MBA2654 Q&A Wednesday: Why Do You Rarely Talk About Marketplace Startups?

You've probably heard stories like this. Someone built Uber for X or Airbnb for Y. Think you to me, but better. And I get this question all the time. Why don't you talk about two sided marketplaces? Why don't you recommend them? Why do you seem to actively avoid the topic? Well, it's not because I don't think they're cool. I love them as a consumer, it's because I want you to actually succeed. The truth is, marketplace startups are one of the hardest businesses to get off the ground. They're not just hard, they're brutal. Let's break down in today's lesson why I don't recommend them. I'm going to give you real examples from companies that you know, like Udemy, Airbnb, Uber, ebay, all these companies are two sided marketplaces. But more importantly, I'm going to explain why I don't recommend them. Especially for bootstrapped entrepreneurs. People are self funded looking to grow life changing businesses. First of all, today's question comes from Frederick on Q and A Wednesday. If you've got a question you want to ask here on Q and A Wednesday, just submit it over@100mba.net Q and you can submit your question there and we'll get answered right here on the show. Welcome Back to the $100 MBA Show. I'm your host, Omar Zenholm where I deliver practical business lessons three times a week, Monday, Wednesday and Friday to help you start, grow and scale your business. Let's start with what is a two sided marketplace? Well, a two sided marketplace is a business that connects two different groups of users, each with different goals, with different behaviors, frankly, with different needs. And you need to consider both of them if you want to make money. Because you make money by facilitating the transaction between them. Think about it. Uber connects riders with drivers. Airbnb connects hosts and and guests. People with properties and people who want to stay at those properties. Right. Udemy connects instructors, course creators and students. Sounds pretty simple, right? And again, I am a user of all these businesses, right? I love it as a consumer and conceptually it seems like a no brainer. Seems like a simple, easy idea. Build a platform, attract both sides, take a cut, get rich. Right? Except it almost never works out that way. The businesses that you see, like the Airbnbs and the Ubers are the exception to the rule. For every success you see, there are thousands that are in the graveyard. So why do I have a problem with them? Well, let me explain. The first problem with a two sided marketplace is that you have to build two businesses. With a traditional business, any of the businesses that I mentioned here on the $100 MBA show, you serve one customer, you build a product, you build a brand, you have an offer. And everything around that is solving a problem for one type of audience, member or group of people, right? With a marketplace, you're serving two at the same time. You're serving two demographics, two different people, two different marketing strategies, two different onboarding flows, two support systems, and often two sets of incentives. Let's look at Udemy, for example. This is a marketplace that sells courses online, right? Instructors want to make money and grow their audience. That's one set of people I'm serving as the creator of a Udemy type business. The other set are students. Students want high quality, low cost, learning on demand. Those are opposing goals, right? Instructors want high prices and high margins. Students want discounts. So Udemy has to constantly juggle promotions, the trust between them, content, quality, the margins. And they have a ton of issues with both sides being unhappy over the years. You, on the other hand, you don't want stress in year one, right? When you're starting your business, right? When you're starting your entrepreneurial journey, why tackle the biggest beast? Why do the hardest thing possible? Get some wins under your belt, get some money, right? Build some wealth, and then you can think of other options here. The second problem I have with a two sided marketplace is what I call the chicken and egg trap. We've heard of this before. Which came first, the chicken or the egg? Right. This is killer, by the way. You need supply to attract demand and demand to attract supply. Let me break it down. Let's take Airbnb, for example. When they started, no one wanted to list their homes because there were no guests, right. On the platform. And no one wanted to be a guest because no one was listing homes. Right? So how did they do it? Literally, the founders and the founding team of Airbnb took professional photos of homes themselves. They wrote the listings for people, they manually onboarded hosts one by one in New York City, in San Francisco, and they faked traction just to get it moving, right? They faked what the users would have to do, the host would have to do in the future. They kind of just forced it to make it happen. A lot of legwork and it could have just fell flat. And people said, no, no, no, I don't want to do this anymore. That's a ton of hustle before there's any revenue, right? Remember, they only make money when the transaction happened. They only make money when the host has a guest, that's how they earn a living. So they make sure they have a host that is willing but also has a product or a place that people want to stay in the guests in order for that transaction to happen. Now listen, I'm not against hustle and that works. When you're trying to build a billion dollar company, raising VC and fund. And if you're like most people, listen to this podcast that are trying to build profitable, sustainable businesses to own your time and your life, this is the worst possible place to start. Also, you got to remember that a lot of these marketplaces are fresh ideas in the market, meaning that you have to train a lot of people and a lot of times the first in the market doesn't make it. For example, with the Airbnb example I just showed, it took a lot of education for people to feel like it's safe to do this, to actually rent somebody's living room out or their, you know, guest room or their whole home to a guest, like