14 Business Marketplace Mistakes That Are Killing Your Startup

Recently, I hosted my eighth Marketplace Dinner. Marketplace Dinners are a series of happy hour-esque meetups that bring together founders and leaders at startup companies growing, you guessed it, marketplaces.

So far, we’ve gathered over 1,117 founders and leaders over eight events hosted at the offices of Thumbtack, Shippo, and DogVacay. In attendance were entrepreneurs and executors from Lyft, Airbnb, UpWork, eBay, Uber, InstaCart, and many more “unicorn” business marketplaces as well as burgeoning startups.

Each event is three hours of eating, drinking and telling tales of what it took to build a marketplace.

Why the need for Business Marketplace Dinners? Two reasons:

1 — Startup founders are incredibly collaborative and thoughtful.

As a Minnesota kid moving to San Francisco, I felt welcomed by the tech community here. I wanted to make sure that continued.

I personally can’t even count how many times I’ve picked up the phone and called, texted or emailed other founders for their perspective or a coffee. Ninety-nine percent of the time I get a friendly response.

2 — Business Marketplaces are rewarding, but hard.

When you are serving two customers, there is a lot to think about, especially when you need those two customers to work together. Thus, many mistakes are made along the way.

Although some mistakes are inevitable and are a natural part of rapid learning and iteration, a lot of common (and costly) marketplace mistakes can — and should be — prevented. We’ll go over those today.

To start, two simple business marketplace definitions from Merriam-Webster to give us a history lesson.

First:

: an open square or place in a town where markets or public sales are held.

Secondary:

: a sphere in which intangible values compete for acceptance.*

*To bring the business definition up to 2015 terminology, assume sphere means platform; compete includes a buyer and seller (demand and supply); and intangible values can be tangible goods as well.

Okay, we definitely need an updated definition.

To rewrite it, I would define a modern-day marketplace business — think sharing economy — as follows:

Now let’s dive into the most frequently made mistakes that occur when building a marketplace (in no particular order), and hear directly from leaders at Airbnb, Odesk, Etsy, and other leading business marketplace companies.

Marketplace Mistake #1 — Poor Risk Management

When an Airbnb apartment was trashed, it caused a media storm. Airbnb spent countless hours responding to the press and supporting their customers, but when Hurricane Sandy drowned a large part of Manhattan, Airbnb was prepared and lent a hand by reducing prices and opening up homes to those that were displaced.

On the other hand, Uber has made this mistake time and time again. Whether it is increasing surge pricing and defending it during a hostage situation in Sydney, Australia, or not running background checks on drivers in India, Uber has given the public a perception that the trust and safety of its customers is in the back seat, figuratively not literally.

Marketplace Mistake #2 — Smart Risk Management Without Self-Promotion

Atish Davda, co-founder and CEO of EquityZen, tells a tale of how important this was for his customers:

Marketplace Mistake #3 — Serving No Purpose

Is your marketplace solving a real problem? Jonathan Golden, co-founder of StartX and product lead at Airbnb, says, “My only two cents are to not think that every market is the same. Meaning, ‘Uber for X’ or ‘Airbnb for X’ may not work. Each market dynamic is unique and different.” Enough said.

Marketplace Mistake #4 — Not Building a Movement

Many say the time of ‘stealth’ marketplaces is nearing an end. You need to capture brand equity for your company early on and stake your place in your operating industry.

The food delivery space is one example. Even though food delivery is an extremely busy industry right now, companies like Sprig in San Francisco and Lish in Seattle are changing the dynamic by building socially conscious and design-forward brands.

It helps them differentiate and break through the noise.

Marketplace Mistake #5 — Not Regulating Your Community

From rampant Etsy forum trolls to the more recent promo code opportunists, you must set out a prominent vision and brand for your company and community. You’ll need to moderate and curate a lot, especially early on in the life of your company.

For example, by better curating the retail spaces available on Storefront to have high foot traffic, we were able to drastically increase the likelihood a brand, artist, or designer renting the space would meet their goals for the retail store or event. Goals usually included exposure, sales, market testing, or customer acquisition. Thus, they need people to walk through the front door, or else they wouldn’t come back to Storefront. By carefully monitoring the supply side we increase repeat renting on demand side to 65% over only six months.

