presidential Inauguration, music festivals, the World Cup, Olympics, etc. Events and PR were the main way we bootstrapped the network in the early days.”

— Brian Chesky (source)

6. Loops

A handful of companies uncovered powerful demand-side growth loops, which became significant growth channels for their marketplace.

GrubHub:

We built a supply generated content loop: Get content (i.e. menus) → aggregate it → get traffic  → convert that traffic → can now promise more demand to restaurants → get more restaurants”

— Casey Winters

Etsy:

An early growth driver was a loop that was created by sellers who were making handmade items buying the supplies to make those handmade items from other sellers. This self-sustaining ecosystem created nice network effects and powered buyer growth early on, before more organic buyer growth happened over time.“

— Nickey Skarstad

Eventbrite:

On the demand side, early levers were Facebook and Twitter as attendees shared the events that they had bought tickets for and encouraged their friends to attend.”

— Tamara Mendelsohn

7. Referrals

An early referrals program was important for demand growth for three of the companies I spoke with (Instacart, Airbnb, Uber) — we’ll see in a later post that this channel becomes increasingly important as companies scale.

Uber:

“Early days, about 30% of trips came through referrals”

— Andrew Chen

Instacart:

“We found a lot of success in a consumer referral program –– about a third of our demand came through referrals early on. Word of mouth referrals were already happening, but providing a good referral program allowed us to track and optimize referrals.”

— Max Mullen

Airbnb:

“The way to think  about referrals is sort of an engineered word of mouth. So, if people are already  talking about your product, referrals through which you can engineer more people talking about your  product. One way could be just making it easier. Another way could be by using financial incentives.”

— Gustaf Alströmer

8. Direct sales

Although direct sales was the single most common growth lever on the supply side, only three companies (Lyft, Uber, Rover) found this to be valuable (and vital) on the demand side.

Lyft:

We literally went door to door to startups, giving away free cupcakes and donuts, along with coupons to take a free ride on Lyft. We were like ‘Hey company, Lyft just launched, have this free box of goodies.’”

— Benjamin Lauzier

Uber:

There was a very significant use of street teams. They went to places like the Caltrain station and handed out referral codes. There are stories about how Travis went to Twitter HQ personally and handed out referral codes. This eventually became a global Ambassadors program.”

— Andrew Chen

Rover:

“We had people go to dog parks and hand out flyers and coupon codes”

— David Rosenthal

9. Events

Essentially the same companies that found success with events on the supply side (Airbnb and Lyft) also found success on the demand side (plus Uber).

Lyft:

Launch parties were big for us. We saw them as one of our main growth levers. We wanted to create a grass-roots movement in each city. Even though they would get us exposure to about a thousand people max, they were a way to create a core group of passionate users who would become ambassadors for Lyft long-term. Looking back, we attributed a big part of this working to Lyft’s differentiated culture.”

— Benjamin Lauzier

Uber:

One of the big ideas for kickstarting growth in a market was a concept of a “rider zero.” We wanted the very first rider on the platform in a new market to be a local celebrity, like the Mayor of Topeka. This is also how we ended up doing things like Uber Kittens and Uber Ice Cream”

— Andrew Chen

10. Single-player mode

Before they had meaningful supply, a few companies found something they could immediately offer new demand-side users (a.k.a. single-player mode).

GrubHub:

Our demand-side solve for chicken and egg problem was to scan delivery menus from restaurants, put them online, and drive SEO traffic. Once we had traffic, went to restaurants, asked if they wanted this traffic. Eventually, once we had low friction enough for restaurants to join, we could go straight to restaurants and signed them up on the spot.”

— Casey Winters

AngelList:

We made a form for startups and told them to fill it in if they wanted intros to the investors. We reviewed each on and sent the good ones to the investors on a mailing list. If the investor liked it, they asked for an intro.”

— Babak Nivi

Instacart:

We collected signups while the markets were closed so we had a list to email when they opened”

— Max Mullen

11. Partnerships

For TaskRabbit and OpenTable, building early partnerships meaningfully accelerated their growth.

TaskRabbit:

We did a fair amount of partnerships with other notable and established brands, like Pepsi, Bravo TV, Gap, Sephora, and more. Most of these partnerships took the form of IRL activations (i.e. getting product in the hands of customers). Like press, these partnerships helped raise the level of brand awareness as well as establish TaskRabbit’s credibility. It was extremely powerful to be in the company of these big brands, generating both brand awareness and user signups.

— Jamie Viggiano

OpenTable:

"We leveraged partnerships to drive demand.  We partnered with Citysearch, AOL Digital Cities, Yahoo, Metromix. Anytime one or our restaurants was listed on an online directory, you could find an OpenTable link (before API’s, you actually went to the OpenTable site).  However, despite the breadth of partnerships, it only accounted for about 15% of our bookings.  The rest came from OpenTable.com directly or our restaurants' websites.

— Mike Xenakis

12. Mobile

And finally, though less of a lever these days, moving to mobile early-on was an important growth lever for Zillow and Thumbtack.

Zillow:

This may sound crazy now, but moving quickly to the mobile platform was a huge growth driver for us. We made an early commitment to mobile back before it was obvious everything was going mobile. We even built our own mapping solution for Blackberry because they didn’t have the mapping tools we needed. We consider moving fast on new platforms and technology really critical. We take advantage of new technology (ipads, apple tv, 360 cameras, etc) because we get extra attention (Steve Jobs featuring the Zillow iPad app) and first mover advantage.”

— Nate Moch

Now, having looked the twelve most common demand-side growth levers, as you zoom out and look at the bigger picture, a couple of additional meta-learnings emerge:

  1. Supply vs. demand levers: Though eight out of twelve levers apply to both supply and demand, the impact those levers have on supply vs. demand is very different. Direct sales, for example, is the most common growth lever on supply, but only the eight most common for demand. Similarly for referrals (third vs. sixth, respectively).

  2. The number of impactful levers: The median (and average) number of levers that any individual company bet on for supply was roughly two, but for demand, it was three. Though that doesn’t sound like a big difference, it does tell us that companies see impact from more channels when driving demand (vs. supply).

🎁 Bonus #1: What DIDN’T work

Some of the most interesting learnings often come from a decision to not do something, or when an investment doesn’t work out. As I spoke with folks, I looked for these stories. Here are some of the most informative examples:

1. Paid growth

Thumbtack:

“Paid marketing was not a big lever for us — we didn't have the cash or revenue model to support until we were many years in!”

— Sander Daniels

TaskRabbit:

“We spent very little money in the early days on digital ads. Paid ads became more important about 5 years after launch.”

— Jamie Viggiano

Instacart:

“We did almost no paid marketing marketing early on.”

