The Biggest Mistakes Founders Make With Marketplace Expansion

So welcome to our office hours, which is going to be a new video series that we're going to start here in the community where we address topics that kind of arise from earlier stage founders. So whether that's through our office hours or discussions or working kind of with directly, but we want to start these videos and have a guest on and just address some of these topics and also share some of our kind of insights, experience, and probably hard learnings that'll come out through them. as well. So first Office Hours today for our little video, we're going to have Danny Martinez join us as a guest. So many of you probably know him from working with a lot of founders in the community and some of his deep dive posts. So he has some really great experience, of course, at Airbnb, eBay, and then working with our early stage founders. So Danny, welcome to our Office Hours here. So this should be fun. And we'll just go ahead and jump right into a few topics. And the first that I wanted to bring up, and this actually came about during the group Q&A, from your workshop recently was on, you know, what are the biggest mistakes that founders make when it comes to marketplace expansion and, you know, typically expanding into new markets? So I'll kind of let you take this one from here and you can probably kind of tee it up and jump right into it.

Awesome. Thanks, Mike. Yeah, glad to be testing out this new format. Yeah, I think in terms of biggest mistake founders make, I think a couple of things come to mind. I think the first one's kind of underestimating the extent of the challenge. I think it can be something that's very easy for people to get very excited about, expansion, growing, etc. Let's open up new markets. But the reality is when it comes to actually like, okay, let's see what we need to actually make it work. I think a lot of founders are usually kind of surprised by, okay, we can't just hire someone in the city and then leave them to it. It kind of can't work like that. Can't just hire an individual and then leave them to it without thinking of the kind of the resources that that individual needs in order to be successful on the team that they'll need around them and the resources that they'll need, right? If you just hire someone and don't give them any budget, whether that's kind of for channels or for hiring itself, then they'll be kind of limited. with what they can do. I think the second thing is around localization. So I've seen a lot of companies just kind of go out and think, all right, I can kind of just do a quick Google Translate of my homepage, release the product as it is, and it's done. Which, yeah, you can theoretically do that, but then in practice, the homepage, the copy, the product just ends up looking and feeling really weird. I think it's the kind of second-order effects of doing that. And so like, yeah, you can in theory do that, but then if you're new to a market, you don't yet have the trust of those users in that local market. And then, you know, if there's like a dodgy translation or, you know, numbers displayed in the wrong way, or maybe there's a product feature that, you know, isn't really used in the local market, it's going to be one of those things that you as a user, you're going to be like, wait, What is this thing? How can I trust it? Is it scam? Is it genuine? So I think, yeah, localization, how important that is, is the second one. And then the third one I think is assuming that the kind of channels and the go-to-market that worked in the first market are going to be the same ones that work in different markets. There's local competitive dynamics to be aware of, and that's usually like a bit of a journey to figure out, okay, is Let's try kind of new approaches in new markets. Yeah, it might be that the approaches that worked in the home market are gonna be the ones that work in the new market, but it might also not be. There might be also different competitive dynamics, different local players, et cetera. So yeah, I think those are the things that come to mind.

Yeah, those are some great points there and mistakes and some that, you know, a lot of us probably made here, you know, as well as founders. You know, it would be nice if we could just hire a team and launch in new markets, new countries, right? So if it was only that easy. But yeah, I guess that brings up another kind of topic I wanted to discuss, which is, you know, it's a question of, you know, why constraining is important. So, you know, a lot of early-stage founders kind of point to, you know, examples maybe of, say, for instance, like a Thumbtack that's more horizontal, you know, took the approach of launching in multiple markets. So, you know, let's just, I guess, like address the topic, you know, of why constraining is important and for local marketplaces.

Yeah, I think a couple of things come to mind. I think the first one is just from a very practical perspective, it makes it a lot more manageable. If you think about taking over a whole city versus just taking over a neighborhood, for example, it sounds a lot less daunting. And somehow that also gives the local teams a lot more energy of like, hey, actually this is achievable, we can do this. And it also leads to, again, another one of the second-order effects of it is Once people see it as less daunting, they start thinking a bit more of a like hacky way, like let's just do something scrappy that works, you know, just in this neighborhood. And funnily enough, that's kind of the approach that, you know, you should be taking when you're trying to open up a new market. And yeah, the fact that you're kind of constraining means that usually the ideas that come out when people think about it on a smaller scale are more on the scrappier end. I think the second thing is the liquidity. You know, like, it's fine to go into a market and think, right, I'm just going to tackle— and I've seen both sides of the argument— I'm just going to tackle supply, I'm just going to tackle demand, whatever, whichever one you choose. But unless you have somebody at the other end of that transaction, all that's going to end up in is, like, you know, disappointed user, right? And so having that liquidity because you've decided to constrain it to quite a small space means that, again, it's more manageable. You can probably find manually at the beginning people on the other side of a transaction. And it means that you have happy customers. The worst thing you can do is like have a marketplace where it's just one side and the other side isn't present. And then I think the third thing that comes to mind is you can get started a lot quicker if you constrain, right? You need less resources to go after a neighborhood versus the whole city. And it enables kind of the learning to start a lot sooner. As well as a result of that ability to kind of get started quickly. So yeah, those are some of the things that come to mind.

