How To Build & Scale a Marketplace From $0 to $Billions with Matt Mickiewicz

There's basically three things I think I've learned over a decade in building marketplaces. Number one is you don't actually need to build a lot of technology so you can validate marketplaces really fast and very, very quickly just using Typeform, SurveyMonkey, Google Spreadsheets, etc. Marketplace is nothing more than a matching engine and it can be done very manually. The second lesson is just to focus focus. A lot of marketplaces try and do too many things with too many people and they struggle to build a great experience for both sides in the early days. So very niche, very small marketplace expands over time. The third lesson is for great marketplace to really scale very fast, you either need very high frequency or a high transaction price.

I need some traction. You need some traction.

Lets get some traction.

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Drop some knowledge bombs on you by way of introduction. My name is Andy McLaughlin. I'm a partner at Encore Capital based In San Francisco, although as you can tell from the accent and from even further, further east, from the UK, originally came out to San Francisco in 2010, came out for a year and never quite made it home. We are a seed fund, we're a generalist fund. We invest in everything from B2B hardware and marketplaces. And we're also big fans of investing in Canada. So we have companies like Vidyard, Top Hat, Tulip Retail, Key, Nexus, Poker, and of course Hired. And that's not just companies based in Canada, but also Canadian founders living and operating in the US or like Matt did, going back and forth every three weeks, which sounds absolutely hellish. So to introduce Matt, founder of 99designs, Flippa and Hired and an angel investor in 20 plus companies and pretty active advisor as well. Matt, you've done some of the most popular online marketplaces and products of like the last 10 years. Give us a brief backstory on how you got into this.

I started my very first company when I was just 14 years old. I was basically teaching myself web design, web development, Internet marketing. I was going through the learning process. I thought there might be other people that are interested in learning how to get online as well and build the first website. So I built a website at the time called webmasterresources.com with a hyphen. I could have gotten a lot more better domain names back then, but I chose and it turns out my timing was ideal. Back in 1998, the Internet was just taking off within two weeks of launching and I was featured in LA Times as a website of the day. Windows magazine, which at the time had over a million subscribers. The full page was this physical magazine. Yeah, physical magazine. And 1 million people reading this magazine about computing technology. And then they actually gave me a column in the magazine as well. Even though I was just like 14 years old.

Being a young entrepreneur doing something at 14, I guess. What was it like interacting with men and women who were like two, three, four times your age? And what were some of the key learnings you've taken on into life since then?

Yeah, it was really interesting. I'm pretty sure I was the very first person in my high school who got a cell phone back in like 1988, 1999. I was like a Nokia 3310 basically.

You and drug dealers?

Yeah, it was me and drug dealers. But the cell phone had like a seven day battery life which is like way better than the iPhone I have now. But I used to schedule all my ad sales meetings between like noon and one and then I'd waltz down to the local Starbucks and like pace back and forth and do these sales calls. But at the beginning of every phone call I would have to preface it by saying I have a hard stop at 1pm but they never really knew that I was like usually social studies class, but I'd walk into social studies class, I just made like 5, 10, 15, $20,000 over the lunch hour, which was pretty cool.

You've been called, I'm going to put this in speech marks the king of marketplaces. Maybe you refer to yourself as that, I don't know, it's pretty cool. But marketplaces are notoriously difficult to build. You need to build both sides or even sometimes 3 sides of a 3 way marketpl. What are some of the things that you really screwed up early that you would advise about?

