Four Ideas For Growing Highly Successful Marketplace Startups – From Bootstrappers

Some of today’s hottest tech companies – including Amazon, Facebook, and Uber – use a marketplace business model, allowing them to reach the staggering proportions we’ve seen today. 

Marketplaces like Facebook were used by as much as 69 percent of the American population in 2021¹. Ecommerce marketplaces like Amazon boasted roughly 82 percent of American households in 2019² and grew their influence even further during the pandemic.

People and businesses love marketplaces because they scale regardless of technical capabilities. For example, a SaaS product like Amazon Web Services (AWS) is only as powerful as the number of servers Amazon can afford to buy and maintain. Amazon’s online ecommerce marketplace, on the other hand, is only limited by the number of buyers and sellers willing to use it. 

The more participants they have, the more desirable their service is. Would you rather sell goods in a place where you can reach 2,000 customers or 310 million?

This process where thousands of users draw in others is called the “flywheel effect.” It’s named after a machine component (traditionally a giant wheel) that builds momentum over time. Once the flywheel starts rotating, an engine can sputter out briefly and let the wheel’s inertia carry it along.

While the marketplace “flywheel effect” is incredibly powerful at a large scale, it is notoriously difficult to start in the early stages. Marketplace founders must find two customers: One to sell goods and services and one to purchase these goods and services. This usually creates a “chicken-or-the-egg” problem where founders must draw one side of their marketplace by building the other one.

Our goal at Acquire is to help make the startup process less daunting for founders like you. We’ve interviewed a handful of fast-growing marketplaces at Bootstrappers from different industries like talent recruitment, contracting, ecommerce, and even music. Here are their key lessons on building successful marketplaces, solving their chicken-or-the-egg problems, and bringing their flywheels up to speed.

Use Other Marketplaces to Grow, Like ServiceBookie

ServiceBookie is a contractor marketplace similar to Yelp or Angie. It allows customers to reach out to home contractors like painters for projects and currently boasts thousands of contractors. In just a few years, ServiceBookie achieved over $250,000 ARR. 

To grow his business, founder (and former painting contractor) Greg Spates utilized a much more popular marketplace, Facebook, to reach a wider audience. He created a group called Painters’ Hub where fellow house painters could share tips and advertise their services. The forum soon became a larger group for house contractors of all types. At the time, Facebook  pushed groups into peoples’ feeds, providing free marketing.

As Painters’ Hub grew, Greg strategically advertised ServiceBookie to his members. His thoughtful moderation of the Facebook group soon translated to more signups and subscriptions to his service.

ServiceBookie’s flywheel operated on two levels. Every time a new contractor from Painters’ Hub joined the service, the website would generate a new page for them. The increasing number of pages (a tool out of the Yelp playbook) helped businesses rank increasingly high on Google. In turn, it became more desirable for contractors to list there as visibility increased.

Today, Greg runs a well-oiled machine and community that requires relatively little day-to-day effort. A perfect project for a retired painter.

Read our full article on ServiceBookie.

Lure in the Attractive Customers First, Like LabelRadar

LabelRadar (recently Acquired by Beatport) is a marketplace where artists match and share their music with record labels. As of their interview in January 2022, LabelRadar made over $300,000 ARR and featured over 100,000 artists, 1,000 labels, and half a million tracks. The platform’s initial growth is largely due to its founders’ established connections with huge record labels.

Derek Clark and Ed Brew were bedroom EDM artists who unsuccessfully tried to join record labels as college students. Later, Ed started working at a prominent label called Monstercat Records. There he realized record labels had trouble finding new artists, and new artists had trouble getting heard by record labels. Both parties were missing out.

When Derek and Ed started LabelRadar, they wanted to solve a problem Ed saw while working at Monstercat: Spam emails constantly overflowed his inbox, making it difficult to pick out top-tier tracks from the crowd. To solve this issue, the duo created a freemium platform where artists could submit a certain number of tracks to labels for free but had to pay for extra submissions. Derek and Ed stayed away from monetizing labels, hoping to lure as many as possible and make their marketplace more attractive to artists.

To solve their chicken or the egg problem, the duo leveraged Ed’s industry connections to bring two large labels onto their platform from the start. One was Ed’s current employer, Monstercat. Once launched, new artists clamored to populate the service side, more than willing to pay a small fee for the chance to be heard by a major label.

Ed and Derek leaned in further by creating contests for artists on the platform, letting them remix tracks from famous DJs like Tiesto. This attracted even more artists and labels hoping for high-profile deals. Soon they’d created the exact tool they wished they had as aspiring music producers.

