First time entrepreneurs should avoid two-sided marketplaces

marketing-challengesIf you are thinking of starting a company, there is one decision that you need to make right up front. Are you trying to create a product or service for one market or are you going to attempt to create a two-sided marketplace? Most of the products and services that we use are one-sided. A company builds a product that certain users demand. A two-sided market (e.g. marketplace)  is one that requires demand from TWO different types of users. That’s really tough to build.

I didn’t know it at the time, but I made a smart decision when I started Punchbowl. Although I had ideas about how to create a two-sided marketplace, we’ve created a product that is fairly simple to market and grow. To be successful, all we need to do is to get more people to plan an event. We’ve tested some ideas around creating a two-sided marketplace, but our bread-and-butter is a simple one-sided market.

Two sided marketplaces are very difficult – they suffer from the “cold-start” problem because you need demand from two sides. Most of us know the “original” two-sided online marketplace: CraigsList. When CraigsList started, the site needed both people wanting to sell things and people wanting to buy things. In the early days of the Internet, this wasn’t a sure bet. But CraigsList was able to create demand on both sides of the market with a simple user interface and by being one of the first to market. And it didn’t hurt that it was free!

Here are a few other two-sided marketplace examples:

  • eBay (EBAY): Needs both people who want to sell things, and people who want to buy things in an auction style.
  • Homeaway/VRBO (AWAY): Needs both people who have vacation homes that they are willing to rent and consumers who are looking to rent vacation homes.
  • Care.com (CRCM): Needs both families in search of child care providers, and people who are seeking child care jobs.
  • The Knot (XOXO): Needs both brides seeking DJs, caterers, and bakeries and local vendors who offer their services for the wedding market

Several times a month, an entrepreneur reaches out to me to get my take on their startup. And more often than not, I’m being pitched a two-sided marketplace. Here’s the problem: to create a two-sided marketplace, that means you need to do TWICE the amount of marketing to be successful. And while two-sided marketplaces can be very lucrative, more of them fail given this intrinsic challenge. If you’re a first time entrepreneur, I would strongly recommend that you build a company for only one market, and leave the more difficult two-sided marketplace for your next rodeo.

SWAMI SAYS: Starting your first company? Don’t try to build a two-sided marketplace. It’s difficult enough to build a great team, get your product to market, and find users. If you’re successful building your first startup, you’ll have the experience to try and build a two-sided marketplace. One last thought: successful two-sided marketplaces can be very lucrative. All of the companies I listed above are publicly-traded companies. Take a look at their financials and quarterly reports to learn more about what it takes to build a successful two-sided marketplace.

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