Yeah, there's basically three things I think I've learned over a decade in building marketplaces. Number one is you don't actually need to build a lot of technology so you can validate marketplaces really fast and very, very quickly just using Typeform, Surveymonkey, Google spreadsheets, et cetera. Marketplace is nothing more than a matching engine and it can be done very manually. You don't need to spend months or years building technology. So with hired in our case, we first of all validated that we were able to get the talent, the engineering talent to sign up. So we just built the front end web forms to capture that data. Once you had proved that out, we went after the employer and the client side. After several weeks of frustration and trying to email CTOs and VPs of engineering, we finally found a backdoor hack that worked which was going around to their investors and getting warm introductions into companies that were struggling to hire. And only after we had enough supply and demand on both sides of the marketplace that we actually built the third piece of technology. Right before Burning man in 2012, my co founder pushed the button and went off in the desert for a week, leaving the other two founders trying to make the marketplace work. So that's the first lesson. You don't have to build a lot of technology. The second lesson is just to focus. Focus. A lot of marketplaces try and do too many things with too many people and they struggle to build a great experience for both sides in the early days. So initially we just focused on Ruby on Rails, Python, iOS and Android engineers only in the city of San Francisco. So very niche, very small marketplace expands over time. But if you try and be everything to everyone in day one, and I.

Think the original brand of the product actually reflect that as well. I mean, Hired is a super chic, sexy name, but it had a much nerdier name.

The original name was developerauction.com so there's a very fun hacker news thread on that with comments around auctioning. And the third lesson is for great marketplace to really scale very fast, you either need very high frequency or a high transaction price. So with Developer Auction and now Hired, we were charging 15% of the base salary, so making 18, $20,000 per hire. Even though the frequency of that might not be incredible, it's not like the people making a hire every day or is sufficient enough to build up a really nice lifetime value.

In a way, you're maybe like, partly responsible for the fact that people in San Francisco feel like they need to change their jobs every six months.

We suff the problem just so much as everybody else.

You had a ton of great success with 99designs. For any of you who know my firm, we were called SofTech VC in the past. We had possibly the world's ugliest logo that my partner Jeff had chosen. I think he paid like $500 in 2004 on 99designs for it. I hold you responsible for that as well. But what was some of the key lessons and why, after the success of 99designs, why did you think, I want to go through the hell of starting another business?

Yeah. So as 99designs was hitting its hyperscale phase, basically, we were struggling to hire engineering and technical talent just like everybody else. At one point, we found ourselves working with 30 different agency recruiters, and it was just a horrible, miserable experience. I'm like, why does this thing even exist? So I was super frustrated, and over the course of two weeks, I went on Angellist in the recruiting category. There were about 550 startups at the time. And over the course of two weeks, I went through each and every one of those startups, hoping to find something that would address the problem that we were experiencing so acutely at 99 designs. But unfortunately, at the end of this process, what I found out was every single startup in this space was playing around the edges of the problem. They were doing background checks and video interviewing and applicants tracking and skills assessment, but nobody was really going for the jugular in solving the fundamental problem of finding me somebody that I'm excited to work alongside for 50 or 60 hours a week. And the fact that I could do that on Odesk or Elance, finding people in Romania or the Ukraine for $15 an hour, but I couldn't do it when I was trying to hire somebody in San Francisco and I wanted to pay them $150,000 per hour. Just seemed like a screaming massive opportunity that needed to be addressed.

And maybe let's recount the story that you told me just a few minutes ago about how you first met your co founder and hired Alan and how that came from 99designs as well.

Yeah. So Alan is a very clever, technically minded hacker who was a fan of 99designs. And one of the things he did is he basically hacked our website and was repeatedly banned for abusing our private messaging system. He scraped our entire database of designers, figured out the top 10, top 20% of designers, figured out that we didn't rate limit our messaging systems. And he was able to write these personalized messages to tens of thousands of designers, inviting them to participate in his design contests. And then, yeah, you're like, that's the.

Guy I want to work with.

I guess that's pretty clever. And I was at a conference and he came up and introduced himself. He's like, hey, I'm the guy who hacked 99 designs. You banned me once or twice. I'm like, that was very ambitious and very clever.

Is there any growth hacks, stories, tips, tactics that you think is broadly applicable to almost any marketplace or just anything that you were particularly proud of that was just a great thing that worked for you?

