Marketplace businesses: they always seem great on paper, but it’s so insanely hard to solve the chicken-or-the egg problem.

Every founder I meet who’s building a marketplace business basically says the same thing: “It’s so much harder than I thought to build a two-sided marketplace.“

Of course, it can be done. There are plenty of examples of success. Ebay did it, we did it at oDesk, OpenTable is famous for doing it, and Airbnb is killing it. What I’ve noticed in the success stories is the basic theme that I call liquidity hacking.

From VentureBeat
Customers don’t just get irritated when you screw up cross-channel personalization. They jump ship. Find out how to save your bacon on this free research-based webinar with Insight’s Andrew Jones.

What is liquidity hacking?

It’s the strategy and tactics that successful marketplace businesses employ to reduce the challenges associated with low transaction volumes. It often requires narrowing the scope drastically of the offering until sufficient scale allows you to expand to achieve a broader marketplace.

This type of hacking is completely necessary in my opinion. The thing with marketplace businesses is that they work great at scale. Once you have hundreds of thousands of users on the supply side and the demand side then everything works great. The challenge is almost always, how do you get there?

The main themes of liquidity hacking are:

  • Provide value to one side.
  • Find aggregators.
  • Curate one side.
  • Narrow the focus.
  • Use hamsters.

Provide Value to One Side

Offer portfolios: Many different people like to showcase their work online. In the olden days, this would be done with a custom and personalized website. Nowadays, there are free portfolio tools for almost every type of individual. Once a site is successful in gaining users for their free portfolio tool, you end up having solved your initial supply challenge. See: Behance, Dribbble, Carbonmade

Build community: If you can establish a healthy and vibrant community on either side of the equation, you’ll end up with the potential for a great marketplace. See: StackOverflow

Offer tools: If you can get a lot of people to use your free tools, then you’ll have a highly engaged user-base on one side of the equation. See: Github, OpenTable.

Find Aggregators

Find physical aggregators: There are various aggregators in the real world that provide really novel ways to hack liquidity. These are physical locations that contain a concentration of supply or demand.

College campuses are one awesome aggregator; word spreads lightning fast and student labor is crazy cheap. I’ve seen some marketplace businesses that start focused on campuses and figure out the formula for getting significant penetration. Then just go to the next campus and repeat. Basically same deal with large office buildings and even high-rise apartment buildings. The great thing about large office buildings is you can sometimes convince the HR manager that your service is so cool that they should email the entire company about the offering. Now you have a trusted recommendation to try a service and you get free distribution to all employees. See: MyEatClub

Find an enterprise client: Enterprise clients often have lots of money to spend on the demand side. Sweet. A single contract can get you off the ground and running and focusing all your efforts on building the supply side and more product. The risk of this is that the enterprise feels like they own you and demand increasingly complex product features that could ruin your platform for other buyers. If the relationships are managed well, it’s a good way to get started. See: Gigwalk.

Find supply aggregators: Let’s say you need a whole bunch of freelance developers (hypothetically speaking of course). You have a vision of cutting out all middlemen and creating real value in the world. But you know it’s going to take a long time. So, you look for some supply aggregators like a web design firm in India to offer the supply you need to get off the ground. Or maybe you have a vision that anyone should be able to rent anything from anyone else. That’s great, but you need a lot of rental supply to get things started. What better source than places like Home Depot for power tools and REI for camping gear to get you off the ground with a solid supply. Then you can spend your time worrying about demand and worry about getting supply from individuals or owning your own supply later. See: Getable

Narrow the Focus

Narrow the problem: In almost all cases, it helps to really focus the efforts of the business. You have very limited resources to get to a sustainable marketplace so you should concentrate your resources on small areas.

Focus on a geography: This is kind of obvious. See: Every local marketplace ever.
Focus on a Niche community – Beanie baby collectors. See: Ebay.

Focus on a vertical Started with anything. Now making a standardized offering around housecleaning. See: Exec.

Curate One Side

One way to make things function reasonably well at low volumes is to curate one side. There is a question of whether a “curated marketplace” is really a marketplace at all, but so what.

Curation is really important. The reason it’s so important is that it greases the wheels of the marketplace. It allows the marketplace to move from a listings model to an open-call transactional model. This brings a lot of efficiency to the process and lowers the effort required by the buyers.

YourMechanic is a great example of this; rather than just have a directory of mechanics that you have to review, they presented me with just two options and their calendar of availability. I didn’t have to think about who to hire, I just clicked on the first available slot since they both looked like great mechanics. See: YourMechanic

Use Hamsters

When all else fails, use hamsters.

This is basically what I was for my first year at oDesk. It’s the brute force method, you just throw bodies at the problem until you have enough scale that you can reduce the manual requirements in the process.

At oDesk we always had the vision to be kind of what you see today, but in the beginning we acted more like a staffing firm, and I was the recruiter that would talk to the customers to take the job requirements and then go on a manual search to find candidates to fill the position. We just had to hustle like crazy, because you only have ~24 hours before the demand side loses interest and realizes that you have nothing. See: oDesk, AirBnb.

Josh Breinlinger is a venture partner at Sigma West. Prior to venture capital, he was the 4th employee at oDesk and helped grow the marketplace over 5 years in a variety of leadership roles.

Top image courtesy of leedsn, Shutterstock