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How to build a billion dollar digital marketplace – examples from Uber, eBay, Craigslist, and more

Marketplaces are easily underestimated
When marketplaces get big, they can get really big. Some of the biggest tech successes ever – eBay, Airbnb, Alibaba, Uber – are marketplaces worth tens of billions of dollars each.

And yet marketplaces often start small, in niches and weird corners of the Internet. As we all know, when eBay got started in 1995, it was focused on collectibles. The venerable venture capital firm, Bessemer Venture Partners, famously passed on an early investment:

“Stamps? Coins? Comic books? You’ve GOT to be kidding,” thought David Cowan, a partner at Bessemer. “No-brainer pass.”

An early investment in eBay would soon yield a 50,000% return from Series A to after the IPO, as the company started to help transact on everything from electronics, cars, homewares, and more.

Two decades after eBay was founded, a similar story unfolded itself, this time over Uber (my current employer!) and the taxi market. NYU Professor Aswath Damodaran asserted that Uber was overvalued after a 2014 investment round. Based on data points from the global taxi and car-service market, he concluded the real number should be $5.9B. Since the 2014 article, Uber has blown past his estimate by 10X, with top line revenues to support it. Not bad. The reason the estimate was so off, as investor Bill Gurley pointed out, is that Uber goes beyond taxi use cases and grows the market substantially by unlocking many new categories of transportation. Another example of going from niche into more use cases over time.

(As an aside, a slightly different flavor of the expansion of audiences and use cases leading to wild underestimates – this time my mistake: Why I doubted Facebook could build a billion dollar business, and what I learned from being horribly wrong)

Starting small, and what to do next
In both the eBay and Uber examples, we see that you can start with a niche – whether that’s a geography or product line – and then quickly scale into a huge network of buyers and sellers. It turns out that there are a couple key moves to make this happen, and today I’ll highlight some of the main strategies with examples across the past few decades:

  1. Expand into new geographic markets
  2. Add new products and price points
  3. Decrease friction from signup to successful transaction
  4. Grow supply + demand stickiness

Let’s dive into each one.

1. Expand into new geographic markets
Marketplaces like Uber, OpenTable, Craigslist, and others are hyperlocal in nature, and a critical mass of supply/demand must be quickly built within a constrained geography. If a customer is trying to book a restaurant in the Hayes Valley neighborhood of San Francisco, you don’t care much how many restaurants are also on the platform in Manhattan.

As you might imagine, breaking into each new local market can be incredibly painful. Marketplace companies often end up employing teams of “launchers,” a specialized ops role focused on cracking new cities.

Here’s a great Quora writeup on Uber’s Launcher team from Chris Ballard (these days, GM SoCal):

The “Launcher” role at Uber is one of the most physically, emotionally, and mentally challenging roles that an individual will come across.  It is also one of the most rewarding. […]

Once in a city, the Launcher must simultaneously:

  • recruit, hire, and train a local team
  • develop partnerships and manage relationships with local hire car operators (NB: Uber does not own any vehicles.  We work with existing accredited, licensed, and insured hire car owners)
  • create a marketing strategy to scale the client base and increase visibility
  • explore biz dev opportunities (sponsorships / partnerships / co-promotions)
  • form relationships with local press
  • throw a legendary launch event to officially kick off the city!

The travel is intensive.  Launchers are on the road over 300 days per year.  We live out of suitcases, and our most important possessions are our MacAirs and our Passports.  If you tend to get homesick after a few days or don’t sleep well unless you’re in your own bed, this is definitely not the position for you.

Launching is hard work, but the good news about these hyperlocal marketplaces is that if it works in one market, then it will probably work in hundreds more. Sometimes there will be stronger cross-network growth across geographies than you initially imagine, enabled by factors like Airbnb’s global travel use case, which can supercharge your addressable market.

Furthermore, if you are a new startup, you can go after hyperlocal markets where your competitors are weak, and build a local network effect that will be hard to dislodge.

2. Add new products and price points
The next variable that marketplaces can play with is expansion of product lines and price points. Both of these directly unlock new use cases and addressable market, and there are strong examples of how this happens. Craigslist, the mother of all free marketplaces, started with events and then expanded to jobs and apartments.

In an Inc interview in 2016, Craig Newmark reminisces on the early form of Craigslist – literally just an email list – and how he intuitively added product categories over time:

Craigslist began with a single email in 1995–you simply shared interesting things going on in San Francisco. What was in that first email? The first ones had to do with two events: Joe’s Digital Diner, where people would show the use of multimedia technology. It was just emerging then. Around a dozen of us would come and have dinner–always spaghetti and meatballs–around a big table. And a party called the Anon Salon, which was very theatrical but also technology focused.

