Information is absorbed and knowledge is formed. Knowledge is an abstraction above information. Relationships in a network of relevancy is what we experience as understanding. What I am giving you in these lectures is information, a recipe. You have to turn it into understanding by adding to it with your own research and making connections. You then turn those connections into knowledge with experience. A 10 minute lecture is a lot. if you want to skip the lecture scroll to the OnliAi summary at the end.
Lecture:
Today I am going to focus on Marketplaces since that is the appliance that most of you are focused on.
Believe it or not, you're actually riding the wave of a trending market: A vertical B2B marketplace that offers substantial advantages due to an enhanced infrastructure. A niche is one of the most crucial attributes a marketplace can have, propelling long-term success. I've often heard that B2B e-commerce spending is nearing a staggering $20 trillion, which is triple the amount spent by consumers online. A few quick searches will reveal that this is an area currently sparking a lot of interest among Venture Capitalists. See, I bet you didn't realize you were in such a hot segment.
First lets get hip to some of the lingo used in Marketplace Theory. one-sided marketplace, where a single supplier interacts with many buyers (hence, one-sided), two-sided marketplaces is where you connect buyers and sellers. You are going hear terms like stickiness (retention), liquidity (how quickly a buyer or seller can fulfill a need), and most important the concept of network effects, where the network becomes more valuable to users as more people use it.
Network effects is a whole thing by itself. But all these are terms you want to familiarize yourself with is all over the internet. Webex has a great glossary to start https://www.webfx.com/marketplaces/glossary/. I also want to point you to Andrew Chen at Andreessen Horowitz who has a great resource, https://a16z.com/book/the-cold-start-problem/ I encourage you to read. That is a rabbit hole we won't go down but you really need to become aware of network effects.
The main challenges in building a marketplace are the "chicken-and-egg" problem and the "cold start" problem . The cold start problem refers to the initial stage where a marketplace has neither buyers nor sellers. It's playing cupid to at least two - its consumers and its producers. But here's the kicker: a nascent platform doesn't initially offer enough value to attract new users. The challenge, then, is to break through this "cold start" phase, to ignite that spark that'll draw both buyers and sellers, creating a bustling marketplace. The chicken-and-egg problem refers to the difficulty of attracting consumers without producers and vice versa.. A marketplace needs to solve the problem of which comes first, supply or demand.
How do you do you manufacture a hot start and what do you focus your marketing on first? Well, you could start by populating your marketplace with initial listings to draw in buyers, or bring in buyers to attract sellers. You could offer incentives to those who join early, or you could target a niche market with targeted stories of experiences. Walk your first customers through the transaction manually, to be sure you worked out all the kinks. The goal is to get that fire started, to move past the "cold start" and create a thriving, vibrant marketplace.
Even if you get one or two completions you still have the chicken or egg problem. Who do you concentrate on first after all you don't have unlimited resources. Here are some important strategies to solving these problems.
The flash technique - buy lists, promote and get signups, do a waiting period to get in, pile all it up and then bang-flash lots of users all at once. People who don't even have anything to do with your value proposition the objective is to drive too lots and lots of traffic. There is also the Reverse-Flash strategy, which is if you doing the luxury brand thing, where you want to be as exclusive as all hell. You want very few customers on your platform, select large volume, visible customers. But make it hard to get in. Focus on a minimum viable segment where your value proposition has the most impact. You want people climbing through the window to get on.
The secret to either method is that in the first few weeks, set some boundaries: limit access and scope, while reducing resistance. Reduce all resistance to near zero. Reward the early adopters with incentives. I often recommend that you offer no fees. It's hard for an existing market to compete with you at zero cost.
Remember, a startup is not a business. You are not building a business when you start. You are a startup, a value proposition in search of proof. You're not trying to make money initially; what you want is proof. You want to prove that your value proposition has stickiness. Remember the old Silicon Valley joke? ROI means radio-on-the-internet; there's no such thing as revenue for a startup. It is not about how much you make. It is about how much you are worth. What you want is valuation and market share, not revenue. You want to get as many customers on your platform as fast as you can.
The value of your first customers is not income; it's them sharing their experience. They tell two friends, and they tell two friends, and so on and so on. That network effect thing I said research earlier. That is worth more than any revenue you get because that early revenue is not going to affect your bottom line. The network effect of adoption is your best investment as a startup. Let me say it again. the best investment for a startup is adoption. Why? Because that will affect your valuation, and that is where your money is, not revenue. A startup is not a business.