— Max Mullen

2. Loops

Lyft:

“That's something I think Uber invested a lot in that never quite worked out as much for us ironically.”

— Benjamin Lauzier

DoorDash:

“We never explicitly went out and said we're going to build a *viral loop*”

— Micah Moreau

Patreon:

“Given that someone already has an audience and has potential to succeed on Patreon, them using Patreon as a patron first [and discovering Patreon this way] is naturally the best advertisement for it. However, unlike Eventbrite, I'm not sure about the incrementality of this path vs. simply seeing that another creator you admire using Patreon. I would guess seeing a creator you admire using Patreon successfully is 99% of what convinces a creator to sign-up, and actually paying as a patron of that creator is icing on the cake.”

— Tal Raviv

3. Supply driving demand

TaskRabbit:

“Most of the tasks were completed behind closed doors so we didn't have the same benefit as the ubiquity of the Lyft mustache.”

— Jamie Viggiano

Rover:

“Seeing Rover t-shirts out in the world wasn’t a growth driver”

— David Rosenthal

4. PR

OpenTable:

"We actually shied away from PR. Given the nature of fine dining (i.e. it's planned and infrequent), we didn't believe PR could actually drive meaningful demand. We loved our business and preferred to fly under the radar with respect to potential competitors. In fact it was only after we went public that our PR ramped up, as did competitive responses.”

— Mike Xenakis

5. Referrals

TaskRabbit:

“We started with a ‘give $10, get $10’ model back in 2010 when referral programs were in their infancy. I remember developing these programs manually at first (testing via email) to see the efficacy. And then ultimately integrating them into the product once we understood their impact on driving the business. However, it wasn't significant. Customers tended to share organically and didn't rely on the referral program.”

— Jamie Viggiano

6. SEO

Caviar:

“SEO was low impact for us”

— Gokul Rajaram

🎁 Bonus #2: Do things that don’t scale

As a closing reflection on Phase 1, I wanted to share one of the most important takeaways from these interviews — something that is often underestimated or overlooked: Starting a marketplace business is HARD. Every single person I spoke with reminded me of the hustle, the scrappiness, and the grit that it takes to make it work. If you’re struggling, and reading these stories makes it feel like it was easy for anyone, keep reading.

Breather:

The real answer in how you onboard supply or demand in a cold-start marketplace is you do whatever it takes. Is this going to work? No? Ok, well is this going to work? No? Keep trying until it works. I designed a funnel where I got leads through Twitter, and manually walked hundreds of people of through the seven-step process. I emailed them to go download the app. Then pinged them — have you downloaded yet? Yes? Now create an account! … Have you created an account yet? I did this over email with hundreds of people.”

— Julien Smith

Thumbtack:

“We spent so much time early on doing things that felt like reverse engineering Google’s algorithm. It felt like wasted time and effort in the grand scheme of things. What we always dreamed of was building a great product and focusing on the algorithm was a diversion from that. But we had no choice — SEO fueled the business, and we needed to buy time to one day build a great product and brand.

— Sander Daniels

Airbnb:

“We had this Silicon Valley mentality that you had to solve problems in a scalable way because that's the beauty of code. Right? You can write one line of code that can solve a problem for one customer, 10,000 or 10 million. For the first year of the business, we sat behind our computer screens trying to code our way through problems. We believed this was the dogma of how you're supposed to solve problems in Silicon Valley. It wasn't until our first session with Paul Graham at Y Combinator where we basically… the first time someone gave us permission to do things that don't scale, and it was in that moment, and I'll never forget it because it changed the trajectory of the business

— Joe Gebbia (source)

DoorDash:

“An example of scrappiness Tony always gives is the Cheesecake Factory in the Macy's building in San Francisco. The reason we won the Cheesecake Factory — it’s on the sixth floor of the mall, by the way — is because we had dashers just dedicated to running up and down the elevator to handoff the food, instead waiting for a dasher to park. That’s one example of us going the extra-mile, operationally, and doing things that don’t scale.”

— Micah Moreau

GrubHub:

“We printed business cards for restaurants. Later we tried other things, like sending orders to restaurants as a cold-fax, followed by a call. We even tried faxing restaurants that weren’t on the system orders, but that went badly, orders didn’t get made.”

— Casey Winters

Etsy:

“The origin is shrouded in mystery, but my understanding is that the founders had been doing contract web work full-time. At some point, they did a job for a craft-related forum and noticed that there was a group of eBay sellers there that were nonplussed with eBay. So they built a prototype of an early version of Etsy, and got some of those people interested. Then they went to local craft fairs and showed it to people, one by one.

— Dan McKinley

Lyft:

We invested in many non-scalable levers early on. That was big for us. Some examples of that are on customer side — when I had joined, the teams had been going door to door at startups, giving away coupons, giving away cupcakes and donuts, along with coupons.”

— Benjamin Lauzier

DoorDash (yes, another story):

The very first iteration of DoorDash was a website called paloaltodelivery.com with PDF'd menus of restaurants in Palo Alto. Tony and the team printed a bunch of flyers charging $6 for delivery and put them all over Stanford University. He and the team first wanted to see if there was demand. That was how it all started. A website with PDF menus.”

— Micah

Thumbtack (and yes, another story):

“There are two dimensions for how to think about a marketplace, (1) Frequency of job, (2) Size of job. Thumbtack is a low frequency, high value job. Which meant we couldn’t build a narrow marketplace like Uber (just cars on demand), or other companies with high frequency jobs. We needed to build a marketplace that was broad across all categories. We had to brute forcing it with a mediocre product, which bought us the time to survive and one day focus on building a great product (which we’ve now been able to do). We knew building this marketplace well would require decades and we were willing to make tough prioritization decisions early on.”

— Sander Daniels

That’s it for this edition! Stay tuned for “Phase 2: Scaling your Marketplace”!

P.S. If you work at any of the companies I looked into, or any large marketplace company, and have additional insights or feedback, please let me know! Just reply to this email or DM me @lennysan.


Overview:

Phase 1: Crack the chicken-and-egg problem 🐣

Phase 2: Scale your marketplace 📈

  • Part 1: Determine if you are supply or demand constrained 🤹‍♂️ (next post!)

  • Part 2: Scale growth levers 🔥

  • Part 3: Maintain quality 🏅

How to Kickstart and Scale a Marketplace Business – Part 3: Cracking the Chicken-and-Egg Problem 🐣 - Growing Initial Supply

Rare insights from 17 of today's biggest marketplaces, including Airbnb, DoorDash, Thumbtack, Etsy, Uber and many more

“Supply growth was all sales - door to door, walking into restaurants during their downtime, talking to owners. It was very sales driven. What we did was take every excuse they had for not using GrubHub, and removed it as an obstacle. Fast forward to a couple of years later — you only pay when you receive orders, there are no hidden fees, you can cancel any time. We got to a place where there was zero downside to sign up and to give it a try.”  