How many people did that first email go to? Ten to 12.

And then? People just kept emailing me asking for their addresses to be added to the cc list, or eventually to the listserv. As tasks started getting onerous, I would usually write some code to automate them. And I just kept listening. At first, the email was just arts and technology events. Then people asked if I could pass on a post about a job or something for sale. I could sense an apartment shortage growing, so I asked people to send apartment notices, too.

Today, Craigslist in over 57,000 cities, generating $700M in revenue per year (on job listings fees!) with just 50 employees. Amazing.

A related move is to offer new price points to the market, which can unlock new use cases and grow the addressable market as well. A good example of this is Airbnb, which provides a much wider set of offerings to guests – from super cheap to super expensive – as compared to their hotel competitors. The low-end of this enables new, higher-frequency use cases to emerge, like weekend getaways. The high-end allows for large family gatherings, like weddings or reunions, to all share a huge house together.

Pricing is a key strategic move because it’s often the main factor for customers, as seen in this Morgan Stanley survey of Airbnb customers:

And of course, we’re also seeing direct product expansion from Airbnb, via their new Experiences product that can be an upsell in addition to accommodations.

3. Decrease friction from signup to successful transaction
The dual levers of geographic and product expansion are powerful, and decreasing the friction of conducting transactions on the marketplace amplifies both. This grows the TAM in two ways: 1) First, directly growing the market because lower friction transactions mean more sales. 2) But also, more subtly, it unlocks more transactions when your marketplace can be incorporated into new use cases that require reliability and ease of use.

For example, few people use taxis to commute, because the service can be expensive/flaky, whereas many folks use Uber POOL to commute because it’s reliable and affordable. You’re bound to use OpenTable more to snag last minute reservations when restaurant inventory is up to date, making it convenient for even casual get-togethers.

There are many ways to decrease friction, but in particular we should look at this from the perspective of the customer (both buyer/seller) through their journey from signup to transaction:

  • Reducing friction from signup to first transaction
    • Signup and onboarding
    • Setting up payment
    • Finding the desired transaction
    • Trust infrastructure (depending on product: Reviews/photos – or ETA – or availability calendar)
  • Reducing friction from the transaction to receiving the product/service:
    • Reliability and consistency – driven by both market liquidity and UX
    • Determining the right price
    • Timing and logistics on completing the transaction
    • Resolving post-transaction issues

Focusing on reducing the friction on the above doesn’t just generate more revenue for the marketplace, but it’s also just a much better customer experience.

4. Grow supply + demand stickiness
Transactions require strong retention of both demand and supply, and if a marketplace can improve that stickiness, more activity can be generated on the platform. In many ways, this is just a classic retention problem, except with multiple players within the ecosystem. Just as you would on a social network product, you can tackle using traditional growth methods:

  • Notifications: Creating a strong notifications platform to engage buyers/sellers at the right time
  • Use cases: Understanding use cases and how to up-sell and cross-sell the stickiest ones
  • Offers/promotions: Using offers and content throughout the calendar cycle to engage
  • Optimization: A/B testing growth levers – from email/SMS/push copy – to when/how to reach out

However, beyond the traditional techniques, we’ve also seen a recent trends towards deeper productization of workflows for buyers and sellers within a platform. This solution, coined in recent years by James Currier and the NFX crew, is to build a “market network” that’s part SaaS tooling and part marketplace.

As a reminder, Market Networks provide useful tools to each side of the market – for instance, OpenTable’s seating system, you get stickiness purely through utility. Combine that with a marketplace, and you get even stronger effect.

Here’s a diagram illustrating the ecosystem:

And below are some examples based on AngelList and Honeybook – showing how multiple players on a market network ecosystem might interact with each other.

As one can see, sometimes these relationships between ecosystem players happen via money, and sometimes it’s through content/community. These rich interactions, facilitated by a great product UX, can retain multiple players and generate a rich stream of transactions. It’s still early years for market networks, and I’m excited to see this sector develop.

Marketplaces can start small, and end up big. Very big. 
To build a billion dollar marketplace, you have to build expansion into your model from day 1.

For some, this will look like focusing on geographic growth and building your team of launchers. For others, it’ll be about adding new product lines and price points quickly, to create new use cases for your market. Or you can improve the core platform, by increasing efficiency – whether that means onboarding or the friction of each transaction. Others can double down on retention, by building utility and workflow automation, to set a foundation for more transactions.

Each of these moves can be valid, and different marketplaces will do each. Or perhaps all of them!

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