Tuesday, June 22, 2010

Creating a Marketplace

Last night I went to the ‘Innovative Marketplace Meetup’ with panelists from Etsy, AdBuyer, and FirstMark Capital. I’ve been interested in platform-mediated networks for a while, and re-read Professor Thomas Eisenmann’s HBS Module Note before this meetup. Excellent real life application and examples from the panelists.

Some interesting points:
• How to retain value – once connected, users are likely bypass you as intermediary, need to find that toll gate to keep the value on your site.

• Microeconomic needs to work out – if network charge a small transaction fee, it needs hundreds of thousands of transactions to stay profitable. Make sure to work out that math.

• Acquisition cost – for a network that focuses on long tail and smaller businesses, the acquisition cost may be prohibitive in comparison to the revenue. Then you know it’s not a business.

• Transaction fee model or subscription model – test both with different groups and see which one works better. Transaction fee model needs a bigger number of transactions to make economic sense, but can quickly ramp up initially. Subscription fee model may have a hard time to ask commitment upfront without showing value, but longer term may be easier to scale.

Discussions sparked this long time dilemma: on one hand, if no one is pursuing an obvious idea, it’s probably because it’s extremely hard or doesn’t make economic sense to do, so the likelihood of you fail is high. On the other hand, if no one is pursuing an idea that you feel there is a pain and need, if you can crack it, it could be a great opportunity. The question is: how do you crack it? And, how do you evaluate if you've cracked it?

How to crack a hard problem?
  1. Think about cheaper, simpler alternatives to current solutions. Clay Christensen's books are fundamentals.
  2. Talk to potential consumers, understand how they live their lives, they feel the pain and may have suggestions already that just needs someone to build it. The Lean Startup methodology explains this process perfectly.
  3. Look at other similar industries and fields, and see what their solutions are and whether they apply to your field. 

How to evaluate if you cracked it?
  1. Talk to your customers! Show them your wireframes / Minimum Viable Product and ask if that solves their problem, and if they're willing to pay for it, for how much. Customer orders are proof of product-market fit. 
  2. Don’t be afraid to talk about your idea with trusted circle of network. There is always a risk that someone will steal your secret sauce, for example, when pitching to investors, they may pass that information to their portfolio companies or even unconsciously to other startups that pitch to them. Be careful not to give away the core secret. Be clear about why you’re talking to them. Build a core circle of people you can trust and share ideas with that can provide valuable feedback – it could be your ex-boss, coworker, schoolmate, fellow entrepreneurs, or contacts built from going to meetups!

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