An Onli-powered marketplace, is kind of unique because you start as a one sided market because you're typically the Issuer, meaning the supplier or producer. The two-sided market is the after market of Buyers and Sellers. This gives you an interesting strategy that you can use to tackle the cold start problem. You can tap into the existing sales channels. A B2B market plays follow the leader. This could mean forming partnerships or adding value to existing processes. Initially, you'll be fulfilling all customer orders on your own, but the goal is to open it up so the secondary market can take flight. And here's where you need to shift your focus away from maximizing profit.
Make room for others to profit on your platform. If there is no economic advantage to using you marketplace then it’s not sustainable. Remember, the path to wealth is to help others make money. I'll say it again, a startup is not a business. Revenue shouldn't be your primary concern; your job is to provide proof. Your angel investor, even if it is you, gave you money to find proof. Your mission as a founder is to demonstrate to your current and future shareholders that people care about your solution. I stress this point because too often, people get caught up in the allure of transaction fee income, a tempting figure when you're crunching numbers on a spreadsheet. Don't lose sight of what truly matters - market adoption flows from economic advantages the customer experiences.
Another key area to focus on is understanding the value chain and pinpoint the pieces causing the most pain for your customer. It's akin to solving a complex puzzle, where you figure out the most significant pain points. You need to delve deep into the psyche of B2B buyers, understanding the factors that drive their decisions. It's not just about peddling a product or service; it's about offering a solution that addresses these crucial considerations of a value chain.
A value chain, a concept introduced by Michael Porter in 1985, is a business model that encapsulates all activities necessary to create a product or service. It's divided into two main categories: primary and support activities.
Primary activities are directly involved in product or service creation. They include inbound logistics (receiving, storing, and distributing inputs), operations (transforming inputs into outputs), outbound logistics (delivering the product or service to the customer), marketing and sales (persuading clients to purchase), and service (maintaining the product's value after purchase).
Support activities, on the other hand, aid primary activities in achieving a competitive advantage. They encompass procurement (obtaining necessary resources), technology development (managing and processing information, protecting the company's knowledge base), human resource management (hiring, training, compensating employees), and infrastructure (general management, legal work, finance, accounting, public relations, and quality management).
By examining these activities, a company can pinpoint its competitive advantage and concentrate on those areas to enhance its market position. In a startup it doesn't have to be complex. In fact, you want to reduce complexity in your value chain. The leaner it is the better it will work.
A B2B market plays follow the leader. It's not merely about the cost. Often it is about compliance - do the products or services align with regulations and standards? Someone who is not here but had a great idea to solve the green washing of ESG investments. That is more important than profit. By leveraging Onli as your platform, you often gain a significant advantage, especially in financial markets, as Onli seamlessly integrates with existing regulatory frameworks. The great thing about Onli is that you are the real thing. There's no need for vague interpretations or hand-waving. Another factors that often drive B2B customer decisions is often quality - does the offering meet the high standards they've set? Can they get a higher return with less worry? And yes, it's always speed - time is money. in the B2B world, time has a more significant impact on bottom line than in the consumer market. Understanding these factors equips you with a roadmap to navigate the intricate landscape of B2B buying decisions.
Now lets go into the deep end of the pool. Marketplaces, they're the lifeblood of the digital economy, revolutionizing industries from retail to transportation and everything in between. Building a thriving marketplace isn't a walk in the park. It's a complex endeavor that demands a deep, nuanced understanding of a multitude of factors. It all starts with how you think about it. My job is to give you things to think about. I'll briefly touch on the ones up on the keynote.
The cornerstone of a successful marketplace is its ability to provide an economic advantage to both the supply and demand sides. This means the platform should facilitate transactions that wouldn't otherwise occur or streamline existing transactions. If a marketplace can't offer this advantage, its sustainability is in question.
A critical determinant of a marketplace's success is the frequency of transactions. This is particularly true for financial marketplaces, which often rely on transaction fees for revenue. High-frequency transactions offer a steady revenue stream and foster a vibrant, active marketplace. As such, marketplace operators should strategize to encourage frequent transactions, perhaps through regular use incentives or features that promote repeat business.
Marketplaces thrive in highly fragmented markets, where they can add value by consolidating and simplifying transactions. The larger the potential user base, the better. Like we discussed understanding value chains of the customers and eliminating pain points is value enough even without a strong economic advantage proposition.
