by Lionesses of Africa Operations Department
One of the many joys of working at Lionesses of Africa is that we have membership in so many different industries, from Fashion and Beauty, to Security, to Health, to Agro-processing, to Construction, to Road Building, to PR and Marketing, to Tech in its many forms, to…, no day is the same. There are also a number of Lionesses who have built and are building marketplaces. Not so simple as we might think. There are so many issues to think about - and assumptions that will be hopeless and overnight just wipeout their dream. Here’s a hint - ‘If I build it, they will come’, never works. Welcome to the world of the Chicken and the Egg.
You have a fabulous idea to bring buyers and sellers together, but where do you start? Creating a marketplace always comes with a chicken and egg situation. In the beginning the market is simply not large enough to attract the buyers, so the sellers start to wonder why they bothered showing up in the first place. This is true of online or even traditional. Ever visited a town miles from anywhere and wondered why it was founded, what drove people to settle, build houses and communities? Chances are very high that it was on a trading route to one of the large cities many miles further. The camels had to stop somewhere to rest and rewater, the buyers knew that was where they would stop and so slowly but surely a town developed, but only because it had the gravitational pull.
The same is true online. One has to get to that level at which the gravitational pull is large enough. At formation the market is simply not large enough to attract the buyers, so the sellers wonder why they bother. One has to find a way to create the marketplace through stealth, namely to build the marketplace up to a required level whereby the natural gravity will then pull buyers and in turn more sellers towards it. Marketplaces can only create value by bringing together supply and demand, sellers and buyers, one on it’s own is a rather dull and lonely party…
That is why your seeding strategy needs to be well thought out. To attract either side (although usually it is the supplier, the seller first), one has to create value to attract them, and it is rarely “I am going to build a marketplace - come join” kinda promise that works, but often something else that first brings the sellers in.
One of the largest restaurant table booking apps started off life as something far more humble. OpenTable started by building a unique table management and Customer Relationship Management (CRM) product, for which it charged a small fee. The Restaurant would use their app to ensure that they would know which of their guests were sitting where (rather than that old large book at the entrance), allowing both a collection of information on their guests (the CRM part) and the ability for their waiting staff to also know who was who. “Good evening Mr and Mrs ABC, how lovely to see you again…” (for even occasional repeat guests this personal approach makes a huge difference). This was the value that OpenTable, or as it was then the ‘Electronic Reservation Book’ (yes, a bit of a mouthful!), brought in to draw one side of the market to them.
Once they got up to a certain size (hundreds of restaurants), they were able to offer the reservation side to the buyers (the paying guests), and bingo, a marketplace, bringing together buyers and sellers and where fees could then be charged to many thousands. In turn this then attracted more sellers as those restaurants heard that this was the place to go to fill their restaurant. This network effect is incredibly valuable. Once you have cracked it - i.e. once you start having that gravitational pull, the market grows exponentially. Think how dull the telephone would have been if only 1 person had it - even if only 100! But get into the thousands, then the race is on! That is the gravitational pull.
What is really great about this method, and no surprise many of the world’s leading marketplaces started like this, it is highly cash efficient. There is no sponsorship or subsidising one side. You are bootstrapping your marketplace.
Had OpenTable simply launched the reservation site with no buyers or sellers and simply hoped that those would turn up through tonnes of advertising, their ‘burn rate’ of cash would have been faster than you can say - “Whoops, we did it wrong!”, and they would have gone out of business fast.
The interesting side effect and upside of this is that OpenTable now has huge control over both sides, the buyers and sellers, and huge data flowing through their own books. The downside of course is that they are very City centric, no one in New York is going to be impressed if the only restaurants shown are in Chicago! Still that is the nature of their business, a market place like eBay or Amazon - so long as it has solved the costs of delivery, and in Africa the really expensive part - the last mile delivery, then they can advertise products on their website across America and even across the world. Even better if you are a market place for software developers, no tuk-tuk delivery issues!
So now we know how to start one, almost like a magician, “Look at what I am holding in my left hand”, whilst the right hand is where the end result is being developed… how do we check that our magic will be successful (no guarantees in life - but let’s get close!).
According to Bill Gurley (here), 15 years as a General Partner at Benchmark Capital and before that Hummer Winblad Venture Partners (he invested in many marketplaces including OpenTable), there are considered to be 10 factors that create the highly successful marketplace and push it above the rest:
New Experience vs. the Status Quo: Seriously, why would I bother if you are not offering me a better experience? This goes for both sides, the buyer and seller.
Economic Advantages vs. the Status Quo: The obvious example is AirBnB - what were we doing with all our spare rooms or second houses before AirBnB came along? They were simply gathering dust when not used. Serious economic advantage.
Opportunity for Technology to Add Value: Does the technology greatly enhance the user experience? Just look at Uber and tell us that watching the car arrive along the streets on your smartphone does not greatly help, if for nothing else, our daughter knows exactly when to pack her bag for the holiday (her best is 63 seconds before the doorbell goes. Grrrr!).
High Fragmentation: High buyer and seller fragmentation is a huge positive for an online marketplace as there is no way the larger players can control this, they want low fragmentation (high concentration) - all their potential customers in one place, which in turn allows them to block any new marketplace.
Friction of Supplier Sign-Up: Make this as easy as possible. A painfully slow process that requires lots of touch-points and local presence is a complete turn off, it slows everything down and significantly increases your costs. If it is difficult for sellers, think how difficult it will be to attract your buyers.
Size of the Market Opportunity: Although a proper analysis of this is very useful, it is a relatively junior issue - if you just have a rubbish idea, it will stay a rubbish idea no matter what size of market. You do however need to be honest about what percentage of the market may be open to your idea.
Expand the Market: Will this marketplace expand the market? It happens - just look at the markets that have opened bringing together software developers in India with the needs of those in the rest of the world. Asked about the market for developers, one could have been forgiven for thinking it was a low fragmented market, developers in Johannesburg service those in Johannesburg, likewise Nairobi and Lagos, but once the market opened - bingo! Huge expansion of opportunities.
Frequency: All things being equal, a higher frequency is obviously better. Use Uber again and again and again, sometimes many times in a day. Result!
Payment Flow: Please be part of the payment flow - i.e. payments come to you and you then pay the seller (less your fee), there are then no invoices involved or chasing for payment! Happy Days!
Network Effects: Finally does your marketplace involve a network effect, where the network becomes more valuable to all parties the more that use it. We previously mentioned the obvious one - the telephone, but it is also true for our friends at OpenTable - the more restaurants there were on this, the better it was for the buyers, more buyers, means in turn more opportunity to fill your restaurant, so more sellers, and so on…
Finally as a16z (the huge Tech investors) always state: ‘Trust and Safety is paramount in all marketplaces’. You have to ensure that users are having a good experience, this means for AirBnB, having staff who check the quality of apartments, who check the feedback (this is paramount - think of the trust gained or lost here) and so on. Test that checkout flow on your website - if it is slow and clunky, change it fast!
As always no guarantees in life, but if you have ticked at least 6 of the above factors, you should be well on your way to success, just don’t tell anyone how you did it!
Stay safe.