One week ago, I hosted my fifth Marketplace Dinner. This particular one took place at the DogVacay headquarters in Santa Monica.

Marketplace Dinners are a series of happy hour-esque meetups that bring together founders and leaders at startup companies growing, you guessed it, marketplaces.

So far, we’ve gathered over 250 founders and leaders (averaging about 50 founders per event), including entrepreneurs and executors from Airbnb, Odesk, eBay, Lyft, Uber, Thumbtack, and many more.

Each event is three hours of eating, drinking, and telling tales of what it took to build a marketplace.

Why the need for Marketplace Dinners? Two reasons:

1. Startup founders are incredibly collaborative and thoughtful.

As a Minnesota kid moving to San Francisco, I felt welcomed by the tech community here. I wanted to make sure that continued.

I personally can’t even count how many times I’ve picked up the phone and called, texted, or emailed other founders for their perspective or a coffee. Ninety-nine percent of the time I get a friendly response.

2. Marketplaces are rewarding, but hard.

When you are serving two customers, there is a lot to think about, especially when you need those two customers to work together. Thus, many mistakes are made along the way.

Although some mistakes are inevitable and are a natural part of rapid learning and iteration, a lot of common (and costly) marketplace mistakes can — and should be — prevented. We’ll go over those today.

To start, two simple marketplace definitions from Merriam-Webster to give us a history lesson.

First

: an open square or place in a town where markets or public sales are held.

Secondary

: a sphere in which intangible values compete for acceptance.*

*To bring the business definition up to 2015 terminology, assume sphere means platform; compete includes a buyer and seller (demand and supply); and intangible values can be tangible goods as well.

Okay, we definitely need an updated definition.

To rewrite it, I would define a modern-day marketplace business — think sharing economy — as follows:

Marketplacea platform that facilitates the exchange of a product or service, enabling those looking to provide that product/service (usually called sellers) to connect with those seeking that product/service (usually called buyers).

Now let’s dive into the most frequently made mistakes that occur when building a marketplace (in no particular order), and hear directly from leaders at Airbnb, Odesk, Etsy, and other leading marketplace companies.

Marketplace Mistake #1 – Poor Risk Management

When an Airbnb apartment was trashed, it caused a media storm. Airbnb spent countless hours responding to the press and supporting their customers, but when Hurricane Sandy drowned a large part of Manhattan, Airbnb was prepared and lent a hand by reducing prices and opening up homes to those that were displaced.

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On the other hand, Uber has made this mistake time and time again. Whether it isincreasing surge pricing and defending it during a hostage situation in Syndey, Australia, or not running background checks on drivers in India, Uber has given the public a perception that the trust and safety of its customers is in the back seat, figuratively not literally.

Marketplace Mistake #2 – Smart Risk Management Without Self-Promotion

Atish Davda, co-founder and CEO of EquityZen, tells a tale of how important this was for his customers:

“Let me start with a quote from Tolstoy: ‘All happy families are alike; each unhappy family is unhappy in its own way.’ Marketplaces are obviously similar in that what constitutes a mistake in each one is different.

For a fin-tech marketplace like EquityZen, trust is crucial. From the get go, our core offering (sellers sell equity to buyers using our transaction structure), has protections built in for investors so their money is protected. It took us a while before we realized we were not communicating this to buyers up-front. We were doing all the work, but not asking for any of the glory.

One day several months go, I sat down with a fellow 500 Startups founder and he put it as simply as if it were a dented car:

‘You’re wondering why people aren’t willing to send thousands of dollars to a no-name website like yours. I would give you $25,000 of my money right now if you just told me my money is protected. You’re not Fidelity. But, if you are protecting their money like Fidelity does, then tell them about it.’

Now, we bring up those marketplace protections early in the dialog and our conversions have grown precipitously.”

Marketplace Mistake #3 – Serving No Purpose

Is your marketplace solving a real problem? Jonathan Golden, co-founder of StartX and product lead at Airbnb, says, “My only two cents are to not think that every market is the same. Meaning, ‘Uber for X’ or ‘Airbnb for X’ may not work. Each market dynamic is unique and different.” Enough said.

Marketplace Mistake #4 – Not Building a Movement

Many say the time of ‘stealth’ marketplaces is nearing an end. You need to capture brand equity for your company early on and stake your place in your operating industry.

The food delivery space is one example. Even though food delivery is an extremely busy industry right now, companies like Sprig in San Francisco and Lish in Seattle are changing the dynamic by building socially conscious and design-forward brands.