it's okay and the guests have to feel safe, that nothing weird's gonna happen. So it's hard to penetrate a brand new segment of the market. Same thing with Uber. You know, there was trust issues. And a good example of this are like MySpace and Friendser, they were the first kind of social media before Facebook kind of became the leader. And no one has a friends account anymore because they were kind of too new. People didn't understand how to use this thing. Problem number three I have with two sided marketplaces. High burn rate, slow traction. Okay, let's look at Uber for example. To kickstart supply, they gave drivers phone plans, they gave them cash bonuses, they gave them vehicle loans, right? They guaranteed hourly rates. So they guaranteed they would make a certain amount of money every single hour they were driving around the car. Then they flooded cities with ride coupons, with referral bonuses, with paid ads to get people to use Ubers, right? The actual passengers. At one point, Uber was losing money on every single ride. Uber lost over $30 billion in its lifetime. Okay, I don't like the sound of that. And that's not a typo, guys. $30 billion. Do you know that Uber was not profitable until very recently? Unless you're sitting on millions of investors dollars, don't try to copy that, okay? Chances are you're not Uber and you're smarter than that. You can build something that can help you build independent wealth without building a two sided marketplace. So why do people build marketplaces? Why do they do that? Because they seem scalable. They think if I build the platform, other people do the work. They create the content, offer the service, handle the delivery, and I'll just take a cut. That's the dream. Kind of like everybody else is doing the work and I just build a platform. But what you don't see is the enormous uphill battle to get there. Marketplaces are often a phase two or a phase three business, not a phase one business. You need time, you need money, you need a huge initial audience or some serious inside advantage that others don't have. Otherwise you're going to burn out before you ever get traction. So what do you do instead? Build something simpler. Build something cleaner, something more profitable. And here's my honest advice. If you're just starting out or you're starting your first business, pick one customer, solve one problem and charge one price. Just make it super simple on yourself to make things easier to get the ball rolling. Here are some of the more easier business models that actually make money. Service businesses don't sleep on this freelancing coaching do it for you work. People want things off their plate. If you can provide a service to solve a problem for them to fill in a gap, you're going to be profitable next. Another option is productized services like editing or design or marketing packages, courses or digital products are great. Subscriptions or memberships or software businesses you could start. Now you can start generating cash flow and learn how to sell as you go without waiting for network effects to kick in. You want to know how I started? Before I built a software as a service business, I had several other businesses. I had content businesses, I had courses, I had an E commerce business, I sold physical goods, I did arbitrage, I had a service based business, I built websites for people. I had several businesses before I started my software company. So I actually understood how to run a business and had some money to invest in my idea a little bit and also just some expertise and network that I can tap into. And that's when I started Webinar Ninja. I focused on one customer that solved one problem and I just focused on how I can make their life easier and make sure I'm solving something that's really painful in their life and in my case was running webinars by themselves as a solopreneur or author or speaker or somebody with a small team. The tech was quite overwhelming. There were a lot of moving parts. Marketing was a whole, you know, thing that people didn't want to deal with. And I just made it easier for people to Run and market their webinars with my software. Listen, if you listen to today's episode and you're like, you know what? I'm still going to open up a marketplace. I'm still going to do two sided marketplace, despite what Omar said in today's episode. That's fine as long as you know what you're getting into, right? I'm not here to tell you not to chase your dreams. I'm here to tell you know what you're getting into. Know what's in store, know the challenges ahead. Look, marketplaces can work because they do work, but only when you have access to a supply pool. When you have deeply understood both sides and their needs, like you know both sides of the marketplace and you're ready for years of unprofitable hustle, right? If you are ready to do that, great. But know that you need to have a lot of things on your side because most people, despite all this, still fail. So if you're tempting to launch Uber for whatever, stop and ask, is that what I want to be doing every day for the next five years? And think of what you're going to do every single day, your day to day tasks. Well, how are you going to wake up? How are you going to show up? What are you going to do? Because it's going to be you in the beginning, answering customer emails and trying to get both sides to show up and convincing investors that hey, this is a great idea and you're struggling to generate revenue because, hey, the platform sits on this, you know, seesaw of I gotta make sure these people are happy and these people are happy. If you want my advice, start with something that allows you to build wealth that you can own, that you can control, that you can grow without burning out or begging strangers to list their services. But if you still want to do it, go ahead. But don't tell me that Uncle Omar did not warn you, okay? I'm here to support you in any way possible. If you have a question, if you have something you're struggling with, send me your question over at 100- MBA-NETQ. And we'll answer right here on Q and A Wednesday, just like we did today. 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