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Beware multi-sided businesses

In one episode of How I Built This about Bumble the guest (Whitney Wolfe) describes how when Tinder started, they had a bit of a chicken and the egg problem: guys would only want to use the app if there were a bunch of girls on there, and, on the other hand, girls would only want to use the app if there were a bunch of guys on there (setting aside heteronormativity – at the time, Tinder only allowed two genders, and only showed you people that were not your gender).

How they solved this chicken and the egg problem was creative to say the least. They went to their alma mater on a Saturday night, and went to a sorority at which they had connections. They stood up and told the whole house about the app, and how there were tons of guys waiting to meet them. Then, they immediately left the sorority and sprinted to the nearest frat, where they told THEM that there were tons of girls on the app waiting to meet them. And so it went, all that night, going from sorority to frat to sorority as quickly as possible to get as many people swiping as possible.

This is an example of a simple multi-sided business: at the time Tinder needed girls on it for the guys to want to use it, and it needed guys on it for the girls to want to use it. Even now, the same is true no matter how you use Tinder; if you’re looking to match with anyone of any gender description, for you to use the app you need people of that/those gender(s) to also be using the app.

There are tons of other multi-sided businesses as well, for instance: food ordering apps (restaurants need lots of customers, people want lots of restaurants), car service apps (drivers want to have lots of riders, riders want lots of driver availability), and any sort of reservation app (hosts want lots of guests, guests want lots of options for stays).

Now, I just listed some common markets for these companies. In fact, you can probably name several companies in each category (eg, Grubhub and Chownow for food apps, Lyft and Uber for car service apps, and Airbnb or Hipcamp for reservation apps). However, these sorts of companies can be very difficult to get off the ground. The reason for this is the company is attempting to offer something different to multiple, totally different groups of people. If those multiple groups are required to make your company a success, then failing to interest ANY of those groups dooms you to failure.

I do not recommend beginning entrepreneurs attempt to build a product like this. Getting product-market fit for a single market is hard enough, let alone a market that relies on another market to be successful.

Let me give you an example of a company I see getting invented every few years. The idea goes like this: young adults want to know where the party is, so we’ll provide an app that shows you where there are large groups of your peers on a party night. One iteration of this I saw was a company that put blurred out webcams in bars, so you could see how busy a bar was but not necessarily who was there (for privacy).

Problem is, you have to provide value to two separate groups for the product to be useful. Bars have to see the value in it to put the cameras in, while people need to have enough cameras in their favorite bars to use the app. To make any money, the company has to charge the bars, and they’ll have to make the case that the bar will get more customers as a result. But that’s a chicken and egg problem, in that without lots of users you can’t say that the bar will get more customers, which means bars won’t sign on, and without lots of bars users won’t use the app.

Now, this is exactly what funding is for; to prove out your case, to get you through the period when you don’t have enough of either users or bars. If bars don’t have to pay money, perhaps they’ll be more likely to install the cameras. But they’ll still have to manage the cameras to an extent, which is an opportunity cost in itself – and I’ve heard that bars, restaurants, and other service based local businesses are getting offered things like this all the time, so even when it’s free it could be a hard sell. Many investors won’t want to invest in something that doesn’t have revenue sources lined up, and so now you have a different chicken/egg problem: to get revenue lined up, you need investment, and to get investment you need revenue lined up.

Solving these problems is possible. Obviously, companies have done it. But jeez is it hard to build something that has to be an amazing experience for multiple different stakeholders. If you’re starting out in entrepreneurship, there are lots of ways to create value – I’d suggest starting with something else.

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