Building a multi-vendor marketplace from the ground up is challenging. According to venture capital firm Version One, it can take three years before you start seeing results.
Because of the lengthy ramp to build a marketplace, many marketplace founders have to figure out how to fund their efforts. So how and where do you start?
There are several different ways to go about finding marketplace funding, and the right option for you will depend on the specifics of your marketplace.
We'll run through some stages of marketplace development and then dig into some common funding options.
Since every marketplace is unique, your funding journey is also unique. Marketplace funding requirements will change based on your stage of marketplace development and your specific marketplace goals.
The three stages of marketplace development are:
The first step in funding your marketplace is understanding what development stage your marketplace is in.
Problem-solution fit is the earliest development stage of your marketplace. At this stage, you have to validate whether your marketplace is solving a real problem.
Without significant upfront costs in technology or marketing, you should gather a small group of initial marketplace buyers and sellers to validate your idea. You could launch the initial version of your business and verify your concept with as little as a landing page.
From there, you should build a marketplace minimum viable product (MVP) on a no or low code marketplace tool that offers more marketplace functionality to deepen your learnings and viability.
Many marketplaces at this stage are bootstrapped or funded by friends, family, or angel investors.
It's all well and good that some people find value in your marketplace, but how many people find value in it (and how much are they willing to pay) is another question.
Product-market fit is the process of validated learning and experimentation. This stage shows that your marketplace alleviates customer pain points and that the market is large enough to cover the costs of serving it (aka you can make a profit).
A key market measure to prove out PMF is liquidity.
Marketplace liquidity is the likelihood that each user, whether on the supply or demand side, will be able to acquire what they came for. Another product-market fit indicator is the repeat purchase ratio, which measures how many customers return for a second purchase.
At this point, you should have turned your marketplace MVP into a functional marketplace. Investments should be made in automating processes and preparing for scale.
After validating that your marketplace serves a sizable market and finding product-market fit, you're ready to share your marketplace with the masses. This can mean expanding into new markets or offering supplementary products.
Depending on your marketplace goals, you may have reached profitability and do not need to raise additional funds. But, if you're looking to grow rapidly and believe your marketplace can support a larger market, raising a round of venture capital may be your best bet.
If you're going the venture capital route, it's vital to have solid business plans and projections before you start looking for funding. If you can show investors that your marketplace has growth potential, you'll be in a much stronger position to get the financing you need.
Here's a list of key metrics to demonstrate marketplace growth:
Depending on the multi-vendor marketplace model you run, some of these metrics may not be applicable.
Now that we've laid out the phases of marketplace development let's run through common ways to fund your multi-vendor marketplace.
Bootstrapping, or self-funding, is building a business without external funding. You can use personal savings, credit cards, or loans from friends and family.
One of the advantages of bootstrapping is that you retain control of your business and don't have to give an ownership stake to any other parties. You're ultimately the only one who makes (or loses) money.
More than 77% of startup founders get their initial funding from personal resources.
Venture capitalists are investors who provide capital to startups in exchange for equity.
Not only do venture capitalists invest money, they also can offer valuable advice, introductions, and guidance.
However, venture capitalists typically want a higher return on their investment than other investors. VC can be costly for your marketplace in terms of percentage, but you should measure this against the acceleration lever VC money provides.
Crowdfunding is a relatively new funding option, but it can be very effective.
Crowdfunding isn't a surefire approach to getting operating money for your marketplace. If it takes off, though, you'll get a double benefit: not only will you get financing, but you'll also be connected to a fully engaged and invested customer base.
Crowdfunding can be time-consuming, but that's because it's a form of marketing. Rather than making a one-time pitch, you must regularly modify your message, adapting it to your audience. Crowdfunding stakeholders like to be kept up to date on your progress.
Angel investors are individuals who invest their own money in startups. They typically invest much smaller amounts than VC firms, but they can be a great source of funding for a marketplace startup.
You might be able to connect with an angel investor through a marketplace that matches entrepreneurs with angel investors. At the very least, you can get your marketplace idea in front of a larger audience.
Here are a few platforms you can use to research potential funding:
A business incubator is a program that supports startups in the product-development phase. Incubators give essential resources to entrepreneurs, such as free office space, equipment, mentorship, a collaborative environment, and the opportunity to network with potential funding sources such as angel investors and venture capitalists.
Existing businesses with product-market fit and at least an MPV can benefit from a startup accelerator program. Mentorship, free co-working spaces, legal assistance to help safeguard intellectual property, a collaborative work atmosphere, and access to industry leaders and potential investors are available through startup accelerators. A typical program lasts one to three months.
There are several grant programs out there that can provide funding for a marketplace startup. For example, the US government offers grant programs supporting small businesses and entrepreneurs. If you do your research, you may be able to find a grant that can help fund your marketplace.
There is no one "right" way to fund your marketplace. Depending on your marketplace vision and stage of development, there are many funding options at your disposal.
No matter how you plan to finance your marketplace, you need to ensure you invest the right amount in your business at each stage without over-investing in resources or technology. Using a marketplace platform will help you get to validation faster and set your business up for scale without spending millions on custom development.