I just read the following quote in a post about platform failures:
Because platforms depend on the value created by participants, it’s critical to carefully manage the platform’s “openness” – the degree of access that consumers, producers, and others have to a platform, and what they’re allowed to do there. If platforms are too closed, keeping potentially desirable participants out, network effects stall; if they’re too open there can be other value-destroying effects, such as poor quality contributions or misbehavior of some participants that causes others to defect.
Marketplaces are a type of platform in which Forward Partners routinely makes investments. They make up around one third of our portfolio. We love these companies because (done right) they are better for the supply side and the demand side and because at scale they exhibit significant network effects which make them very valuable.
The early marketplaces were modelled on stock markets and were very open. Companies like ebay offered full visibility over supply and demand, few restrictions on who could use the platform and let the marketplace determine pricing. More recently marketplaces have started operating more curated models with much less transparency and more control over pricing. Uber is one of the more extreme examples – as I imagine you know passengers have to accept the car they are given and Uber decides on the pricing.
Amongst our more recent marketplace investments Lexoo is a good example of a highly curated marketplace. They connect companies with legal services but rather than have an open marketplace where customers browse through lawyer profiles they’ve built a sophisticated matching engine which identifies the best lawyers for a particular job and gets four of them to quote within twenty four hours. Similarly ClickMechanic, another of our partner companies, fixes the price of jobs that mechanics do through the platform and finds the mechanics rather than asking the customer to do the work.
In the Uber, ClickMechanic the Lexoo examples the marketplace is doing much more work than a more traditional model. Companies like ebay find the supply and demand, optimise the browsing and search process, build trust systems, and then process payment, whereas marketplaces like Lexoo, ClickMechanic and Uber are doing that, but also assisting much more with selection and making sure the transaction runs smoothly.
Getting the right level of ‘openness’ is critical to marketplaces’ success. In our experience finding the optimum level starts with the founders’ vision and then evolves following customer research and how the supply and demand side respond to early versions of the product. There’s no generic right answer but rather individual marketplaces need to find the solution that works best for their supply and their demand, as measured by conversion. The less work a marketplace does the cheaper it is to build, of course, so there is a trade-off between cost and time to market on the one side and conversion and customer satisfaction on the other. As marketplace models are moving to new industries with more complicated transactions the trend is definitely towards more cost.