The Power & Peril of Two-sided Marketplaces

[Editor’s note: This is a blog post from Brett Crosby, Co-Founder and COO of PeerStreet. PeerStreet is a silver sponsor at LendIt Fintech USA 2019, which will take place on April 8-9 in San Francisco.]

We live in a world increasingly dominated by two-sided marketplaces: Amazon, Uber, AirBnB, Upwork, even Facebook—a social network but also a marketplace, with content creators on one side and content consumers on the other. The modern two-sided marketplace is powered by technology, which is why so many of the most successful technology companies today follow this model. And yet building one is extremely difficult, which is why so many failed technology companies also attempted this path.

My co-founder Brew Johnson and I thought long and hard about building our company, PeerStreet, as a two-sided marketplace, and we’ve since learned additional lessons along the way. Below are some of the major considerations for entrepreneurs considering this model.

The Power

“A one-sided marketplace builds one business; a two-sided marketplace scales thousands of businesses.” –Brew Johnson, CEO, PeerStreet

One of the defining advantages of modern two-sided marketplaces is that they enable the creation of thousands of businesses, all built on top of the software platform that powers the marketplace. A cab company is just one business, but Uber empowers thousands of individuals to be entrepreneurs and earn money independently. A hotel chain is still a single business, but AirBnB allows for so many others to make a living hosting travelers.

Because of this unique characteristic, two-sided marketplaces can feel infinitely scalable. Once the infrastructure is in place, the cost of adding another user or vendor, on either side of the marketplace, gets very close to zero.

When two-sided marketplaces take off, they truly gain a life of their own — they become self-sustaining, scalable, value-creating businesses whose presence empowers an entirely new ecosystem. Other players in the ecosystem now depend on the marketplace to function, making it all the more essential.

As more users join in the use of the marketplace and participate in the ecosystem, the network effect kicks in — another enviable business phenomenon where the value of the product or service grows exponentially as more participants join.

The Peril

At the beginning of every two-sided marketplace is the chicken-and-egg problem.

The power of two-sided marketplaces doesn’t come easily, due to the immense difficulty of starting one. This is known as the cold-start problem. If the supply side depends on the demand side to function—and vice versa—how do you get both sides of your marketplace up and running simultaneously?

The most common solution seems to be managing expectations by limiting access while conveying a sense of exclusivity, essentially to entice early adopters who will be more forgiving and patient until you achieve scale. This was tried-and-true for social networks like Facebook, which limited access to universities before it opened up to the public. The same was also true PeerStreet. An invite-only model allowed us to line up just enough buyers and sellers on each side of the marketplace to get the flywheel turning. Early users were not expecting the entire market from day one, and we didn’t have to promise the world… just yet.

Alongside extending exclusive access, another viable solution is to limit the scope of what your marketplace is trying to do. For example, Amazon started with “just” books; Uber started with black cars; and PeerStreet started with investments in short-term real estate debt. For one, you carve out a more niche, unique space from your competition, allowing yourself time to grow. For another, you’re able to build and test your platform, strengthening the infrastructure to ensure that it can handle more volume and traffic. Reducing the scope to the MVP (minimum valuable product) allows you to focus on the real problem and target your resources in answering the true customer need.

Once it’s built…

The two-sided marketplace is a powerful business model if you get it right. Once you have the initial users on board, once you’ve achieved enough inertia to get the marketplace wheel turning on its own, and once you’ve mastered your particular corner of the industry and turn your eye to the rest of the pie, the potential for growth can be incredible.

Leave a Reply

Your email address will not be published. Required fields are marked *