Yeah, yeah, I'll go ahead and jump in here and share some examples of, you know, what can happen when you don't kind of constrain, right? And I'll share, you know, some of my experience and hard learnings with StudioTime. So I guess, you know, for a little bit of context, you know, we started StudioTime, you could think about it like a quote unquote Airbnb for music studios. So in the early days, we, you know, of course kind of focus on supply. So how do you kind of get supply and then start to generate demand and kind of match those and create liquidity? And so, you know, in the early days we actually didn't constrain markets. So, you know, we had studios primarily in LA. We started, you know, New York City and then kind of international. And of course, one of the challenges with that is not, you know, being able to drive demand to those listings. So, you know, it was great to see that like, hey, supply is growing. And we thought that like, you know, we were growing as a marketplace, but kind of, you know, supply and that promise for them to sign up, create a listing and, you know, be able to get bookings through the marketplace and not being able to deliver on that. of course, wasn't making it something that was valuable to them. And so that was definitely a hard learning and something we had to focus on. So definitely kind of looking back now, wish we would've taken the approach of kind of constraining from the beginning. And eventually we did and had to kind of take a step back and say, okay, we do have a lot of supply across various markets, but how do we start to identify kind of like tier 1, tier 2, tier 3 cities and focus on kind of building up liquidity and almost kind of like relaunching those cities from there? Definitely, I guess, a mistake I've made myself, you know, quite a few times. So, and then I guess, you know, this also brings up another kind of topic, or I guess kind of, you know, hard realization that sometimes that we all kind of face, which is, you know, what can happen when you don't constrain, right? And you don't have liquidity. And I briefly kind of mentioned in an example there, but, you know, let's, I guess that's kind of a common occurrence, right? Which is like early stage kind of founders, maybe you join, you know, join the community or join the office hours. And they see that, hey, we have a lot of supply in these markets and we kind of have some demand that we're starting to generate. But, you know, we really start to realize that we don't actually have liquidity. So, you know, how do we kind of think about that? And, you know, why do we realize it's so important at that point in time?

Yeah, I think, and again, to your point, I think this is like a really, really common thing that I see in different marketplaces, which is like, hey, we're going to go after international expansion and we're going to go after this city and that city in this country. Um, and then, yeah, the reality when it comes to it, it's like, right, unless, unless you can actually have, um, a marketplace without, um, a match happening is, is, is nothing, right? That's kind of like the very beginning, the very starting point. Unless you can create that magic with a match, there's just really nothing there. And so, um, when you don't, when you don't have that liquidity as a result of not constraining, then that's— it's inevitably all it's going to lead to is, is unhappy users on, on whichever side you've decided to prioritize. I think a jobs marketplace that I worked with at one point, they kind of, they had this issue, right? They'd go in and find the workers first and they'd be like, right, we're gonna find companies to come and match with these workers. But then because they didn't constrain themselves to like a specific neighborhood, a specific city, they'd have that issue of, right, you just can't get the workers the jobs that they need. And so again, if especially depending on the vertical, If there isn't that ability to keep one side of both sides of the equation happy, but especially the side that you're getting started with, then it's gonna lead to failure, basically.

Yeah, that's a great key point to say, keep both sides of the marketplace happy. And that's definitely something, you know, we're always working towards. So I guess, you know, we've covered a few different topics here, you know, the first kind of being the biggest mistakes founders make with marketplace expansion. expansion. You know, the other, as far as like why constraining is important, which is something that I'm sure we'll, you know, keep addressing quite a few times here, not only in the community and on some of these kind of videos that we make. It's probably also worth noting that, you know, there's of course kind of like counters to this and examples of, you know, of, you know, of when it's actually kind of worked in the past. And so I feel like one of the things that we're always going to mention here is it's always like, it depends as far as the marketplace since they're so nuanced. You know, but I guess like the last thing is, you know, one of the things that I wanted to mention and kind of bring up here Is, you know, why it's a mistake to kind of, we can use the word fake or kind of juice growth by simply expanding markets or expanding categories, maybe a little bit too early for the sake of fundraising and kind of increasing your metrics.

Yeah, I think, again, it's a pretty common thing for— it feels good, right, to open up a new market and to be like, right, we're now in this new space or this new vertical or this new city. But the reality is, unless you can show that there is kind of local product market fit in each of those cities, then all it's going to lead to is like a bad outcome. And so whilst the early kind of signals might be there that, okay, like we've opened up a market and that feels great and everybody can kind of like clap their hands and feel good about it, it's not going to lead to like a good long-term outcome because unless you can figure out, okay, do I have that local product market fit? Is it resonating for users in this new market? It's not gonna lead to transactions ultimately. And so yeah, if at the end of like a period of expansion, you've just got a bunch of cities that you've opened where you have no liquidity, no product market fit, and no happy users, then yeah, it's just not a good kind of long-term approach.

Yeah.

Yeah.

And I'll kind of jump in here and I guess I don't want to share too much of a hot take here, but, but, you know, of course, as I mentioned, you know, right before I kind of teed this up, you know, a lot of times you do see this with founders and, you know, they think that like, hey, you know, investors are just looking to see, you know, like just top line kind of, you know, metrics or kind of growth there. And, you know, I think that, you know, they're thinking that, you know, that's actually, you know, what's going to be beneficial for them as far as like when it comes to fundraising and their business. And I think it's just important to just really understand what is important for the business that you're building and how does that benefit the actual business and not for the sake of just trying to please investors or just trying to increase those metrics. So marketplace-specific investors definitely really dig into things and understand or help try to help you understand what's important for your business and not just that top-line growth. Well, cool. So that's probably going to lead to a few questions and comments on this, but we'll wrap it at that. You know, this is fun to kind of, you know, chat through a few different kind of topics that come up here and also a few of the kind of common mistakes and share kind of, you know, quick, you know, hard learnings here on my end as well. So thanks for joining us as our first guest for the Office Hours. And, you know, we'll keep this probably as like an unedited version that we share and, you know, love to chat through any comments here in it and, you know, experience and expand on it. So thanks again, Danny.

No worries. Look forward to the next one. Thanks, Mike.