— Casey Winters (ex-growth at GrubHub, CPO Eventbrite)

Welcome to the third post of our limited series on marketplace growth, where I share learnings and insights from founders and early employees at today’s most successful marketplace businesses. I’ll be releasing four more parts over the next two weeks, and then I’ll return to my regular cadence of once-a-week. 🤙

I continue to be blown away by the response to this project. Thank you so much to everyone who has sent me kind words, helpful feedback, or shared these posts with others. I started this research out of a personal desire to learn more about other marketplace businesses, but seeing how valuable this has become to so many makes me feel all warm and fuzzy inside.

What I said in the last post continues to be true — it only gets better from here. If you’re new to this series, don’t miss the earlier posts covering Phase 1: Cracking the chicken-and-egg problem:


Step 3: Drive initial supply 🐥

As we saw in the last post, the vast majority of marketplaces start off supply-constrained. Interestingly, most marketplaces continue to stay supply constrained throughout most of their history (which we’ll spend more time on later). Why are most marketplaces supply constrained? Li Jin (partner at a16z) said it well, “the best consumer marketplaces end up supply-constrained because they tap into an incredible amount of demand. The product/market fit is so strong that this demand puts pressure on supply.”

With supply being so essential, how did today’s biggest marketplace companies grow their initial supply? Below we’ll dive into each and every lever, but here’s a cheat sheet:

I’ve integrated all of my learnings and surprises into the individual sections below, but before we get there, one fascinating meta-learning that emerged from this research is how few levers individual companies found success in early-on. The median number of levers that the biggest marketplace companies relied on to kickstart supply growth was just TWO (and the average was 2.5). Though this isn’t necessarily true for everyone, the lesson here for most teams is to focus, focus, focus. Early on, you are more likely than not to find most of your success in a couple of levers. Figure out what those are and double down.

Now, let’s get into each lever (sorted by most commonly utilized):

1. Direct sales

One of the most significant learnings (and surprises) for me in doing this research was how important one-on-one direct sales was to most early marketplaces. Sales ended up being a crucial lever for about 60% of the companies I talked to — twice as common as the next biggest lever (piggy-backing and referrals).

Airbnb:

Direct sales was critical to get the first listings on the platform, especially in immature markets without critical mass. It enabled us to pick and choose different supply types and build the right mix of homes. The local teams were accountable for their market and could themselves decide which supply to acquire, e.g. in which neighbourhood, what size of the listing, and price points.”

— Georg Bauser

OpenTable:

“On the restaurant side, unfortunately, there were no easy levers early days. It was hire a direct sales force on the street. People on the street knocking on doors, carrying the software. Demo’ing it and showing them how it worked.

— Mike Xenakis

Etsy:

“The main thing that I believe really worked was recruiting sellers in person at craft fairs and elsewhere. This was a small activity in terms of human effort, but it scaled beyond that since the sellers marketed themselves.”

— Dan McKinley

Caviar:

“For us, for supply growth, it was direct sales / field sales - no question!”

— Gokul Rajaram

Uber:

“Uber Black was initially ops and phone driven. They would call limo companies to pitch them. A lot of limo companies were sole proprietorships, and the pitch was ‘While you are waiting for trips, we’ll guarantee you a minimum level of income if you keep this app on’.”

— Andrew Chen

DoorDash:

The primary lever for restaurant growth was pounding the pavement, inside and outside sales, people on phones, door to door sales. The pitch is that we bring you incremental demand. Large QSRs and fast casual chains like McDonald’s, Chipotle, and Panera have quoted publicly that delivery is 70-80% incremental, and thus gives resturants access to new types of customers. We have always prided ourselves as being a merchant-first platform. For a small mom and pop business, they don't have many options to drive demand. They’re doing payroll, marketing, staffing; all of these things take them away from why they started a restaurant in the first place, and what makes them happy. We can do the marketing for you, and help keep your kitchen busy even when in-restaurant dining is slow.”

— Micah Moreau

AngelList:

To grow initial supply, we asked a bunch of investors we knew to fill in a web form with their name, location, markets they like, investments per year, typical investment amount, etc.”

— Babak Nivi

2. Referrals

The second most common early supply-growth lever (tied with the next lever) was offering a referrals program — incentivizing existing supply to refer new supply. About a third of the marketplaces I spoke with saw a lot of success here.

Lyft:

“Referrals and ambassador programs were big for us early on. Double digits of %’s of new supply early on came from these programs. We went after students because our primary audience was younger and millennial. Some students made so much they had weekly lobster dinners. The pitch to students was to get some work experience and make some money. We had tiers of rewards -- the top tier was essentially a part-time job. As a reward at the top tier, we gave you a letter of recommendation from the COO of Lyft, which many students valued very highly, and was very cheap for us.  Referrals (online program) was more impactful top-line, but Ambassadors (people referring users on the ground) were key piece to the launch strategy in each city -- seeding supply and demand ahead of launch. We were able to reduce overhead when launching a city this way, by getting the word out early.”

— Benjamin Lauzier

Uber:

“On the supply side, referrals was about 1/3 of the first trips — and they were also the best drivers. The other 1/3 was WOM, and 1/3 was paid.”

— Andrew Chen

Caviar:

“Referrals, yes, a big growth lever on supply in every market, both early in the life of a market, and later too.”

— Gokul Rajaram

DoorDash:

Referrals is massive on the Dasher side. It is effective on the consumer side too but a lower % of our acquisition mix than dashers.”

Micah Moreau 

3. Piggy-back off of an existing network (mostly Craigslist)

About a third of the marketplaces also relied heavily on piggy-backing off of an existing network (in almost every case, Craiglist) to bootstrap their supply growth. I don’t have a lot of quotes here (sorry!), but when it worked, it was the first or second most important lever for these companies.

Uber:

“The first thing the launcher team would do when they launched a market would do is figure out supply. They would go straight to Craigslist.”

— Andrew Chen

4. Word of mouth

Though not really a growth lever, organic word of mouth was a significant factor in the growth of early supply for about a fourth of today’s biggest marketplaces.

OpenTable:

The restaurant industry is very tight. Every restaurateur sure knows each other -- so if someone is trying something out, there is a virality that takes place. We benefited from that. A year or two later, with the transient nature of restaurant employees, they are bouncing every couple of years -- if they go from one restaurant that’s using OpenTable, the first thing they say to the owner is that you have to get this software.”

— Mike Xenakis

Eventbrite:

“You can read our IPO filing — WOM was listed as a key strength and quantified as 36% of supply awareness.”

— Brian Rothenberg

Patreon:

Creators come to the platform because they already follow their peers online, and thus see other creators launch on Patreon.”