Yeah. So one of the things I always think about when looking at growth tactics is to figure out if there's an organic behavior that's already occurring within the marketplace that you can amplify by building some technology or tooling around. So at 99designs, we repeatedly heard people who were overwhelmed with the abundance of choice that we offered to them, and they would end up either creating email threads or spreadsheets or surveys where they would set and poll dozens or hundreds of their colleagues, friends, and co workers when trying to pick the winning design. We heard about this behavior over and over again until finally one day I said, let's just build a voting tool that would enable people to import an email list and then have a poll. Once we did that, we were able to attribute over seven figures in revenue just directly to this tool by emailing people coupon codes and explainer videos like, hey, your friend just picked a winning design. Here's how it worked, here's how much it paid, et cetera. And that was a really powerful tactic, just figuring out this organic behavior, just making it 10x easier, and then adding on some life cycle email marketing. And couponing and things like that on the back end.

There's been a lot said in the past about in consumer businesses, if you can tap into one of the seven deadly sins, that's a great way to really get humans to engage with something. Have you seen any of that work with the marketplace businesses that you've been involved in?

Yeah. So with Hired, one of the very unique things about the marketplace is that we force employers to state a salary up front. So we essentially elevate the candidate on this pyramid and employers compete for them. So individual developer, the individual candidate, designer, product manager, what have you, feels very wanted, very validated after the two week process because they get 5, 7, 15, in some cases, 55 offers over the course of two weeks.

I also remember a great story about Hired becoming one of the biggest shippers of alcohol in the state of California. And one day, the atf, the Alcohol, Tobacco and Firearms enforcers coming round. Give us the backstory there.

Yeah. Back to the earlier story where we were working with 30 different agency recruiters at 99designs. Once in a while, one of them would get lucky. They would mail me an invoice for 30 or 40 thousand dollars. And I remember one time getting this pack, like six pack of donuts. I'm like, this is fucking ridiculous. You guys are cheap as hell. They're making so much money, why can't they give me something nicer, right? We can do so much better. We can do so much better. So then when we launched higher, they decided to give every single candidate who got hired a bottle of Dom Perignon champagne. And we actually became the biggest buyer of Dom Perignon champagne in the state of California. We got like a phone call from the distributor, like, are you guys running a nightclub? Are you working with Jay Z or something? I'm like, no, I don't think he's a Dom guy. But yeah, that was fun. And when we went to visit the Dom Perignon outside of Paris, they treated us really nicely, I'm sure.

And so for anybody that's kind of thinking about operating this at scale, you need to have some alcohol distribution license.

Yeah. So we outsource it on that. But we used to actually have room in our office that was stacked floor to ceiling with a quarter million dollars worth of Dom Perignon champagne.

Previous companies were bootstrapped. You were funding them through early revenues and through other projects, but you decided to raise venture money pretty early at Hired, and our firm has been lucky to be part of that journey. Why fundraise? And for the folks in the room that are thinking about taking VC dollars. 1 When is the right time to do it and what should they be looking for in a vc, despite a very charming accent.

Yeah. So we thought this would be a market where winner takes most. And we had a really strong feeling that given the traction we saw in San Francisco, in New York, in the first three to six months of the business, that we would have a lot of regional copycats and that would be really, really important to stamp out a geographic footprint. In the first one or two years of the business that was simply not possible to do just using the cash flows that the business was throwing off. So we decided to go forward and raise a $2.7 million seed round a few months after funding and after we had already started generating pretty significant revenues.

And then talk us through the journey after that. In terms of when you raised more money, what that money was used for, given that you were generating significant revenues, why sit on the VC train and continue going?

