Marketplace businesses can achieve some of the strongest competitive positions imaginable—think Amazon, Booking.com, Mercado Libre, Pinduoduo, and YouTube. The primary reason is that they benefit from network effects: The more buyers who join a marketplace, the more attractive it is for sellers to join, and vice versa. That’s why entrepreneurs are seeking to build, and venture capitalists are seeking to invest in, the next Airbnb, Uber, or Twitch. And it helps explain why marketplaces cover every imaginable sector: StockX for trading sneakers, Faire for connecting retailers and brands, Whatnot for livestream shopping, Houzz for hiring home designers, OpenSea for trading non-fungible tokens (NFTs). Many established companies are also building marketplaces around their successful products in order to catalyze growth and enhance defensibility: Zoom launched its app marketplace in 2021, and OpenAI launched its GPT store in late 2023, following the models of the Apple App Store, the Shopify App Store, Amazon’s AWS Marketplace, and the Salesforce AppExchange.
Will That Marketplace Succeed?
Marketplaces are the quintessential type of business that can profit from network effects: The greater the number of buyers who join one, the more attractive it becomes to sellers, and vice versa. Indeed, marketplaces such as Amazon, Booking.com, and Apple’s App Store have achieved some of the strongest competitive positions imaginable. That’s why entrepreneurs are seeking to build, and venture capitalists are seeking to invest in, the next Airbnb, Uber, or Twitch.
But not all marketplaces have the potential to realize strong network effects—the kind that make a marketplace defensible against wannabe competitors. Differentiation among sellers, fragmentation of the seller and buyer bases, the value added by discovery and transaction services, and the importance of seller ratings are all decisive in determining whether a marketplace can flourish. That’s why it is extremely important, both for new and established companies trying to build marketplaces and for their potential investors, to dig deeper into those factors.
Drawing on their more than two decades’ worth of research and their own experience as angel investors in some 40 marketplace start-ups, the authors offer a comprehensive list of questions that anyone thinking of launching a marketplace should explore.
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