"Marketplace" seems to be the pitch I hear most often. The theory seems to be, "I will put people together. They will make things happen with each other. Everyone pays me for the privilege of having been put together."
Most of the marketplaces I talk to focus on wanting supply to get together. They know these people! They want the suppliers to run their transactions through the platform - what a great deal! But whence the demand? The answers get vaguer. How do you enable the transactions?
Here is where the wheels come off the cart, in my opinion. I hear how this is "just a marketplace." They say that many of the issues I raise about liability, logistics, fulfillment, etc., are the responsibility of the participants. Isn't it great - they can be just the marketplace and take their rake!
One who is interested in a marketplace must first be a market maker. Create liquidity in the market by ensuring supply and demand. A great way to make markets is to be the vendor yourself. First, you attract demand through personal service and reputation. Subsequently, bring in other vendors to take over the business.
A market-making path has three levels.
First, be the supplier or have a trusted partner. Doing commerce oneself establishes one as an expert in the field. Both suppliers and demand turn to you for expertise. Since you are focused on developing the market more than keeping your slice, you give your expertise freely. Believability grows. In this case, you are the wine, the valuable part of the exchange.
Second, bring demand together with high-quality providers. Now you are acting as a broker. This position leverages your credibility in the market to build that market. You create more and more connections. Now your expertise is in making transactions - filling cups with quality wine.
Third, credibility established, become an impresario, throwing open the doors so all can trade at your bazaar. Your rules are in place because they all trade with the confidence that comes from your reputation. Reputation is the reason they pay your tribute to operate under your roof.
All this is a very old-school three-step of commerce. The necessary parts of the job also evolve. But all are about compounding credibility. Both vendors and buyers must see the future marketplace impresario as an impeccable source of judgment and truth.
Each step has higher headwinds and involves taking a smaller piece of a much bigger pie. It is also not clear to me that the top of the mountain is the best place to be - everyone else is training their fire there.
There is a bigger idea in splitting off pieces of the market to be where your credibility has the highest returns. A broad, generic market looks best to a broad, generic financial model. But in the real world, margins come from where you are unique.
Back to the startup that announces "we're a marketplace." If they are not ready to make the market in the manner of the middleman jobs above, this is a climb. I have seen people overcome some pretty steep hurdles, so I never say impossible, but this is playing on hard.
To an outsider, this opportunity appears as a way to extract some money. More than that, it so often feels like the entrepreneur does not fundamentally care about the market in question. The person who loves the market will serve it well at the ground level. They have an excellent chance to attain the leadership and reputation to ascend the three steps I outlined above.
What great news for entrepreneurs who want to make marketplaces! You can create value immediately and get paid for it at the first two levels. Direct market participation funds both credibility development and market validation. Best of all, it requires zero or very little capital. Depending on the domain, very little tech investment is needed.
If this sounds appealing, do it! Get some good people backing you with advice, but you don't need money at the outset.
By the time you're ready for step 3, you can hit the VC circuit as the undisputed expert in your field. The tech required is minimal - and will be even cheaper by the time you get there. Now you are raising money to scale. Growth money is both easier and cheaper money to find.
Marketplaces require a deep love and understanding of the market evinced through months or years of hard work. If you are willing to put it in, and if you have an unfair advantage in understanding one of these markets, let me know! I am always down to help on the early end.