Yeah, so we decided very purposefully in the early days to focus all of our marketing efforts on attracting the best candidates into the marketplace. We thought we had the best inventory, the best supply of engineers, design, product managers, et cetera, that the companies would simply come to us. And that proved to be incredibly true. During the first three years of the business, we had hundreds and thousands of companies signing up on a monthly and quarterly basis, basically organically through word of mouth because they wanted to hire talent they had heard about us through friends, the press and media. We had basically just the customer success function, picking up phone calls and writing out invoices. So it was a really strong product market fit from the early days of the business because we hit on such a very deep seated pain point that existed across so many companies.

And do you still think that raising venture was the right thing? If you were to talk to the folks in the room today, do you think that you should prove product market fit before raising venture at scale? Or do you think that these days, if you have the inkling of it, you need to put your foot on the gas so that you, you can outstrip any other regional or local competitors?

Yeah, I think it's highly subjective and specific to the context. If you're building a lifestyle business or a company that you'd be happy to sell for $50 million, it probably doesn't make sense to take the VC route. If on the other hand, you're trying to build a half a billion or a billion dollar plus company, then VC money can accelerate that. It's also really important to have brutal honesty internally with yourself. If you're raising money off of the back of vanity metrics, the capital is just going to amplify those vanity metrics via bad unit economics, et cetera, then that can crash a business. A lot of companies die from indigestion rather than starvation. Having a lot of capital at hand can also decrease your creativity and also separate you from your customers. So Juicero, as a recent example, raised $100 million to build a machine that squeezes juice. And they've actually done it less well.

Than somebody could do with their hands.

Exactly. They've actually went down and talked to customers and figured out whether they could sell for the prices they were hoping to get. If they had raised more money, they would have figured out that they didn't have product market fit much faster and much more effectively and efficiently.

So as an angel investor now and an advisor to startups, what are you looking for when you're assessing deals that you want to personally invest in? Is it people, is it product, is it market opportunities? It the magical mix of all three? Because everybody has a slightly different view on this. What's Matt's take?

Yeah, all three of those things are super important. The founder, the product, the market, the valuation, the product founder fit is also important, as well as an unfair advantage that the business or the founder has over the competitors. And finally, I think I want to invest in businesses that I can reflect on five or ten years from now and say I'm really proud to have been part of this company's journey, either through capital advisory or something else. Even if the business fails, I want to be proud. I helped bring this forward. And whether or not ends up being a failed experiment, I want to feel good about it.

And with the. With the investments you're making, I assume you're looking across North America. You're not just focused on marketplaces, though. You're looking at really any type of technology business.

Obviously, SaaS companies and enterprise SaaS companies are really interesting as well, since Haier now derives the majority of its revenue from subscriptions and customers pay. So we have over 100 salespeople scaling to over 150 by year's end. So we have a lot of experience in that.

If you had one piece of advice to give to the entrepreneurs in the room, really, absolutely anything, what would it be?

The great thing about entrepreneurship is that you don't need anybody's permission to start a business. You can just go and do it. It's really easy to make excuses and not to go out there. And test and just put yourself out there in front of customers and start generating revenue. It's a really personally satisfying feeling when you go out and meet people. Like in the case of 99designs, people pulling out their business cards showing me they got this design, a 99 design. So people telling me they hired their best engineer off of hired. So the highs of entrepreneurship and the rewards that you get are very personally satisfying and gratifying. The second thing I would just say is like invest in building yourself a huge and great home library. Like books are fantastic. Not everything that has been written can be condensed in a 500 word medium. Blog post. You can. I refuse to believe that I have hundreds of books. I read like dozens of books a year. It's absolutely fantastic to learn from. Biographies and success stories of other people have gone through the journey.

All right, if you were to recommend one book, what would it be?

I just finished reading Homo Deuce which is a fantastic book by Eval Harari.

Wonderful. Thank you all for listening. Thank you so much. Matt. That was awesome. I need some traction. You need some traction.

Thank you for listening and we hope you enjoyed this week's episode of the Traction podcast. If you enjoyed the show, please leave us a five star review and you can find more information and all the resources mentioned in today's episode at Boast AI. That's B o a S T AI blog.