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The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch cover image

20VC: a16z's Jeff Jordan on The Ultimate Guide to Investing in Marketplaces, Two Core Features to Look for in All Marketplace Investments, Why Fragmented Supply is so Important & Lessons from Airbnb, Pinterest and Instacart on What Makes the Best Cohorts

The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch

NOTE

The Importance of Fragmentation in a Marketplace

Fragmentation of the supply side is an important characteristic of a great marketplace. When the supply side is fragmented, it is easier to aggregate and there is no supplier power. In contrast, if there are only a few major suppliers, each of them has supplier power, making it challenging for the marketplace. OpenTable had a target market of thousands of restaurants, each managed by a single owner, making it difficult to aggregate. However, once aggregated, it was hard for competitors to compete. Acquiring fragmented supply takes time and effort, but it is crucial for the success of a marketplace. OpenTable started by selling a productivity-enhancing tool and slowly built up supply in each market until they reached a critical mass that attracted diners. The convenience of the service eventually won over diners, leading to explosive sales. The diner's discovery of the service and their preference for convenience determined the critical mass of supply in each region. One of the biggest reasons for failure to acquire fragmented supply is a lack of depth in the value proposition. Successful marketplaces are typically supply constrained and always looking for new supply to enhance the user experience.

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