Questions

Why do two-sided marketplaces seek or gain millions of dollars of investment?

I'm wondering why companies with 2 or more sided marketplaces are seeking millions of dollars of investment? What does the money actually get used for? Can it be done successfully without?

3answers

Having worked at Uber for a number of years across Rides (2 sided marketplace), EATS (3 sided marketplace) and Freight (2 sided marketplace) I can help.

To build a successful 2 or 3 sided marketplace, the company has to build up the "supply" side before there is any demand. In the ride-sharing business, the supply, and limiting factor to grow, are the drivers. In the early days at Uber, Uber had to get enough drivers on the road so that when a rider requested, there would be a driver within a few minutes to create a good rider experience. The only way for Uber to do this was to "guarantee" earnings for the driver, whether they got rides or not. This looked something like, "we'll pay you $20 / hr to be online and accept trips when they come your way." Of course, this is expensive if you don't have a lot of demand.

However, once Uber was able to get drivers on the road and the word got out there on the rider side, riders had such a good experience that they would tell their friends, families, and colleagues about Uber, and demand for the product spread rapidly.

Can one build up a 2-sided marketplace without millions in investment? Possibly, especially now that many of the barriers to these kinds of "part-time" gigs have been broken down. You would need to devise a way that if a person or company is supply in your business, that they are making money elsewhere, and using your platform to supplement their business (Uber originally did this with black car companies). Then, as your business grows (likely slowly) they can move more and more of their business over to your platform, so you're not subsidizing the down time.

Happy to answer any additional questions about the marketplaces for Uber Rides, UberEATS, or Uber Freight!


Answered 3 years ago

These are fast growing startups in the marketplace today. The type of investors this model attracts are in it for the long term. The investment cost to a 2+ sided marketplace are expensive models & challenging to grow. These models are all about growth which can happen very quickly and scale. Two-sided network effects: Marketplaces and platform businesses have 2-sided network effects. Every new supplier on a marketplace adds value to the customers and vice versa. Take Facebook for example. Its the worlds largest social network connecting users, while at the same time there is also a marketplace for advertisers to target FB members.


Answered 3 years ago

It can take tens of thousands of dollars to develop a fully formed two-sided marketplace. You essentially have to develop the app, website, payment gateway, and everything else twice. Then there's the standard Opex and Capex costs associated with any business. When you add it up, it can be very expensive. If one person had all of the coding and design knowledge they needed to fully develop the app and website for both groups of end-users it would still take them a couple of years to fully create the system. A large capital injection would help the business succeed by either paying the persons wages so they could focus full-time on development or by helping the owner hire developers to get the job done quicker.

It could be done without that much money but it would take a ton of time and dedication from the company owners with little to no immediate return on their investment.


Answered 3 years ago

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