It helps them differentiate and break through the noise.

Marketplace Mistake #5 – Not Regulating Your Community

From rampant Etsy forum trolls to the more recent promo code opportunists, you mustset out a prominent vision and brand for your company and community. You’ll need to moderate and curate a lot, especially early on in the life of your company.

For example, by better curating the retail spaces available on Storefront to have high foot traffic, we were able to drastically increase the likelihood a brand, artist, or designer renting the space would meet their goals for the retail store or event. Goals usually included exposure, sales, market testing, or customer acquisition. Thus, they needpeople to walk through the front door, or else they wouldn’t come back to Storefront. By carefully monitoring the supply side we increase repeat renting on demand side to 65% over only six months.

Marketplace Mistake #6 – Over Regulating Your Community

Here’s a lesson from Shelby Clark, founder of RelayRides, and the P2P advocacy organization Peers, “In the early days, we tried to control too much of the experience in order to provide a high-quality experience,” Shelby explains.

“What we found was that the community was better able to do this at scale than we were, and the more we relinquished control to the community, the better the experience, the more engaged the community, and the faster we could scale.”

Shelby gives two examples of over-regulation:

1. “Early on we did all of the customer service. We soon put the renter directly in touch with the owner in the event of an issue, which reduced work for us and improved resolution time.”

2. “In the early days we installed Zipcar-type technology in every car to allow for mobile access instead of meeting to exchange keys. We were worried about the friction introduced by the key exchange. People figured it out just fine, but it changed the model to longer-term reservations (not worth it to meet up for a $5 rental), which led to better economics for everyone. Also, by having people meet to exchange keys, it strengthened the connection between owner and renter, and the renters treated the cars better and led to less damage.”

Marketplace Mistake #7 – Choosing a Really Bad Name

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Jen O’Neal, founder of Tripping.com, tells a couple stories about company and community names:

“Having spent my entire career building marketplaces, I can think of a bunch of great stories.

Though it would be fun to talk about how StubHub’s original name was LiquidSeats (which was bad for a bunch of reasons), this is the first story that came to mind:

When we first launched Tripping.com in Germany, we initially called our users ‘Trippers,’ which unfortunately translates to ‘gonorrhea’ in German! Nicht so gut. When building a global business, it’s good to check for translation issues.”

Airbnb also has run into this problem in Europe, as the term ‘bed and breakfast’ is not always easily understood.

Marketplace Mistake #8 – Focusing Too Broadly

TaskRabbit and Zaarly got taken over by HomeJoy and Handy before realizing their cleaning and home services were the most purchased services on their respective platforms.

Richard Werbe, founder of StudyPool, a marketplace for student questions, also found this out the hard way:

“A mistake we have made was trying to sell too many types of verticals. We had 30 different verticals at one point. It was hard to manage and we ended up being only okay at each vertical. Then we cut it down to one vertical – academia. That’s when we started to see traction.”

Overall, make sure your current vertical market is large and growing. Then dominate it.

Marketplace Mistake #9 – Pulling Out the Chair on Supply

Social networking within a marketplace has become commonplace. Whether that comes in the form of Airbnb’s groups platform, which allows hosts to chat with one another, or Couchsurfing’s forums where hosts and guests can talk openly about meetups, social connections play an important role in marketplaces.

For those who have managed large online communities, it’s no surprise that the dynamic of an online community changes with its size.

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Early on at Lyft, they launched private Facebook groups, which enabled drivers in a city to connect with on another. Drivers benefited from being able to tap into the insights of other drivers, and Lyft benefited by being able to receive real-time feedback from the community.

However, as Lyft’s community scaled, the personal connections between drivers became more and more difficult to form. A room of ten thousand people simply cannot form connection in the same way a room of hundreds can.

Lyft ultimately switched up the structure of their groups to make them more relevant to drivers and smaller. This brought back that personalized feel that drivers experienced early on. If your marketplace relies heavily on community, keep in mind how it will change as you scale.

Marketplace Mistake #10 – Over Optimizing on Price

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Gary Swart, the past CEO of Odesk (before the merger with Elance) and now venture partner at Polaris, lived this first-hand.

He explains, “One of our big lessons learned was around price. We were charging 30% and we labored over the decision to modify (read:lower) our fees. We ultimately did and that move turned out to be really great for our growth and overall success.”

This experiences is chronicled here by Bill Gurley of Benchmark.

