How To Overcome The Chicken-And-Egg Dilemma Of A Marketplace Startup
There’s an infamous dilemma that all marketplace founders face: Should they start with
supply or demand?
Uber faced this question in 2008. Initially, Uber’s founders designed it as a limo service.
Finding more demand in the non-luxury market, Uber pivoted to an app-based
replacement for cabs. By 2010, co-founder Travis Kalanick called the initial limo
Uber started with demand. What if they’d started with supply? What if they’d bought
hundreds of limos and hired hundreds of drivers in anticipation of huge demand?
Like Kalanick said — hilarious.
My co-founders and I had a similar experience building Lawtrades. We started with one
concept that gave way to another, more scalable concept. We sought to understand who
our customers were and what they wanted — where demand was — and then found the
supply to fill it.
Marketplace startups’ fundamental value is creating economic opportunity — helping
users earn a living through their platform. Finding a bunch of sellers is useless if no
one buys their services.
There’s no universal solution to the supply vs. demand dilemma. But I believe the vast
majority of marketplace startups should start with demand.
Here’s how we managed to tip our marketplace and how you (as a founder) may want to,
too.
1. Solve for demand
When Lawtrades first launched, we were selling to small-to-midsize businesses (SMBs).
The theory being, small companies can’t afford full-time lawyers, so we’ll give them
affordable part-time solutions.
Unfortunately, we found that churn for SMBs was really high. Retention was low,
and even while they used our platform, they didn’t spend enough money to fuel
legitimate growth.
Before our pivot, we saw that one customer was using the platform on an almost
daily basis. At first, we couldn’t understand why. After doing some digging, we
learned that he was General Counsel (GC) — meaning he ran all the legal
operations within his company.
A lightbulb flashed on.
GCs had near-constant demand for legal services — much more consistent than the
one-off needs of SMBs. Especially at fast-growing tech companies, they had more
need than they could hope to fill alone. GCs had a strong pain point. If we pivoted
to GCs, we could tap into demand that already existed and provide a much more
stable revenue stream for our supply side.
2. Build manually (at first)
Once we decided to target GCs, the next challenge was connecting them with
lawyers. We’d found a source of major demand — now we needed major supply.
At first, we built supply manually. Our small team stayed up all night finding lawyers
on LinkedIn and various niche job sites. We did all the headhunting, sourcing, and
vetting, then presented our customers with a handful of options.
Doing this manually at first allowed us to learn (a lot) about both our customers
and supply-side lawyers. Some customers were looking for part-time help, some
wanted full-time support, others needed project-based help. We took data points
for the most requested type of talent (which turned out to be flexible commercial
lawyers) and ramped up the supply of that exact persona.
When one GC had a good experience, they recommended us to their GC friends,
which meant we had to find even more supply. Thus, the cycle repeated. We got
back on LinkedIn,gathered a few new options, presented them to the GC, understood
their decision.
Completing this process manually meant many late nights. But after a few dozen
repetitions, we had a solid base of supply — hundreds of lawyers that practiced
commercial law in the San Francisco area.
This hands-on learning opportunity made us really good at matching and
ultimately enabled us to build a powerful matching engine into the product.
3. Build the product specifically for your super consumers
The more we grew into our base — fast-growing tech companies with small
legal teams — the more it fueled a viral loop of word-of-mouth. Brick by
brick, we built relationships with GCs in this market and ultimately attracted
big-name companies like Yelp, Doordash, and AngelList.
Those were our super consumers, and they had much higher usage of our
platform than SMBs because they were growing like crazy and needed extra
lift along the way. This meant we really only needed a few of them using the
platform to get it going instead of thousands of smaller customers.
4. Repeat: Iterate and improve the experience for both supply and demand sides of the marketplace
By now, we had product-market fit. Now was the time to seek capital that
would allow us to build a platform to scale the operation.
Many startups go wrong by seeking VC money before they have
product-market fit. Even if hey find investors, they’re not funding product
growth, they’re sinking funds into an unproven concept.
We used investment capital to build a system and a team around a concept
that was already working. Only now did we invest in major engineering, to
automate the search work we’d been doing manually and expand into
new markets.
In each new market, you’re always solving for demand and supply. The
solution is never identical: What worked for capturing San Francisco won’t
necessarily work for capturing Spain. But the advantage you have in each
new use case is a system to suss out the nature of demand and match
it with supply.
VC money also let us fund measures like cold outreach, SEO pages, and
free credits (thousands of dollars for new customers to spend on our
platform after signing up). By meticulously tracking the value of these
measures, we calculated a payback cycle, quantified ROI, and justified
further investment dollars.
Lawtrades couldn’t have grown with a demand-agnostic mindset. All of our growth
happened because we pivoted, started with demand, paid attention to nuanced ways of
delighting our customers, and then focused on helping our supply-side lawyers earn a
predictable source of income.
This last point is most crucial: Every step of the way, focus on relationships.
That goes for customers and vendors alike. I foresee the future of marketplaces
having a built-in social network element to keep people engaged beyond that initial
transaction. Whether that’s a Slack group, conferences, or community events,
marketplaces live or die by their users’ devotion. Reinvesting in community
strength is the best way to consolidate trust and commitment to the platform.