— Tal Raviv

5. Subsidizing

Similarly, about a fourth of the marketplaces I spoke with bootstrapped supply by subsidizing (paying for it) in some form.

Uber:

We used money to solve the problem. We’d guarantee you $40/hour to drive. All you had to do was maintain an acceptance rate of 70% and keep your app running. You could decline riders up to a point, but you don’t get paid for doing nothing.” 

— Andrew Chen

Lyft:

We had an income floor for drivers, to guarantee some amount of money per hour. This helped us jump-start the marketplace from scratch.”

— Benjamin Lauzier

Breather:

“You have to choose which side to subsidize. For Breather, that was the supply side. We subsidized it with things like furniture and locks, to increase the quality. With low size transactions (e.g. 2hrs), you can’t walk in and have it be schmucky.”

— Julien Smith

Zillow:

We subsidized leads in almost all of our marketplaces to get them going. We wanted to show new users the quality of our connections and give them a risk-free way to get started. We would then slowly turn on pricing as we proved the value. This helped us build supply in the early days of each marketplace.”

— Nate Moch

6. Employees are the early supply

In a few cases (Rover, TaskRabbit, and DoorDash), the company’s own employees were the initial supply — both to create liquidity and to better understand the problem space.

Rover:

All early supply was employees” 

— David Rosenthal

DoorDash:

“We have a policy where everyone in the company dashes once a month. In the early days, there was always a shortage of dashers, so Tony and the team dashed constantly, close to every day. In addition, Tony and his wife had their weekly date night on Friday nights, and on some of those date nights Tony and his wife would dash together.”

— Micah Moreau

TaskRabbit:

In the earliest days, Leah [the CEO] and the early team were Taskers. I remember distinctly dispatching employees from HQ when tasks would come in. In the early days, we were obsessed with ensuring that every customer who came to the platform had a delightful experience. If that meant we had to drop everything we were doing and run a task, we did. It was a great way to ensure quality in the early days.”

— Jamie Viggiano

7. Single-player mode

I was surprised to learn that the tactic of bootstrapping one side of a marketplace by offering that side a tool they find useful on its own (aka “single-player mode”) wasn’t more common. But when it worked (for OpenTable, Eventbrite, Patreon), it was the most important tactic for these marketplaces to get off the ground.

OpenTable:

“To get into the door with restaurants, we couldn’t lead by talking about online bookings -- there were no online bookings. We decided to invest in the software side of the business -- we created a solution that could stand on its own without the demand side. What this meant was building a suite of tools for restaurants to replace their manual booking process (usually a notebook they passed around). Our sales pitch initially was 90% “use our software to better run your restaurant”, and 10% “we’ll help customers find your restaurants and book a table online.”

— Mike Xenakis

Eventbrite:

“We made the product self-service for the supply side early on.” 

— Tamara Mendelsohn

8. Performance Marketing

I was also surprised to learn how rarely performance marketing was used to grow initial supply, being a major lever early-on only for Lyft and Uber.

Lyft:

SEM + Display + FB was effective early on for both supply and demand. It gave you a baseline for CAC that you can use for other levers. Even if it was a tinkle of growth, we had the machine going, and it allowed us to dial it up and down.” 

— Benjamin Lauzier

Uber:

The paid channel was half the signups, but only 1/3 of the first trips, which tells you it was the least efficient channel.”

— Andrew Chen

9. Loops

A couple of companies (Eventbrite and Airbnb) found a powerful supply-oriented loop (also known as a flywheel, or virality), which drove early supply

Eventbrite:

We invested in strengthening viral loops in our product where attendees (the demand side) would become event creators (supply side). In addition, we had a free-to-paid loop where our free product (free to use for free events) attracted a lot of creators who tried the product for free first. Many of these free creators later hosted paid events, converting into paid users. The free viral loop ultimately drove 34% of supply-side awareness/acquisition, and 17% of creators who have produced a free event have gone on to host a paid event within twelve months (included in our public IPO filing).” 

— Tamara Mendelsohn and Brian Rothenberg

Airbnb:

“Person books trip —> lovess the experiance and gets an offer to make their home available for guests while on their trip to help pay for trip —> becomes host”

— Casey Winters

10. Events

And a few companies (Airbnb and Lyft) successfully organized events/meetups to help build early supply.

Airbnb:

To launch a city, we’d travel there and hold a meetup. Here in San Francisco, it’s not a big deal to meet a founder. In other places, that’s pretty novel. They would get so excited that they met us that they’d tell their friends. The markets started turning on, and we religiously focused on making sure customers loved us.”

— Brian Chesky (source)

Lyft:

An early part of our foundation was onboarding classes for drivers. We would bring bagels, and have dozens of driver applicants come at once to go through a series of educational videos & chats.”

— Benjamin Lauzier

11. SEO / Content Marketing

I was very surprised by how rarely SEO was impactful in driving early supply growth — only being a key lever for Eventbrite.

We invested in blog posts, white papers, ‘How to Market Your Event’ articles that drove SEO traffic from creators.

In addition to content we wrote ourselves, we had a great UGC/SEO loop: 1) creators built their event pages with user generated content, 2) creators linked to their event pages on Eventbrite from their own websites, 3) these Eventbrite.com event pages ranked well in SEO. They also created content for and funneled link value to our "San Francisco events" SEO pages. 4) this drove both demand, and a good portion of supply as well.” 

— Tamara Mendelsohn and Brian Rothenberg

12. Leverage your community

And finally, maybe the most unique lever of supply growth I came across in this research came from Etsy.

One of the most effective early levers for supply growth was building the Etsy community, offline. After spending years going to craft fairs every weekend promoting the brand we launched a program called Etsy street teams that organized passionate community members around the country (eventually the world) and had them be on-the-ground brand evangelizers. We provided tools and money for these leaders to start their own “teams” (or chapters made up of other sellers) that went to craft/vintage fairs and promoted the Etsy brand to buyers. Some of these teams are still around and very much alive today. More recently Etsy has invested in traditional advertising but early on, they did nothing of the sort - it was sellers promoting their shops/the brand that drove growth. And they were not compensated -- they got value from sharing what they were passionate about, ie. Etsy!

— Nickey Skarstad

Once you sense that you’ve got enough supply — or even prior to that (we’ll spend more time on how to understand this in a subsequent post) — you then need to figure out how to drive your initial demand. In our next post we’ll explore this exact question, covering the twelve most important early demand-growth levers across these seventeen companies. Can you guess what the first two most common growth levers might be? I was pretty surprised when I saw this. Hint: They aren’t performance marketing, SEO, referrals, sales, or PR.

Ask: If you work at any of the companies I looked into:

  1. PLEASE let me know if I got anything wrong. I’ll correct it in the next post. Just reply to this email or DM me @lennysan.