Read our full story on LabelRadar.

Build Critical Mass and Then Land Huge Contracts, Like Upshift

Upshift is a fast-growing staffing marketplace based in Ohio currently connecting over 1,200 American businesses with more than 70,000 workers. They expect to crack $100 million ARR in 2023. 

Today, Upshift contracts with some of America’s largest hospitality, logistics, and food service businesses. To pry these massive and desirable contracts from traditional staffing agencies, founder Steve Anveski focused on populating the service side of his marketplace first (i.e. the contractors).

In 2015, after trying Uber for the first time, Steve decided to create a solution to staffing vacancies. He struggled to fill open shifts at the restaurants and sports bars he ran in Ohio on short notice. He wanted to create a flexible system for businesses to hire reliable short-term workers on short notice.

To beat traditional staffing agencies for contracts, Upshift focused on all of these agencies’ weak points. Upshift only hired workers if they could pass strict tests, including finding a ride to a local testing site. Steve also used the centralized nature of his service to permanently ban any worker who missed a shift without notifying an employer.

Upshift was highly attractive to employees too. Steve and his cofounders set up legal entities in every state they operated in, ensuring all employees received health benefits. This also helped draw companies because they knew they weren’t liable for anything that happened to Upshift employees on the clock.

Steve and his team focused heavily on referrals from Upshift employees. These stellar referrals caused Upshift to become radically more popular wherever they set up business – and helped them land huge national contracts from food companies and warehouses. As Upshift became one of the hottest staffing solutions in town, its influence spread to several communities across the country.

Read our full story on Upshift.

Automate an Existing Marketplace, Like Auxe

Auxe is a contractor marketplace based in Canada specialized in home installations and repairs – for items like TVs and home security systems. As of interviewing Auxe’s founders in September 2021, it made $4 million ARR. Their secret to early growth was manually facilitating contractor-client relationships and then turning their improvements into technology later.

Before Auxe, there were few ways for contractors and clients to connect besides Craigslist or other job boards. Contractors had to spend extra time finding customers, and customers couldn’t reliably find quality contractors in their area.

At first, founders Raf Recavarren and Peter Semkowski cold-called contractors and asked if they were interested in work. On the other side, they searched job forums for clients and dispatched contractors to these gigs. Once they’d established regular contracts, they used a program built for a messenger tool, Slack, for communication. Customers would ask for work in Slack, and contractors would respond with a thumbs up if they took the job.

Once customer and contractor communication was semi-automated, the Auxe team hired one of their contractors as a COO to vet and train new contractors. This increased the quality of their service substantially and helped them land contract deals with steadily larger customers, including enterprises like 7-Eleven, KFC, and Hisense.

Today, the Auxe team still makes a difference by building personal relationships with their contractor network and hiring consistent performers to work with Auxe full-time. Raf and Peter consider Auxe a community as well as a marketplace.

Read our article on Auxe.

Marketplaces Are Filled With People – Make Them Personal

Marketplaces are communities – before they reach an eye-catching size, folks join them because they like the people there.

As you’ve likely noticed, none of these businesses started as automated solutions but rather as personal connections with individuals. Each founder leveraged different strengths and relationships to start up their marketplace flywheel, whether through cold calls, previous business connections, or online forums.

If there is a playbook for creating a marketplace, it’s this:

  1. Find a connection between two people that needs to be simplified.
  2. Gather enough initial connections on the harder side and use those connections to attract the easier side.
  3. Manually connect the two sides until you can use your cash flow to automate everything.
  4. Improve quality on both sides.

Sell Your Marketplace on Acquire

Successful marketplaces aren’t just profitable investments; they are also highly sought after for acquisition and relatively liquid if they run autonomously. As of our August 2022 multiples report, marketplace businesses typically sell for one to three times their revenue.

While you may not be interested in selling your marketplace right now, the possibility of a quick exit is one of the best insurance policies you can have as you build your business.

We created Acquire as a free marketplace for founders like you to safely and securely sell your business at any stage, whether you’re making just a few thousand ARR or millions. As a seller, all tools on our platform are free unless you choose to be Managed by Acquire (where we take a percentage of the sales fee).

You can create a free account in just a few minutes and start fielding offers on your business in less than a day. Visit our seller page to get started.

Happy building!

Sources

¹https://www.pewresearch.org/fact-tank/2021/06/01/facts-about-americans-and-facebook/
²https://www.digitalcommerce360.com/2019/07/11/82-of-us-households-have-a-amazon-prime-membership/