This is the third post of our three post series on why peer-to-peer marketplaces fail. Read part 1 and part 2.

So you’ve found the core problem to solve and picked the right niche. Great. Now let’s talk about how to make your marketplace sustainable.

First, you need to think about what it is that you want with your business. Are you planning to build a large VC-funded global marketplace business, or a smaller local business? This decision can make a big difference.

Zaarly was previously one of the best-known “reverse marketplace” businesses out there. At its peak, it processed more than $1 million in transactions per month. However, Zaarly had also raised a large amount of venture capital, and was thus aiming for high growth. While $1M sounds like a lot, it doesn’t necessarily make a huge business: as Sunil Rajaraman calculated in TechCrunch, the way Zaarly’s commission model was structured meant that it only received revenues of $15k per month. Still a nice amount of money if you are a local business, but not enough for VCs. So Zaarly decided to pivot. And then pivot again.

It currently seems like the once tremendously popular reverse marketplace model is facing the same problem in general: it’s difficult to achieve true scale. TaskRabbit, the best known example in this category, recently pivoted away from the reverse marketplace model in favor of an on-demand model., one of the most popular European reverse model startups, also ended up pivoting to a model that is closer to Etsy and are changing their name to Milkster. At the same time, service marketplaces with an on-demand booking model, like DogVacay and Fiverr, seem to be doing well—not to mention on-demand “ridesharing” apps Uber and Lyft.

ThredUP, having found their niche after the previous pivot, was also struggling with similar challenges in 2012 with their peer-to-peer clothes swapping site. Eventually, this led them to abandon the peer-to-peer model completely and instead become an online consignment store, angering its original community. TaskRabbit’s recent pivot caused similar angry reactions.

There are many such stories. TutorSpree shut down its marketplace after getting 7000 tutors to sign up, and LooseCubes ceased its operations only a few months after its big funding round. All these marketplaces were doing well by many measures. The only reason they shut down was that their founders (and/or investors) wanted even more.

As all these examples show, high growth and VC money can be a double-edged sword for a marketplace startup. As Raz Godelnik notes in his article about ThredUP’s latest pivot, “it’s impossible to be both Freecycle and eBay“. If you want to build a big business, it can involve tough decisions that can sometimes be in conflict with the original values of your concept.

High growth and VC money can be a double-edged sword for a marketplace startupClick To Tweet

In the VC world, there are only a few winners. The examples of Freecycle, CouchSurfing and StreetBank show that it’s possible to scale a marketplace and have a big impact even with a non-profit model, but this is not without its challenges. Non-profits need money too, and it’s really difficult to find a sustainable model solely through donations and similar sources of financing.

Luckily, everyone doesn’t have to become big. The unique nature of the collaborative economy makes it possible for small, highly focused marketplaces to thrive alongside their bigger companions. As Adam Berk from neigh*borrow notes, a peer-to-peer marketplace for sharing low-value items can still make for a great lifestyle business, even though it might not be that interesting from a VC perspective. There are lots of similar niche marketplace concepts out there that are just waiting to be discovered.

Another piece of good news: the cost of marketplace technology is a lot less than before. You don’t need VC money to build a profitable local marketplace business. With turnkey solutions like Sharetribe, you can set up your marketplace in a matter of minutes, for the fraction of the cost of hiring a developer.

Lesson: If you are trying to get VC funding, make sure that you are actually targeting a large enough global market, and that your business model can scale fast enough. It’s often a better idea to start by bootstrapping and building a sustainable local business.

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    Article by: Juho Makkonen

    Juho has been building marketplace websites since 2008. He is a Co-Founder of Sharetribe and currently serves as the CEO of the company. He’s also a OuiShare connector in Helsinki and a long time advocate of the sharing economy.

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