  2. If you have any other insights to share about what was important early-on for your company (or any marketplace company), I’d love love love to know. Please share!


Phase 1: Crack the chicken-and-egg problem 🐣

How to Kickstart and Scale a Marketplace Business – Part 2: Cracking the Chicken-and-Egg Problem 🐣 - Supply vs. Demand

Rare insights from 17 of today's biggest marketplaces, including Airbnb, DoorDash, Thumbtack, Etsy, Uber and many more

“When we were starting out, we looked at the biggest marketplace companies – eBay, Craigslist, Amazon. There were two things in common: (1) They had all the supply, and (2) they had ugly products and brand. The lesson we took away from this was that all that matters is supply. So we decided to focus on that above all else. We postponed building brand and delightful product until we had liquidity. Dozens of other startups took another direction. Case after case, it proved a mistake. Creating scaled supply early on matters more than anything.”

— Sander Daniels, Thumbtack

(This is a special edition of my newsletter — the second in a series of posts sharing insights from interviews with founders and early employees at today’s most successful marketplace businesses. Our regularly scheduled weekly Q&A series will resume in a few weeks.)

The response to the first edition of this series has significantly more enthusiastic than I anticipated (who knew so many people are interested in marketplace growth 🥳), so I’m excited to jump right into part two. To be honest, part one may be the least interesting portion of the entire series — it only gets better from here. Enjoy!


Step 2: Decide which side of the marketplace to concentrate on 🧐

Once you’ve decided how to constrain your marketplace (geo or category), you then need to decide which side of the marketplace to put most of your resources behind — growing supply (e.g. dog walkers) or growing demand (e.g. dog owners). My second major learning from this research is that the vast majority of successful marketplaces focused almost all of their resources on growing supply early-on (80% of the companies I interviewed, 14 out of 17). In all of these cases, the companies found that their supply was either driving its own demand, or word-of-mouth was strong enough to take care of demand. In the three remaining cases (Rover, TaskRabbit, Zillow), there were clear signs that supply wasn’t an issue and thus resources quickly shifted to demand. And, in one illuminating case, one company realized they weren’t a marketplace at all 🤯.

The vast majority of successful marketplaces concentrated most of their efforts in the early years on creating supply

Eventbrite:

In the early days, we were only focused on driving supply. We found that supply drove demand. Specifically, event creators drove traffic to our site. Most event organizers had some built in demand that they brought with them. We also believed that the supply side would be the hardest to acquire, since event ticketing (in the US at least) is sold through a single platform, so we focused there first.” 

— Tamara Mendelsohn

Lyft:

“No question, supply growth was the unlock for demand growth at Lyft”

— Benjamin Lauzier

DoorDash:

“When I started looking at the evolution of how marketplaces like ours grow, the playbook is the same: Get restaurants -> Get delivery people -> Get customers. The largest growth lever has always been the supply -- the restaurants. They bring the demand.”

— Micah Moreau

Etsy:

“In the early days there was a huge focus on sellers. The marketplace needed sellers and their listings to build enough supply to attract buyers. Also, the sellers were also the buyers early on. Supply directly created demand. They were literally all the same people.”

— Nickey Skarstad and Dan McKinley

Caviar:

“Restaurants, restaurants, restaurants. In food, restaurants (our supply) drive demand because they have their own brand that diners want to order from.”

— Gokul Rajaram

Instacart:

“We always onboarded supply ahead of demand

— Max Mullen

GrubHub:

“To scale, we always went supply side first

— Casey Winters 

In a few (3 of 17) cases, however, supply growth took care of itself and demand quickly became the primary constraint. My hypothesis is that this happens when you can offer your “supply” super easy, super flexible, meaningful income. OR, in the case of Zillow, your supply is essentially publicly available data (i.e. county and tax assessor records) used in a new way.

Rover:

“For us, the scarce resource was demand. I don’t think we were ever supply constrained. Supply was easy. It was the dynamics of the market -- if you are someone who loves dogs, you work from home, you are in a situation where an extra $50 is meaningful, why wouldn’t you sit on Rover? It’s a no-brainer. Demand was much harder because we had to change customer behavior. We had to convince someone to get over the hump of letting a stranger watch their dog -- similar to Airbnb.”

— David Rosenthal

TaskRabbit:

TaskRabbit was never supply constrained. We had thousands of people on our waitlist to provide services, but the demand-side was more challenging. Over time we actually ended up charging new supply an application fee to reduce the volume of applications, and to increase the quality, while managing our costs to process background checks and other onboarding costs.” 

— Brian Rothenberg

Zillow:

“Our case is a little strange because we started the marketplace by getting supply that wasn’t really supply (we used public data). We used that to get demand, which we in turn used to get the real supply (listings). We would not have been able to get listings without demand.”

— Nate Moch

And finally, an important lesson from Patreon that sometimes you’re better off admitting you aren’t a marketplace after all

A lot of people wrongly think of Patreon as a marketplace. I don't blame them - most of Patreon's team for a while thought of Patreon as a marketplace. Fortunately, we corrected our vision and our metrics in time to match the reality of our product market fit. Realizing we weren't a marketplace was the best thing that happened to us. It allowed us to take ‘Discovery’ (find a creator to pledge) off our roadmap, because we realized this would misalign us with creators as those creators got big. Similar to Etsy's ‘graduation problem.’ It allowed us to focus on building an apps and developer platform (analogous to Wordpress/Salesforce/Shopify/Segment etc.) instead. Something that YouTube and Facebook, with their competing products, could not do.”

— Tal Raviv

Assuming you still believe your business is a marketplace — you’ve now determined how to constrain your marketplace (geo or category), and picked a side to concentrate on (most likely supply). Now, you need to actually build your initial supply and demand. In our next two posts, we’ll dive deep into how these marketplaces approached early supply and demand growth — including the 12 most common growth levers, the most effective tactics, and a bunch of great stories. Stay tuned!

Phase 1: Crack the chicken-and-egg problem 🐣

Quiz: Can you guess which growth lever was most commonly used to drive early supply for the majority of today’s marketplaces: SEO, Referrals, Single Player Mode, Direct Sales, Piggy Backing, or Performance Marketing? No need to tell me — just see if you can guess. And if you want to cheat, the previous post has the answer 👀

How to Kickstart and Scale a Marketplace Business – Phase 1: 🐣 Crack the Chicken-and-Egg Problem (Part 1/4)

Rare insights from 17 of today's biggest marketplaces, including Airbnb, DoorDash, Thumbtack, Etsy, Uber and many more

“Everyone's always looking for the hack - what's the channel that will unlock something big? But every time we looked for a reason we weren't growing, it always came back to the basics –– selection, delivery quality, pricing. That's it. Always come back to first principles. Whenever we made a mistake, we forgot this.”