Marketplace Mistake #6 — Over Regulating Your Community

Here’s a lesson from Shelby Clark, founder of RelayRides, and the P2P advocacy organization Peers, “In the early days, we tried to control too much of the experience in order to provide a high-quality experience,” Shelby explains.

Shelby gives two examples of over-regulation:

Marketplace Mistake #7 — Choosing a Really Bad Name

Jen O’Neal, founder of Tripping.com, tells a couple stories about company and community names:

Airbnb also has run into this problem in Europe, as the term ‘bed and breakfast’ is not always easily understood.

Marketplace Mistake #8 — Focusing Too Broadly

TaskRabbit and Zaarly got taken over by HomeJoy and Handy before realizing their cleaning and home services were the most purchased services on their respective platforms.

Richard Werbe, founder of StudyPool, a marketplace for student questions, also found this out the hard way:

Overall, make sure your current vertical market is large and growing. Then dominate it.

Marketplace Mistake #9 — Pulling Out the Chair on Supply

Social networking within a marketplace has become commonplace. Whether that comes in the form of Airbnb’s groups platform, which allows hosts to chat with one another, or Couchsurfing’s forums where hosts and guests can talk openly about meetups, social connections play an important role in marketplaces.

For those who have managed large online communities, it’s no surprise that the dynamic of an online community changes with its size.

Early on at Lyft, they launched private Facebook groups, which enabled drivers in a city to connect with on another. Drivers benefited from being able to tap into the insights of other drivers, and Lyft benefited by being able to receive real-time feedback from the community.

However, as Lyft’s community scaled, the personal connections between drivers became more and more difficult to form. A room of ten thousand people simply cannot form connection in the same way a room of hundreds can.

Lyft ultimately switched up the structure of their groups to make them more relevant to drivers and smaller. This brought back that personalized feel that drivers experienced early on. If your marketplace relies heavily on community, keep in mind how it will change as you scale.

Marketplace Mistake #10 — Over Optimizing on Price

Gary Swart, the past CEO of Odesk (before the merger with Elance) and now venture partner at Polaris, lived this first-hand.

He explains:

This experiences is chronicled here by Bill Gurley of Benchmark.

Marketplace Mistake #11 — Quantity vs Quality

Gary Swart also found focusing on either quantity or quality to be utterly important:

Marketplace Mistake #12 — Preventing Disintermediation Instead of Adding Value

Every marketplace deals with disintermediation and their customers going around the platform.

It’s a common issue, but a small amount of disintermediation doesn’t always matter. It’s important to know your customers and the value you are giving to them through your marketplace. If you know how your top 2–4 value props rank, then you know what matters to your customers.

Is there a rule of thumb for when your level of disintermediation signals a value prop red flag?

1. Start by looking at each stage of your marketplace funnel and focus on where user activity drops off to address this.

2. From there, you can compare where users are disintermediating against your value props (or demonstrating other issues with activation) and make sure your value is clearly explained and actually rings true for users.

3. Finally, combine user testimonials with tracking data to formulate hypotheses that you can test and iterate on.

At Storefront, we mainly focused on the transactional side of our marketplace (thus why we are called ‘Airbnb for Retail’), which was the second step for a demand side customer, but more recently we saw that the first step — finding short-term retail space — was even more important. That led to new discoveries and new features being offered that made retail space even more accessible on the platform.

Marketplace Mistake #13 — Over Catering to Supply Customers

Jason Davis, founder of Radico, and past director of search and data at Etsy, learned this:

(An Etsy snapshot from the Wayback Machine).

Mistake #14 — Thinking Marketplaces are Easy Exits

At the end of the day, marketplaces are exciting, empowering, and hard businesses to grow.

Marketplaces take much longer to reach product-market fit, liquidity, scale, and are often a 7–10 year venture before you’ve nailed it. LoopNet exited in eight years. Etsy was founded in 2005 and is just now looking to IPO in 2015, 10 years later. Airbnb is now valued at $31 billion, but it took nine years. Lyft is valued at $7.5 billion, but it took an evolution from Zimride, it’s previous company, and an additional 5 years.

Remember to build your marketplace with a passion and vision that’s big, lofty, and adds a positive impact to the people and world surrounding it.

PS — here’s my Marketplaces Resource Guide.