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Series V

Musing About Marketplaces

The…market for marketplace businesses across Africa is wide and shiny, but is often not deep enough to sustain startups at scale. There is a big disconnect between top line, quantitative signals like population [growth] and other, more qualitative signals like access to infrastructure, consumer purchasing power, etc.

Why does this matter? Because these marketplaces are often started to create efficiencies in markets that *already* exist (“X is bypassing middlemen by connecting farmers to consumers!”), they only make a percentage of the economic activity they enable. This model lends itself to scale, but as we saw in the last paragraph, scale is as scale does, and scale may not be found.

Another side effect of an underdeveloped consumer market is that it is difficult and expensive (eBay and Amazon raised less money pre-IPO than Jumia and Konga) to educate users. Given that most marketplaces will live or die based on the quantity / quality of their demand side, marketplace startups in Africa face the uphill task of providing a better experience than the alternatives. (Consumers don’t want ‘cooked meals over the internet’; they want ‘cooked meals, period’) Here’s Bill Gurley making a similar case:

“A true marketplace needs natural pull on both the consumer and supplier side of the market. Aggregating suppliers is a necessary, but insufficient step on its own. You must also organically aggregate demand. With each step, it should get easier to acquire the incremental consumer AS WELL AS the incremental supplier. Highly liquid marketplaces naturally “tip” towards becoming a clearinghouse where neither the consumer nor the supplier would favor an alternative. That only happens if your momentum is increasing, and both consumers and suppliers are sensing an increasing importance of your place in the world. Much easier said than done.”

Yet another side-effect of the market being informal is the high risk of platform leakage (disintermediation). Founders building marketplaces need to think hard about inserting themselves into the payment flow, otherwise they will quickly see their suppliers connect directly to consumers, and their businesses turned into free lead generation services for the supply side. For example, Uber does the work of identifying demand (the desire to go from point A to B) and charges the supplier 20% of the value of the ride for making the connection. A driver might have the rider cancel the trip then drop the fare by 15%. In this case, the driver is earning 5% more, the consumer is paying 15% less, and Uber… 🙂

One way to mitigate against might be to embrace integration. Example: Amazon handling logistics, Alibaba building Alipay, etc.

Ultimately, this is about being thoughtful about what jobs a product / marketplace is doing for its users, and reasoning from first principles towards a solution that accounts for local / cultural behaviors. As with all his work, Professor Clay Christensen’s Push-Pull framework is instructive:

“Why do so many multinationals run up against long-standing obstacles to success in developing markets, whereas other MNCs and local entrepreneurs succeed? We believe the answer lies in the difference between “push” and “pull” investment.

Push strategies are driven by the priorities of their originators and generate solutions that are imposed on markets and consumers. Pull strategies respond to needs represented in the struggles of everyday consumers.”

Fin.


Inside VP

  • Kola and Osarumen are carrying out mentor duties in Nairobi at the Google Launchpad accelerator.
Kola A.
Osarumen Osamuyi mentoring
Oo Nwoye with ThriveAgric (VP C2)
kudi.ai (VP Portfolio Company)
  • Kola will be facilitating a masterclass on ICT this Saturday at the Recall for Men conference.

Portfolio Propaganda

  • Data collection startup, Mobile Forms (VP C1) on the problems they are solving, their solution and strategy for the future. [Link]
  • Paystack just introduced bulk transfers on the Dashboard. It is now possible to send instant transfers to multiple bank accounts at the same time right from your dashboard. [Link]

Links from the Internets

  • Thou shalt not minivate or feature shock or do these other things that cause new products to fail. [Link]
  • On creating the ideal customer profile. [Link]
  • The trust equation + when trust fails.[Link]
  • Is the complete lack of a driver — partner schedule the most elegant feature of uber? + other relevant findings. [Link]
  • Are you thinking what Jason is thinking? [Link]

Have a great day!

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