Series V

Musing About Marketplaces 2

The best marketplaces are the ones that improve an existing behavior between the supply and demand side of the market or make it more efficient. They ride on an existing behavior without trying too hard to create a new one.

Since the internet became ubiquitous, marketplace platforms have been a quintessential part of the business model deployed by online entrepreneurs. It’s one of the best examples of the use of technology to aggregate supply, enable visibility of product and create transparency of services and transaction. The key challenge, however, is that marketplaces are quite foreign to the way Africans normally transact. An open market system is quite dominant, where transaction and communication are done directly between both sides of the market.

And so, to build a successful marketplace in Africa, there needs to be demonstrable value beyond just connecting both sides of the market via an online platform.

Therefore, when you ideate in Africa mimicking a foreign culture you start having problems with educating the market on the need for that marketplace and educating the supply side about the need for them to give you value out of what they are selling. The assumption is that the internet will change people’s behavior but on the contrary, the internet enables an existing behavior. On the flip side of that is creating a marketplace with unique value. Take, for example, Iroko. Before Iroko, movie producers sold directly to retailers and video marketers but Iroko created value through an online channel without having to buy the product physically.

But in a marketplace for artisans, for example, it is harder for the suppliers to see value because they believe they can acquire customers directly and do not see the need for paying transaction fees. So, they turn the marketplace into a discovery platform, and successful marketplaces are not discovery platforms — they draw financial value from all transactions that are going on on their platform. That is how they get lifetime value, data economics, and continuously retain both sides of the market.

When you focus on creating value, or a new value system rather than enabling a transaction, then you start doing something that’s different.

Two things to make marketplaces work: an existing platform that does something similar and a cultural antecedent for that market. These two elements seem to be lacking sometimes in marketplaces in Africa where companies think they can put themselves right in the middle of a transaction just because they have created a platform online.

Right now, VP shies away from marketplaces because it takes a lot of money to validate it at scale — anywhere. Especially in Africa where internet penetration is low and customer acquisition cost is high. And it is difficult to pull in demand and supply and get them to pay in a way that you can draw value from. Except you are creating a value that is very sticky and viral i.e the product itself is inherently viral such that users are incentivized to tell other people about it.

The path to profitability is long for marketplace business requiring a constant injection of capital. The best marketplaces offer end-to-end experiences and they play such a critical role in the commerce experience that buyers often don’t perceive the company as a marketplace.

Inside VP

  • Kayode will be in Nairobi on the 8th for Village Capital’s Fintech Africa cohort demo day.

Kola will be speaking at the Africa Tech Summit London on the 16th. The summit showcases opportunities and connects investors & diaspora in Europe/US with African tech.

Portfolio Propaganda

Accounteer emerged the winner at the #MestLagos challenge and will pitch in Cape Town at the Mest Africa Summit.

NESA by Makers has partnered with Tech Advance to provide full scholarships to 10 aspiring developers. [Link] + On May 16th, their CEO will be discussing Africa’s social, political & economic future at the African Business Day in the Netherlands.

Links from the Internets

  • The most famous quote about Facebook isn’t actually about Facebook — it’s about television. [Link]
  • Are high standards intrinsic or teachable? [Link]
  • A dent in the universe is plenty. Curb your ambition. [Link]
  • Entrepreneurs think they are better than their resumes show and realize they can make more money by going it alone. And in most cases, they are right. [Link]
  • Here’s an interesting research by Ventures Platform Foundation for Google [Link]

Have a great day!

Thanks for reading. Did you like this post? Have Series V delivered to your inbox every Thursday. Subscribe here.

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.”


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) (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!

Thanks for reading. Did you like this post? Have Series V delivered to your inbox every Thursday. Subscribe here.