Uber, Thumbtack and AirBnB are just a couple of the hot young marketplace startups that have completely transformed their industries. To gain insight into how upcoming marketplace companies have fueled their own growth, I talked with with RainforestQA, UpCounsel and Traction, three well-funded startups with a combined $23.17 million raised. These companies spilled some of their secrets for successfully building a rapidly growing marketplace startup - while keeping cost to a minimum.
One of the most common mistakes early-stage startups make is that they spend too much on marketing channels before they actually have the product or are capable of putting in the effort to be successful. Online marketing involves many expensive channels that may not be the right fit for a company that hasn't already built an effective website and business model. For marketplace companies, it's all about finding tactics that work in the early stages.
For example, when Fred Stevens-Smith of RainforestQA, a company that provides ways to test products, was asked how he and his team built their early customer base, his said, "Definitely referrals. We focused on really solving the CTO's problems and direct introductions to new potential customers still generates 25 percent of our business."
Mark Faustman of UpCounsel, a marketplace for legal services, says, "We did things like craigslist ads, sending out a lot of cold emails to people, anything we could do to build up our community of lawyers. This was when we had no demand."
This is a common trend with many successful startups. If the company doesn't have the connected referrals to reach a tipping point of critical early customers, they will probably need to spend their time building a "ground layer" for success by doing things that don't scale.
Surprising Tactics for Success
Everyone is looking for a single silver bullet to success, but such tactics don't really exist. Gimmicks rarely last long or take the company as far as it needs to go. Some of the more successful tactics startup teams use may surprise you.
"Hire great remote sales people that are already strongly connected in their location," says Kenzi Wang of Traction, a marketplace that helps people find marketing specialists. "This allowed us to immediately build and maintain brand relationships."
Stevens-Smith shared a solid silver bullet tip. "Quora! Answering a few questions about outsourced QA (an industry that competes with Rainforest) on Quora has been a strong source of leads that convert to customers."
All of the founders agreed that paid advertising and expensive PR firms are generally a bad idea for early-stage startups. It can be a long, cumbersome process to make paid marketing successful, and these efforts often don't generate the immediate results that companies are usually looking for.
Driving Sales for Your Company
Each of these marketplace companies built systematic sales funnels for driving new inbound leads to their company. RainforestQA uses sales development reps (SDRs) to do targeted prospecting for their ideal customer type. They use an outbound multi email campaign to get their target buyer interested in hopping on a call. Upcounsel and Traction have similar setups. They say they put a lot of focus on finding approaches and content that get potential clients to talk to sales people about the product.
Understanding Your Market
All three companies agreed that understanding the market is the key to success, but their approaches for getting there varied.
"This varies based on the marketplace," Says Faustman. "For labor or service marketplaces, first thing is you need to understand your supply, and build that up - enough to where the experience that you want your demand to have can be present the first couple times that they use it. If it's Uber, you want to make sure there are drivers. If it's UpCounsel, you're gonna need lawyers."
Fred of RainforestQA digs deeper:
"This is a fascinating question and one where I think there's no definitive answer. In short there are two options: low volume, high quality OR high volume, low quality. Two examples: for the former, Uber, for the latter, HomeJoy. Uber started just in SF and just for black cars which is relatively speaking a small market. They figured out the various challenges using this low volume model and were able to deliver a very high quality experience, before scaling to massive volume.
HomeJoy on the other hand went immediately into land-grab mode for massive volume, and never really managed to fix their quality issues.
While those examples imply that low volume, high quality is the right way to go, I think that one shouldn't dismiss HomeJoy's approach. Others have done this same thing and won (eBay for example). In my opinion the 'correct' approach is determined largely by competition and your confidence in your ability to drive up quality over time, as eBay has done."
Wang offers this actionable way to develop a good knowledge of your space:
"Focus on a specific niche within the full marketplace you're targeting, and specialize on building a solution for that piece first. Having a solution for small piece of the market provides a competitive advantage in influence and margins, and allows you to test your hypotheses about the needs of the marketplace."
Paths to Success
It's no secret that marketplace companies are a hot topic of discussion right now due to just how popular some of them have become. It would benefit the rest of us to take notes. As some marketplace companies have dominated their their spaces, it's fueled venture capital, creating a feeding frenzy. While investors and entrepreneurs love to hear these success stories, it's easy to forget the hard work involved, especially in the beginning. RainforestQA, UpCounsel, and Traction show us the approaches that were effective for them, which you can use to help drive your own company's growth.