The Big Leap to Two-Sided Marketplace


Dave Yuan

Founder and Partner, Tidemark

Tilting at Windmills? Maybe. (Illustration by Picasso, 1955)
This is Part 4 of the Consumer Demand Series.
Part 1: Merchant Front Office Apps - Setting the Foundation
Part 2: Creating Demand with Merchant Facing Apps
Part 3: Consumer Apps
Part 4:
The Big Leap to Two-Sided Marketplace

And now we arrive upon the Great White Whale—the two-sided marketplace. Extending to a consumer two-sided marketplace is the financial promised land, given the economics (anywhere from 5% to 70% take rates) and the strategic flywheels created. 

Marketplace Takerates

Marketplaces are an opportunity when utilized and a threat when ignored. The most forward-looking marketplaces are beginning to evaluate vertically integrating into SaaS to build moats, secure their supplier base, and provide a better consumer experience. By nature of their high monetization and strategic value proposition—delivering customers—marketplaces pose a real long-term threat to any VSV. They can fund significant sales efforts, offer disruptively low prices on software, and compete in ways unfamiliar to the typical VSV. I don’t want to be the boy who cried wolf, but VSVs should be afraid. They need to respond before it becomes too late. 

Candidly, this essay is speculative. The existence proofs of VSVs extending to marketplaces are sparse. Today I will cover why this is possible, the important things to consider as you go down this path, and how to get started. 

Why is this possible? 

The hardest part in starting a marketplace is “the chicken or the egg problem.” You need density on both sides of the marketplace to make for a compelling offering. However, a VSV has a head start over someone trying to build a marketplace from scratch.

The good news is that you have a relationship serving the supply side of a marketplace—the merchants. Lenny Rachitisky, former growth product manager at Airbnb and respected marketplace strategist, interviewed 17 successful marketplaces and found that the vast majority of successful marketplaces concentrated early efforts on scaling supply. Even if it takes some time for the marketplace flywheel to spin, you have both a strong single-player value proposition to the merchant and a sustaining business model as a VSV.

Marketplaces by early scaling strategy

Merchants also generally don’t like marketplaces. Marketplaces commoditize merchants’ inventory by comparing primarily on the basis of price, rip them off by taking a 20% take rate on both their new and existing customers, and don’t share customer information so a merchant can try to remarket to that customer over time. If you spend enough time with merchants, you’ll realize the resentment runs even deeper. When I was doing due diligence calls with SiteMinder, hotel owners got spitting mad when the topic of OTAs came up. “[The OTAs] charge us 20% to flip our inventory! They are doing jack squat but are valued 10x more than we (the hotel) are.”

The even better news is that Vertical SaaS industry structures are almost perfectly set up for marketplace models. Conventional marketplace theory would tell you to seek highly fragmented markets where supply is underutilized. VSVs merchant customers tend to be local small businesses, and these businesses can experience explosive growth when given the right tools.

Further, Vertical SaaS also tends to be a highly localized market. Local brand awareness and acceptance drive light local network effects that show up in VSV go-to-market economics. You’ll see all different types of companies with really strong network effects in dense local markets. One of the most remarkable examples is Justworks, a health insurance SaaS product that pulls 53% of its revenue from New York alone. 

It is tempting to say, “Well, there is merchant density, so let's go for it,” but it is much more nuanced than that. A VSV pursuing this path should look carefully at both sides of the marketplace:

Supply Side 

Multi-homing of supply (merchants): The VSV’s initial key advantage is the pre-existing relationship with supply. The strength of that advantage is determined by the degree to which merchants will multi-home their offerings. For example, restaurants tend to only list their reservations on one marketplace due to the desire to minimize hardware in a constrained physical environment. This pragmatic exclusivity has been the basis of an enduring OpenTable marketplace. On the flip side, most hotels list their inventory anywhere and everywhere. As a result, the online travel agency business model is more akin to that of lead generation. 

Homogeneity of supply: If supply is homogeneous and commoditized, then incremental supply creates little advantage. On the flip side, unique supply is strategic. In the early days, the marketplace’s value prop to the consumer is the merchant. If you have unique supply, your marketplace can be differentiated even when you’re early in supply or demand density. A good example of this phenomenon in restaurants was Tock taking market share from OpenTable by focusing on high-end establishments. OpenTable offering reservations at Olive Garden is very different from Tock having exclusive access to the newest Thomas Keller restaurant. 

Minimum supply-side density: The VSV should ask what is required in terms of supplier density to make a compelling marketplace offering. Unfortunately, it is context-dependent, so I can’t give a hard rule on the numbers. Some markets require just a few key merchants, while others require 100% before being viewed as a complete marketplace. Once a VSV hits critical supply-side mass, it can start up consumer acquisition efforts. Still, though, the math is relatively simple on the supply side for VSVs. Demand is where it gets really tricky.


The Demand Problem 

It is incredibly capital-intensive and expensive to build consumer density—even more so for a VSV that has to split its funds between a new marketplace and its existing software business model. Even pure-play marketplaces tend to want only to have to pay for one side. As a result, a VSV should prioritize a marketplace where the buy-side shows the following characteristics:

  1. Pre-existing: Ideally, you’re building a marketplace that doesn’t yet exist. Or at least that doesn’t compete against a well-functioning marketplace with ubiquitous brand awareness (e.g., it’s probably smart not to pick a fight with DoorDash).