– Micah Moreau (DoorDash, VP of Growth)

(This is a special edition of my newsletter — the first in a series of posts sharing insights from interviews with founders and early employees at today’s most successful marketplace businesses. Our regularly scheduled weekly Q&A series will resume in a few weeks.)

Having worked at Airbnb for many years, I’m frequently asked about what Airbnb did right in order to grow into what it is today. While sharing my learnings, I’ve become increasingly wary of teams relying too heavily on a single company’s experience. There are so many factors that go into an eventual success story, and what’s effective once may not be again. Thus, I’ve been yearning to get a wider perspective on what has (and hasn’t) worked for other marketplace companies.

Since I couldn’t find anything out there that was comprehensive enough, I decided to be the change I want to see in the world and do the primary research myself. Over the past few months, I’ve had the good fortune to interview dozens of incredible people with direct experience building and scaling some of the most successful marketplace companies in the world. I’ve consolidated their learnings into a sort-of-playbook to kickstart and grow a successful marketplace business — which I’ll be sharing as bite-sized posts over the next few weeks:

How to Kickstart and Scale a Marketplace Business

Phase 1: Crack the chicken-and-egg problem 🐣

Phase 2: Scale your marketplace 📈

  • Part 1: Determine if you are supply or demand constrained 🤹‍♂️

  • Part 2: Scale growth levers 🔥

  • Part 3: Maintain quality 🏅

Phase 3: Evolve your marketplace 🐛

  • Part 1: Move to a managed marketplace 🕹

  • Part 2: Add new business lines 🍰

This work would not have been possible without the enormous generosity of countless people, all willing to share their precious time, stories, and insights with me simply because I asked. The readiness to share so openly and transparently says a lot about the value people in the tech industry place on sharing and giving back. A very special thank you to Andrew Chen (ex-growth at Uber, GP at a16z), Babak Nivi (co-founder of AngelList), Benjamin Lauzier (ex-growth at Lyft, Director of Product at Thumbtack), Brian Rothenberg (ex-growth at Eventbrite and TaskRabbit, Partner at defy), Casey Winters (ex-growth at GrubHub, CPO at Eventbrite), Dan Hockenmaier (ex-growth at Thumbtack, founder of Basis One), Dan McKinley (ex-Etsy, Principal Engineer at MailChimp), David Rosenthal (ex-Rover, GP at Wave Capital), Georg Bauser (ex-Airbnb, CEO of Expansion Partners), Gilad Horev (VP Product at Eventbrite), Gokul Rajaram (Caviar Lead), Gustaf Alströmer (ex-growth at Airbnb, partner at YC), Hunter Walk (partner at Homebrew), Jamie Viggiano (ex-marketing at TaskRabbit, CMO at Fuel Capital), Julien Smith (co-founder of Breather), Kati Schmidt (ex-Airbnb), Max Mullen (co-founder Instacart), Micah Moreau (VP Growth at DoorDash), Mike Duboe (ex-growth at Stitch Fix, investor at Greylock), Mike Xenakis (ex-SVP of Product at OpenTable, Lecturer at Kellogg School of Management), Nickey Skarstad (ex-Director of Product at Etsy, VP of Product at The Wing), Nate Moch (VP at Zillow), Sander Daniels (co-founder of Thumbtack), Tal Raviv (growth at Patreon), and Tamara Mendelsohn (VP and GM at Eventbrite). Unless otherwise stated, all of the quotes below come from my direct interviews.

Background

What is a marketplace business, anyway?

A marketplace business is one that (1) connects demand (i.e. people who want a thing) with (2) supply (i.e. people who have that thing), and (3) leads to a financial transaction. These businesses do not generally own any supply, do not provide products or services directly, and (eventually) handle the money being exchanged. Simply put, their job is to provide a platform where the supply and demand efficiently find each other and transact successfully.

Examples of classic marketplace businesses: Airbnb, Uber, Lyft, Alibaba, eBay, Etsy, Hipcamp, DoorDash, Caviar, Rover, Postmates, Thumbtack, TaskRabbit, Craigslist

Examples of non-marketplace businesses: Delta Airlines (they own all of the inventory), YouTube (no financial transaction), Slack (no supply).

Why are marketplaces great businesses?

  1. Network effects: The more users you get, the more useful/cheap your product becomes, the more users you get (e.g. Lyft/Uber vs. taxis)

  2. Barrier to entry: Once they have a strong network effect, it becomes increasingly difficult to enter or replicate the marketplace (e.g. Airbnb vs. hotels)

  3. Efficiency: No inventory means cheaper to operate (e.g. Airbnb vs. hotels)

  4. Scalability: No inventory means easier to scale (e.g. Rover vs. dog hotels)

  5. Flexibility:  No inventory means easier to pivot (e.g. Uber Black -> Uber X)

Important disclaimers

  1. For many of these companies, the primary reason they became successful was not because of some amazing growth insights – it was primarily because of great product/market fit. Many folks I spoke to are first to admit this. The growth levers they employed helped accelerate (and control) growth, but they may have been successful anyway. At least for a while.

  2. Past behavior is not predictive of future behavior. When reading through the lessons below, my advice is to focus more on ways of thinking and the cleverness behind the ideas –– not only the specific tactics. Many of the most successful growth levers of the past no longer work, or are significantly less effective. Take inspiration from what you read, but don’t expect them to work the same way for you.

  3. This research is based on interviews, of events many years ago. Memory can be faulty, takeaways could be anecdotal, and you often don’t really know what mattered in the end. Also, I probably got some stuff wrong, so please don’t take any of this as gospel (and I’ll include any corrections in future posts). All that being said, I’ve tried my best to triangulate what actually happened across multiple sources, and made sure things felt right.

With those caveats in mind, let’s dive in!


How to Build a Marketplace Business

Phase 1: Crack the chicken-and-egg problem 🐣

Once a marketplace business is operating, supply (i.e. restaurants, homes, drivers) happily serve demand (i.e. eaters, travelers, passengers). However, when your marketplace is just getting started, and you have neither supply nor demand, it’s challenging to get the flywheel going. You must convince one side of the marketplace to commit before the other side. For example, without restaurants onboard, a customer looking for food has no reason to check your app. And without customers using your app, restaurants have very little reason to spend time onboarding onto your platform. This is known as the “chicken-and-egg problem”, and solving it is one of the biggest barriers to launching a marketplace business. Below, and over the next few posts, we’ll walk through the steps that the biggest marketplaces worked through in order to crack this problem. Also, here’s a cheat sheet:

Step 1: Constrain the marketplace 🔬

The first major learning that emerged from this research is that, with the exception of one company, every single marketplace that I interviewed constrained their initial marketplace to more quickly get to critical mass. To some this may seem counter-intuitive — why limit your growth and opportunities when you are starting out? It turns out that the best way to get big is by first going small.

