Demand v. Supply: Who Do I Prioritize in Two-Sided Marketplace?

Marketplaces are all the rage right now, and with good reason. Two of the top three unicorns, Uber & Airbnb, on the TechCrunch leaderboard employ marketplace models, allowing them to command extremely high operating margins in an asset-lite fashion. These two-sided marketplaces disrupted entrenched, non-tech friendly markets with easy to use tools and became the metaphor-standard for new companies trying to disrupt adjacent spaces with ("We're the Uber for _____! / Think AirBnb for _____!"

In early days, the question for a two-sided market then becomes: Do we focus on acquiring customers and optimizing their user experience with investment in ease-of-use tools, or do we focus on acquiring vendors and focusing the product on optimizing the vendor experience? The case for each is valid - as its very much a "chicken & egg" paradox, however most startups fail to determine which path to focus their resources on, or worse, incorrectly allocate resources to one path vs. the other.

So which one is right for your business?

Critical to building an "on-demand" product these days is to start by validating if your product is even IN-demand and how that demand is met by the existing market. This is to say that if your marketplace serves the needs of customers once in their lifetime (say, a wedding), there better be a massive market for wedding vendor services that justify your need to exist.

Secondly, and most importantly, once you understand the demand dynamics of your market, you need to look at how your service expands the existing market of services, and how best to drive expansion of that market. In doing so, you'll be able to concisely communicate the value of your business to an investor, often in one sentence or less that will then guide your company's initial capital investment.

Let's use Airbnb as a real-world example. (Note, these are fairly generic assumptions that lean heavily on hindsight, but when communicating your pitch to VCs, simple is better).

AirBnb Market: 10.9 billion trips booked worldwide annually.

AirBnb Demand Assumptions:

• Existing Market: The average US citizen needs a hotel room 4 times/year (estimate detailed at end, but overly simplified)
• Market Expansion: Offering additional hotel services in underserved areas and at lower rates will make travel more accessible.

• Existing Market: Hotels/Vacation Homes offering rooms on a nightly basis
• Market Expansion: Individual home owners offer space/services to travelers increases the available hotel options in any market.

For Airbnb, in order to expand demand for hotel services, they needed to develop tools and functionality to enable home owners to become renters. The founders clearly recognized this, given the first page of their solution read simply:

This signaled to investors that Airbnb was critically focused on increasing the value proposition to its suppliers in developing critical renter services with insurance, security, and payment management, as opposed to other future competitors who focused on building a community of users passionate about the brand (see Couchsurfing).

Not all marketplaces are built the same (Seamless/Grubhub jumps out to me as an example where by marketing the product to consumers led the suppliers to adopt the system) a clear understanding of how you're going to expand the market for services you're attempting to corner will drive your investment strategy and ultimately garner VC interest in the business.