Understanding market asymmetries, such as which side (supply or demand) is harder to secure, can be beneficial. It allows operators to focus their efforts more effectively and devise strategies to balance supply and demand. Simultaneously, marketplaces must avoid disintermediation, where users bypass the platform after the initial connection. To prevent this, marketplace operators must ensure they provide sufficient value in every transaction, rendering the platform indispensable.
The homogeneity of user needs on each side of the marketplace is also crucial. Marketplaces must avoid "pollution" or unwanted behavior that can repel users. A successful marketplace should strive to address the comprehensive needs of one side.
In essence, building a successful marketplace is a complex task that requires a deep understanding of various factors. By considering transaction frequency, market fragmentation, user base, market asymmetries, and disintermediation, marketplace operators can navigate these complexities more effectively.
Then there is the big one: Network Effects. A substantial user base contributes to the network effects that often underpin a marketplace's success, as each additional user enhances the platform's value for others.
The reason marketplaces are a darling of investors and entrepreneurs, is simple: the robust network effects they generate, which in turn create a formidable defensive moat for startups. This is why you walk in and say I want to build a electric truck investors go hmpf. You walk in and say you want to build a marketplace for goods on electric truck and VC's throw money at your value proposition. There is a reason.
Let's clarify that "network effects" isn't just about amassing a large user base; it's about creating a scenario where the value of a product or service increases with each new user.
In essence, when a new user joins the network, the product or service becomes more valuable for all existing users. This added value can take various forms, such as reduced costs (for example, in user acquisition), enhanced liquidity (in a marketplace), or a more vibrant community (in social networks).
Network effects can be broadly categorized into direct and indirect effects. Think about how users benefit each time someone else participates, and in what way: directly or indirectly.
Direct Network Effects The most straightforward type of network effects are direct: an increase in usage leads to a direct increase in value for all other users. Social networking platforms like Facebook, Twitter, and Wattpad are classic examples of direct network effects. If you join Facebook and start sharing content that I find interesting, Facebook inherently becomes more valuable to me. Direct network effects hinge on participant roles. In marketplaces, users can be buyers, sellers, or both. On social platforms, they can be content creators, consumers, or both. Distinct buyer-seller roles lead to two-sided network effects. Overlapping roles can expedite network launch by achieving liquidity quicker.
Indirect network effects can also play a significant role. Here, the product's increased usage prompts the creation of complementary goods, boosting the original product's value. For example, Shopify's bustling developer ecosystem and value-added apps, or services like Guestly for Airbnb management and Drover for Uber/Lyft driver rentals, all emerged to support popular platforms.
That's everything on the keynote. There is one more thing I do want to land heavily one.
Let's delve into Branding, an area often overlooked by startups. Consider banks - fundamentally, they all offer the same services. Yet, their sizes vary dramatically. Why? The answer is Brand. It's the customer experience, the brand message that differentiates them. Your brand is your identity, your promise to customers. In fact, as a startup, particularly in financial services, your brand should be a significant part of your investment, second only to your value chain. The difference that makes the difference is in the power of the brand. Brand means you are either Capital one or Capital Savings and Loan. You have heard of one of them right, rest my case.
A brand is a promise, a pledge you make to a customer that they will receive a quantifiable, tangible value when they choose your brand. You need to crystallize what that promise is, and every facet of your organization should be laser-focused on delivering on that promise.
Branding isn't merely about aesthetics; it's about functionality. Find the best designer you can afford. Especially in User interface, the user experience. Think about it like a lot. Do not skimp on design. Your website isn't just a digital presence; it's your global storefront. Don't give this to your cousin. Engage a professional.
Why is Brand so important? Because, as I've reiterated time and again, a startup is not a business. A startup is a value proposition in search of proof, a hypothesis in search of a business model. A brand is a promise. You can build a business model when you can prove that people believe that you can deliver on that promise. It is all about the power of your brand.
If you take away one thing from today's lecture it's a startup is not about profit. I know it sounds crazy and it doesn't make logical sense. This is why some people can build Unicorns and others, who have been in the business for years aren't even worth 10% of that. You want to build a billion dollar startup? Shift your thinking. Reflect on Amazon’s journey. It took Amazon more than 14 years – 58 quarters after its IPO in May 1997 – to make an annual profit. You need to re-calibrate your thinking. It is not what you make it is about what you are worth. Social media don't get it. They never will. You are not going to get lots of people going yeah that make sense. Armchair analysis belongs to a guy in an armchair. You don't care what his opinion is. He is not your customer. If you want to build a Unicorn then you have to make up your mind to change the make-up of your mind.