The research points to two ways to constrain a marketplace: (1) by geography, and (2) by category. If the offering requires supply and demand to be in the same physical location, the constraint is always geographical (e.g. a limited set of markets). Otherwise, it’s category-based (e.g. handmade goods). And the one exception to this rule, Thumbtack, is a fascinating case study in and of itself.

If the service requires supply and demand to meet, it always started with a geographical constraint (i.e. a single market)

Rover:

We started in Seattle, and stayed hyper-focused on Seattle, for a while. Seattle was the perfect market for us: very dog-friendly, early adopters, techy, working professionals who go on vacation and business trips. Plus Amazon is super dog-friendly. There is probably no more dog-friendly city in America. This helped figure out the product quickly.”

— David Rosenthal 

Airbnb:

“Similar to how the founders first focused on New York early on, when Airbnb expanded internationally in 2011, we focused on creating critical mass in just a few markets in which we were quickly able to unlock supply and demand.”

— Kati Schmidt

Uber:

“We created a playbook for opening up a new market, which got set by the Launcher team (led by Austin Geidt). The first thing they would do when they launched market is to figure out supply. The goal was to get over 30 drivers, shooting for ETA of less than 15 minutes.”

— Andrew Chen

OpenTable:

“We ultimately discovered if we had enough restaurants in a market, we’d have enough value for the diner to use OpenTable. Dining is local, so concentration was key. A rule of thumb was that if we could get to 50-100 concentrated restaurants in a city, we had enough for a consumer to land on the site, cast a wide net, and get a consideration set that was meaningful enough to not be disappointed.”

— Mike Xenakis

Instacart:

We selected our initial markets where there would likely be demand, e.g. Chicago in the winter. A high household income, fewer households with cars, and frequently inclement weather — typically means people want delivery.”

— Max Mullen

Breather:

“When transaction length was low (a 2 hour room booking), proximity was super important. We had areas of density like the Flatiron District, where we added units and they kept getting booked immediately. It was clear product/market fit. We followed this in a super dense and a very precise way. This cafe, at this location, at this time, is working. Duplicate this exactly. Don’t try to create something else. Don’t try to launch a new city yet. Don’t change anything. What is the exact same thing I can duplicate or extend? What else can this customer go do after? How can I double the size of the transaction. A lesson of marketplace companies --  if you are in a place with a decent market size, then just double down on what’s working. You don’t need to do anything new. Like with Airbnb, it was working in NY, so just create that again and again and again.”

— Julien Smith

Zillow:

“When we started the mortgage marketplace, there were no automated systems for anonymous, accurate, real time mortgage rates. So we had to start small in a single market and work with mortgage brokers who would respond to emails and manually enter quotes by hand every day.”

— Nate Moch

Essentially every other marketplace (not location-based) started with a category constraint:

TaskRabbit:

“While we were always a broad platform, we were very deliberate about building a liquid marketplace for our most popular task categories, which were and continue to be: handyman tasks (including IKEA assembly), house cleaning, and moving help. We focused on these categories to ensure that there was high-quality supply to meet the consumer demand for these services.”

— Jamie Viggiano

Eventbrite:

“Find your core use-case, and gain traction there. For Eventbrite, this was tech mixers and conferences. As you got invites from events, you started to see the name Eventbrite over and over and it became a thing. We focused on this, based on seeing where most early traction was.”

— Brian Rothenberg 

Etsy:

“From the beginning, we had only three categories of things you could sell: vintage items, craft supplies, and handmade items.”

— Etsy, Dan McKinley

In one rare, fascinating, and deliberate case, Thumbtack decided to eschew any constraint:

“The conventional wisdom was to narrow focus to a category (like Amazon did with books) or geography (like Yelp did with San Francisco). We didn't get funding for many years in part because we did the opposite -- we did all categories and all geographies from the beginning. People thought that wouldn't work, that we were boiling the ocean. In retrospect it was the only way to build a marketplace in our space at scale -- being broad in category increased the frequency of use of our product from once every couple years (how often do you need to hire a house painter?) to 8-12 times a year (the number of Thumbtack services an average American household hires annually). And being broad in geography allowed us to scale our marketplace as fast as possible, giving us the revenue, traffic, and thus experimental velocity we needed to bootstrap a great product. In our case we wouldn't have survived had we done it any other way.”

— Sander Daniels

Once you’ve decided how to constrain your marketplace, you then need to pick which side of the marketplace to put most of your resources behind (supply or demand). In our next post, learn how today’s biggest marketplace companies decided whether to concentrate on supply vs. demand early-on, plus how one “marketplace” realized they weren’t a marketplace after all.

Other posts:

This Week #8: Splitting equity with late-joining co-founders, favorite roadmap templates, and small changes that improve your org

With special guest contributor Hunter Walk!

Hello and welcome to my humble newsletter, where I attempt to answer your questions and offer candid advice about building product, driving growth, working with other humans, and anything else that’s stressing you out at the office 🤝

If you’re returning from last week, thank you! If you’re new, nice to have you! Help spread the word by telling your friends 🙏

New this week: Special guest contributor Hunter Walk 🔥🤩🤯 answering one of your questions! Also, watch out for something very special coming next week.

On to this week’s questions…


Q: I have bootstrapped my startup to our recently launched MVP by using paid contractors, and I’m now looking to bring in key team members (at least a CTO) as co-founders. Given that I have not raised any funds yet, one of the potential CTO candidates has agreed to join me on an equity basis. What do you recommend I offer the CTO candidate to demonstrate that I really want to work with him as a co-founder, but at the same time not make a decision that will deter potential investors (e.g. issuing him preferred instead of vested common stock for his work/contributions)?

Though I’ve had a bit of experience with this, I wanted to make sure you got as complete and accurate an answer as possible — thus, I turned to the man, the myth, the legend: Hunter Walk. Hunter is a partner (and co-founder) at Homebrew, former PM at Google (AdSense, YouTube), has personally worked with over a hundred early-stage startups, and has shared a few strong perspectives on equity splits. He generously offered to share his perspective on your situation:

Congrats! Bringing on a key technical leader is a milestone that you should be proud of, and which will impress any potential investors. Your question around equity has a few components, but directionally you’re exactly right:

  • What’s the CTO’s value? If they’re a true cofounder, would you consider giving them equity starting around 10% of the company — all the way up to a share equal to yours? For a very early stage company, we see “late-arriving cofounders” all the time. Otherwise, senior engineers/founding team would usually receive 1-5% of the company. These are all averages and situations definitely differ.

