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 idea “Hilarious.”
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 they 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.