Marketplace Mistake #11 – Quantity vs Quality

Gary Swart also found focusing on either quantity or quality to be utterly important:

“In the early days of oDesk we hand-curated both buyers and sellers in our marketplace and as a result, the conversion rates were very high and the quality of outcomes was fantastic.

The issue with this approach was that it was not scalable. We were limited by acquisition of both clients and freelancers and decided to go to low touch to scale faster. The result was that it forced us to build a product experience that was good enough to scale in a no touch way.

However with this scalability, we sacrificed quality which ultimately hurt us in the long run.”

Marketplace Mistake #12 – Preventing Disintermediation Instead of Adding Value

Every marketplace deals with disintermediation and their customers going around the platform.

It’s a common issue, but a small amount of disintermediation doesn’t always matter. It’s important to know your customers and the value you are giving to them through your marketplace. If you know how your top 2-4 value props rank, then you know what matters to your customers.

Is there a rule of thumb for when your level of disintermediation signals a value prop red flag?

1. Start by looking at each stage of your marketplace funnel and focus on where user activity drops off to address this.

2. From there, you can compare where users are disintermediating against your value props (or demonstrating other issues with activation) and make sure your value is clearly explained and actually rings true for users.

3. Finally, combine user testimonials with tracking data to formulate hypotheses that you can test and iterate on.

At Storefront, we mainly focused on the transactional side of our marketplace (thus why we are called ‘Airbnb for Retail’), which was the second step for a demand side customer, but more recently we saw that the first step — finding short-term retail space — was even more important. That led to new discoveries and new features being offered that made retail space even more accessible on the platform.

Marketplace Mistake #13 – Over Catering to Supply Customers

Jason Davis, founder of Radico, and past director of search and data at Etsy, learned this:

“Etsy’s search box was introduced in 2005 just a few months after launch. The implementation was quite basic: a simple database statement that pulled back results ordered by recency. It worked well enough at the time.

 

(An Etsy snapshot from the Wayback Machine).

Yet as time passed, sellers started to realize that their newer items were getting more heavily promoted at the top of search, while stale items were falling deep into the results. Sellers also started to realize that for the listing price of $.20, they could “relist” their items, hence bumping up the timestamp in the database, effectively promoted their items back to the top.

By 2009, relisting could definitely be called “a thing” and represented a sizeable chunk of Etsy’s revenue ($.20 at a time). Yet at the same time, the marketplace had over 5 million items and search quality–and the buyer experience–suffered.

Etsy eventually solved this problem but won’t go into details here. It was a huge project for the entire company.

The lesson learned here is the balance between the marketplace, buyers, and sellers.

Sellers are the most vocal and act in their own best interest which isn’t necessarily aligned with the overall marketplace experience.

Buyers are silent judges of your success: treat them well and they’ll spend money, otherwise they’ll just silently disappear.

And of course, the marketplace needs to generate revenue via sustainable offerings to make ends meet as a business.”

Mistake #14 – Thinking Marketplaces are Easy Exits

At the end of the day, marketplaces are exciting, empowering, and hard businesses to grow.

Marketplaces take much longer to reach product-market fit, liquidity, scale, and are often a 5-10 year venture before you’ve nailed it. LoopNet exited in eight years. Etsy was founded in 2005 and is just now looking to IPO in 2015, 10 years later. Airbnb is nowvalued at $13 billion, but it took seven years.

Remember to build your marketplace with a passion and vision that’s big, lofty, and adds a positive impact to the people and world surrounding it.

Want to know more about marketplace events? Check out Tristan’s events here or or join the 500 DISTRO Newsletter for more strategies on growing your startup.

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ABOUT TRISTAN

Tristan is an Entrepreneur in Residence at 500 Startups, the world’s most active investor, and empowering the most creative people in the world as co-founder of Storefront, the online marketplace that connects makers with physical retail space. Called ‘Airbnb for Retail’ by The New York Times, Storefront has helped open over 1,000 stores to date.

His last startup, SocialEarth, the Huffington Post for social entrepreneurship, hosts over 200 contributors in 25 countries. SocialEarth was acquired by 3BL Media in 2012.

Tristan has also been named to the Forbes 30 Under 30 list in 2015, and led national marketing campaigns at Best Buy, including crafting the most read email of all time reaching over 23 million customers.

A Minnesota native from a family of makers, Tristan now lives and creates in San Francisco, California. Keep up with Tristan’s events here.