  • The stock grant should be common shares with a standard vesting schedule. Even outside of investors, this will give you comfort that you have time to evaluate this new team member before handing away meaningful portions of your company. Any venture investor will likely begin a vesting schedule for you as well.

  • Given that they’ll start work during the vesting period, the CTO might ask for something from you which signifies commitments — such as if they’re terminated without cause pre-vesting cliff, that you grant them some negotiated amount of stock. In my mind, this seems fair. 

Good luck! Building a team and a culture is the best part of building a company!

Thank you, Hunter!

Q: What’s your favorite roadmap template that you like to use?

Yes! Here you go! This is courtesy of my former Airbnb colleague, Andrew Chen (not that Andrew Chen), who had some of the most thoughtful and well-executed roadmaps of any PM I’ve ever worked with. I’ve tried a lot of different tools over the years, and I always find myself always coming back to Google Sheets 🤷‍♂️

Below is a peek, but make sure to check out the full template.

Option 1: Organized by lever (my preference)

Option 2: Organized by product

Bonus: A timeline per team member

If you have something better, I’d love to see it! Reply to this email and share the wealth 🧐

Q: What’s one thing you’ve changed within your organization that has made your team meaningfully more effective?

I asked this question of you all last week, and you delivered 💛 We got a boatload of great stuff (and also ended up rocketing to the top of the Substack engagement rankings 😬).

Here are your top ten highest rated ideas:

  1. Keeping track of every piece of customer feedback we receive, and then actually following up after we've made improvements to let people know they've been heard. I created a template in case anyone is interested in trying out our methodology.” — Justin Hales

  2. Delivered monitoring/analytics with each feature implemented in the product. This made it easy to justify more budget by having a backlog of a pretty deep set of analytics by the time we were a few months into the project.” — Jacob M

  3. “After reading ‘Trillion Dollar Coach’, I liked the idea of ‘Trip Reports’. So I introduced a variation of that in our team meetings. Every Monday morning, I asked the team to send me photos of their weekend/vacation. I collated it into individual slides and at the start of our team meeting, we went around the room talking about your photos! (15 mins). This had a positive impact on the team. We got to know each other as humans outside of work. We let our guard down before talking about work. Especially great for new starters!” — Saffad Khan

  4. “I'm in an engineering first org, so I had to introduce product into our development processes in a valuable and non-intrusive way. I did this by introducing Product Discovery documents on topics that we want to address with the following structure.” — Yehia Khoja

  5. We started to have ‘monthly social events’ -- a rotating set of activity-based events that each person on the team would host. Anything from MassVR to Game Show Game Show. The structure shifted a decidedly introverted team to become much more collaborative and for the newer folks on the team to ask others for help. This then set up a structure where we now have weekly "pod" meetings where various folks collaborate on technical design, coding, and strategy in a way that I never expected!” — Shashin

  6. “Moving over to Basecamp instead of using Google Drive / Docs / Sheets.” — Monica Banks

  7. “(1) Daily Virtual Scrum over slack, where the team shares what are the things they are targeting to achieve that day. And at the end of the day, they share the status update against each line item they shared in the morning. It reinforces for the team to go through the allocated task, and think first thing in the morning, before they start executing, (2) Product Reviews every week/bi-weekly. We keep changing frequency based on the backlog, (3) We started writing the mission, vision, and strategy for the subsequent products that we are planning to introduce. It helped me personally to avoid many mistakes we did in the past based on this link where you shared, Lenny.” — Vikram

  8. “Created a deck on business terms used at our company that many may not be familiar with. Things like MRR, ACV, CAC, CTR, ASO, etc. The idea was to enable everyone to be more proactively involved in discussions whenever these terms are thrown around. Now we showcase this deck to every new joinee at the company during their onboarding! Public link to the deck.” — Sudeep Shukla

  9. “Normally developers would do a ‘Technical Conception’ before a project begins, and that would take a few days or weeks. What I now do as a Product Manager is a ‘Pre-Technical Conception & Legacy study’, where I:

    • Study the legacy product where the team will have to work on. I study all functional aspects, write documentation (super important) to keep track of my studies,and explain how the features & logic work.

    • While studying the function, I also take time to note down all technical aspects that I can understand (ex: database structure of this functional perimeter, API calls during feature interactions, workflow, etc) or any leads/suggestions I can give to the developer so that can help them do the Technical Conception faster.

    • This is a totally new process I created in my team & company. Not only did it benefit a lot the team, but it made the project deliveries significantly faster by making the developers obtain knowledge in advance and do very fast Technical Conceptions.

    Our development time of projects went 300% faster.” — Chaz

  10. “After reading 📚 UX for startups and other UX books in my first 2 weeks after joining the startup, we experimented with setting aside a day where all engineers 👨‍💻 focused on a certain list full of UX annoyances (not bugs) then send out an email with all improvements as we ate pizza 🍕 while solving them

    • 🚨On D-day, there was only 1 engineer who was available because the rest had emergencies.

    • We (me as UX & Front-end of course after discussions with the PM) moved the tickets from: 'Design in progress' 👉'Ready for Dev' 👉 'In Progress' 👉 'Code Review' 👉 'QA' 👉 'Done'

    • 🎉We managed to address 10% of all the UX annoyances.

    • After reflecting with the team 🧠, because we work in an agile way, we all decided that for every sprint ♺, we will be picking 1-2 UX Annoyances 😡 and adding them to the Backlog.

    This was a victory for the team! 🙌 Now we are not just looking at Painkillers (PM vs UX) but also Vitamins!” — Lewis Kang'ethe Ngugi

Thank you all for your ideas! Read the full list here, share yours if the mood strikes.

That’s it for this week!

Inspirations for the week ahead

  1. Read: Beyond Coffee — A Sustainable Guide to Nootropics, Adaptogens, and Mushrooms. Written by James Beshara (of Tilt, and Below the Line podcast fame), and just released today. It’s the most informative, well-research, and digestible (pun intended) read on these substances you’ll ever find. 🧠

  2. Watch: Advice on Organizing and Running Growth Teams from Dan Hockenmaier and Gustaf Alströmer. This video is from earlier this year but I just discovered it, and was super impressed with how much damn wisdom it has packed into it. 📈

  3. Subscribe: Nonzero Newsletter by Robert Wright. Wright wrote some of my favorite books, like Why Buddhism is True and Nonzero, so I was rather excited to find that he has his own Substack now. And it’s awesome. 🤓


If you’re finding it valuable, please share this newsletter with your friends.

And if you’d like some advice yourself, or just want to say hi, just reply to this email. I’ll tackle three reader questions each week (keeping your name and company anonymous) until you quit sending me questions. I definitely won’t have all of the answers, but hey, it’s free 🤷‍♂️

Sincerely,

Lenny 👋

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