Look, I want you to go to crunchbase unicorn leaderboard and tell me how many of those you have heard about? Yeah, that's right. People are building Unicorns every month and most of them, you have never heard of. Shift your thinking. ChatGPT had 100 million monthly active users in just two months after launch. You are in a global market not a geographical one. When you get up in the morning, your first thought should be "market share", and as you go to bed at night, "market share" should be your last thought. If you're one of those people who pray then your prayer should be "Oh God, please give me market share." A startup is not a business. A startup is about market share.
So today what you have is more of a research assignment. Go out and learn about markets. There are very curious animals. Venture out and learn about markets. They're fascinating creatures. You can unravel the chicken-and-egg conundrum with a few simple techniques we've discussed. But the most potent weapon to solve it, your best bet, is to transform your thinking. Right actions stem from right thinking. Always remember the mantra: a startup is a value proposition in search of proof. Proof is what I am after.
end
I wanted to add this great channel on marketplaces.
Summary
# 8 Key Insights into Marketplaces
Marketplaces are the lifeblood of the digital economy, revolutionizing industries from retail to transportation and everything in between. Building a thriving marketplace isn't a walk in the park. It's a complex endeavor that demands a deep, nuanced understanding of a multitude of factors. Here are eight key insights into marketplaces:
## 1. Understanding Marketplaces
Marketplaces are platforms that connect buyers and sellers. They are often categorized into one-sided marketplaces, where a single supplier interacts with many buyers, and two-sided marketplaces, where multiple buyers and sellers interact. Key terms in marketplace theory include stickiness (retention), liquidity (how quickly a buyer or seller can fulfill a need), and network effects, where the network becomes more valuable to users as more people use it.
## 2. The Challenges of Building a Marketplace
The main challenges in building a marketplace are the "cold start" problem and the "chicken-and-egg" problem. The cold start problem refers to the initial stage where a marketplace has neither buyers nor sellers. The chicken-and-egg problem refers to the difficulty of attracting consumers without producers and vice versa. The challenge is to break through this "cold start" phase, to ignite that spark that'll draw both buyers and sellers, creating a bustling marketplace.
## 3. Strategies for Building a Marketplace
To overcome the cold start problem, you could start by populating your marketplace with initial listings to draw in buyers, or bring in buyers to attract sellers. You could offer incentives to those who join early, or you could target a niche market where you can quickly become the go-to platform. The goal is to get that fire started, to move past the "cold start" and create a thriving, vibrant marketplace.
## 4. The Role of Boundaries and Incentives
Setting boundaries and offering incentives can be key to building a successful marketplace. Focus on a minimum viable segment where your value proposition has the most impact. Walk your customers through the first deal manually. Reduce all resistance to near zero. Reward the early adopters with incentives.
## 5. The Importance of Network Effects
The network effect of adoption is your best investment as a startup because that will affect your valuation, and that is where your money is. A startup is not a business. It is not about how much you make. It is about how much you are worth.
## 6. Understanding the Value Chain
Understanding the value chain is crucial. It's akin to solving a complex puzzle, where you need to pinpoint the pieces causing the most disruption, the most significant pain points. You need to delve deep into the psyche of B2B buyers, understanding the factors that drive their decisions. It's not merely about the cost. It's about compliance - do the products or services align with regulations and standards? It's about quality - does the offering meet the high standards they've set? Can they get a higher return with less worry? And yes, it's also about speed - in the B2B world, time often has a more significant impact than in the consumer market.
## 7. The Role of Branding
Branding isn't merely about aesthetics; it's about functionality. Allocate the necessary funds and secure the best designer you can afford. Your website isn't just a digital presence; it's your global storefront. This isn't a task to delegate to your cousin. Engage a professional.
## 8. The Startup Mindset
A startup is a value proposition in search of validation. When you rise with the sun, your first thought should be market share, and as you retire for the night, market share should be your last thought. If you're inclined to pray, let your prayer be "God, give me market share." A startup is not a business. The business part comes later, after the startup phase. A startup is a value proposition in search of proof.
In conclusion, building a successful marketplace is a complex task that requires a deep understanding of various factors. By considering transaction frequency, market fragmentation, user base, market asymmetries, and disintermediation, marketplace operators can navigate these complexities more effectively. Always remember the mantra: a startup is a value proposition in search of proof.