Marketplaces and Magical Xylophones: Why Complex Service Marketplaces are Different
The term “marketplace’ has become a bit of a cliche in technology circles.
Yet, for all the times I’ve heard terms like “MarTech” or “Multi-Sided Platform” thrown around, I have yet to hear anyone discuss a subset I call the “Complex Service Marketplace” (CSM).
Often, differentiation amongst models revolves around the number of participant types or payor/subsidy mix. I believe that considering the complexity of the product transacted is equally important.
To draw the distinction, a simple product would be a marketplace for Beenie Babies. Basically, a discrete widget that may have some minor differences (no offense to Beenie Baby lovers). The marketplace’s job (the “product”) is to provide the means for transacting the item.
In a CSM, the “product” is the service provided in connecting sides. I’ve founded two such businesses. The first, Funding Circle, is the largest global marketplace for small business loans. The second, Vocate, is the replacement for university career centers, featuring a matching market for entry-level hiring.
Too often people get wrapped up in Valley thinking and apply a basic model to a complex problem. Companies build what I call a “Magical Xylophone,” a technology product that portends to solve a complex problem with a sweeping tech-only solution.
A major problem arises when the “product” cannot actually perform the complex service. Companies often then attempt to boil the ocean by massively adding users on both sides in hopes that they can optimize their product into making transactions happen.
Sometimes, the sweet sound of the magical xylophone (easy user acquisition + scale-able product) tricks VCs into heavy funding, but still, the product doesn’t actually solve the problem.
The right way to address CSMs is to make sure the service actually works. The best way to do this is to build the service using humans (“ew,” shrieks the millennial) and then automate it out over time. By doing this, the market can actually fill its responsibility to its participants. By not doing it, the market collapses because neither side is fulfilled. Eventually, you have built enough and collected enough data to actually having the magical xylophone.
This may seem contrary to Valley gospel, but I’d urge people to remember the Book of Graham citing that startups should “do things that don’t scale.” Over time, your product team learns from the human process and automates meticulously every piece of the process.
In the early days of Funding Circle’s US business (then called Endurance Lending), we had the challenge of actually underwriting small business loans. There were competitors who had xylophones which did the underwriting automatically, tried to put the burden of analysis on market participants, or expected community crowdfunding would lock down one side of the market.
Yet, those models didn’t actually create loans that would be good investments. VCs were skeptical about our heavy-handed approach which involved making sure our legal/regulatory strategy was strong and doing diligence in the loan process. It didn’t seem innovative enough. And yet, the innovation was in the CSM itself. Over time, we were able to apply technology to those pieces and eventually build a pretty powerful xylophone of our own.
Now, as I build Vocate, I’m experiencing a similar challenge. Advising students on their career and giving credibly evaluated students to employers is complex. There are companies out there which use xylophones of different types, such as assessments or boil the ocean approaches. And yet, those products don’t work. Students cannot reliably get a job through those services and employers cannot reliably find students better than they could by a Monster or Indeed posting.
Vocate started with an almost entirely manual pilot at one school. We learned a ton during this pilot by building a human-based service. After about a year, we launched our fully-automated product, which is still heavily supplemented by humans. Every day we automate the process and we can feel our ability to scale growing rapidly, but with deep knowledge of how to solve the problem. As I write this, we’re expanding from 8 to 30 schools in our 5th quarter of operation.
While there are many problems that can be solved with a magical xylophone, it’s important to realize that some of the world’s important problems are too complex for that. Applying a CSM analysis when looking at marketplace concepts might prevent going down a wrong path or provide the solution to truly difficult issues.