  2. Local market demand: If consumers are looking for local merchants, a VSV can constrain the market and start locally. When consumers go into Google and type, “X service near me,” a VSV is well positioned.

  3. Cross-side network effects: Merchant density needs to increase the value proposition to consumers and vice versa. The supply conditions above generally lead to cross-side network effects. Connecting more barbers to more shaggy-headed consumers leads to an increase in service providers over time.

  4. High repeat rate: High repeat rate not only amortizes customer acquisition costs but also provides frequent engagement that can increase loyalty and cross-sell. The ideal scenario is where purchases become programmatic or habitual. That behavior might be endemic (e.g., I go see my barber Larry every third Thursday of the month for a trim) or created through automated purchasing for discounts or efficiency.

  5. Virality: There are many forms of virality, but the end result benefits the marketplace by providing leverage on customer acquisition spend. Virality can be driven by the quality of the experience, the engagement of multiple indirect customer parties (e.g., sending an e-vite to a long list of friends), etc. You should also be aware that in some purchases, people will never share, no matter how magical the consumer experience is. People will never tweet out, "I had a great time at my payday loan provider today!”

  6. Magical consumer experience: I talked about “magical experiences” earlier in this series. A VSV is actually pretty well positioned to provide a magical experience, and customer delight is what can cut through the noise.

  7. The merchants are also buyers: It’s great when the merchants are also the consumers: you have a lot of them, and the same ad reminds both to buy and sell on your platform, and my gut is that C2C marketplaces enjoy more virality than B2C ones. Canva is a great example of this idea: they sell software to designers who create beautiful graphics that they can then sell on the Canva marketplace—where other Canva designers can buy them to use in their graphics. 

If you serve merchants with a known good (again, our friend Larry the barber would be a prime example—haircuts are not a new invention), the happy news is there is an existing stream of demand and search traffic to tap into. The bad news is that it will almost certainly be competitive and expensive. If a customer doesn’t know what to expect from the experience, you’ll need to help create demand, but there will be far more opportunities to create magical, viral moments. A good rule of thumb is that the more of a transaction involves a pen, an email, or a check, the more valuable your service will be.

So we know why, and we know where. Now we must deal with how. 


Fortunately, there is a wealth of information written on how to scale a marketplace, and there is no need to reinvent the wheel. However, there are some specific callouts for VSVs: 

  1. Start narrow: Marketplaces are expensive, the path of VSV to becoming a marketplace is poorly understood, and boards of directors are skeptical. (Note: Unless I’m on the board!) Make sure to have a hyper-narrow scope when you start so you can have a low burn until there are obvious signs of success. This will allow you to increase your experimentation rate and move more nimbly before you hit the scale button.

  2. Density matters: Tactically, I talked about match rate as a driver of NPS and vitality in our Extend Framework. If you narrow the scope, you can increase your odds of success.

  3. Non-VSV supply should be included: If your core business is as a VSV, should you include merchants that haven’t purchased your software products but want to participate in your marketplace? The answer is, likely, yes! You’ve “Won the Category” on the VSV side, so you should be willing to bring them on to add density, even if it is to the detriment of your software business. Moreover, engaging with a merchant on the marketplace side will likely open up an opportunity for vertical software down the line. With a long-term view, it becomes a win-win.

  4. Look for ways to hack awareness: As a VSV, you don’t necessarily have a consumer brand, but you may have some branding in-store. Can you create incentives to have the merchants place in-store promotions for the marketplace? Do the merchants have content that could be indexed and published for SEO?

  5. Hire for Consumer DNA: Much of the above will involve unfamiliar concepts or tactics for your organization. Consider bringing in consumer talent in product, growth, and marketing at all levels to graft the DNA into your org. You’ll also likely need to have independent organizational structures that will allow a consumer-focused team to move quickly while still leveraging the VSV merchant core. 

As I said, this is speculative! No one has gone all the way on this journey. However, I think it is just a matter of time before it happens. If you want to ward off the only existential threat to your business, enjoy higher take rates, and greatly expand your TAM, a consumer marketplace is the way to go. 

Consumer Demand Series
Part 1: Merchant Front Office Apps - Setting the Foundation
Part 2: Creating Demand with Merchant Facing Apps
Part 3: Consumer Apps
Part 4: The Big Leap to Two-Sided Marketplace

Share your thoughts

We love the idea of bringing together a community to explore the boundaries of Vertical SaaS and are excited by what we can learn from each other. If you have thoughts or comments or want to get involved, reach out to us at knowledge@tidemarkcap.com. We’d love to hear from you. 


SiteMinder: Extending into Consumer Demand

AppFolio: A Case Study on Consumer Extension Options

Slice: Unbundling the Franchise


Consumer Demand 4
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The information presented in this post is for illustrative purposes only and is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by Tidemark or any of the securities of any company discussed. Companies discussed in these posts may include current Tidemark portfolio companies and/or prior investments made by Tidemark employees while at other investment firms. These companies identified above are not necessarily representative of all Tidemark investments, and no assumption should be made that the investments identified were or will be profitable. The information in this post is not presented with a view to providing investment advice with respect to any security, or making any claim as to the past, current or future performance thereof.

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