Most of the world’s leading consumer marketplaces looked like completely different businesses at their inception. Amazon was famously an online bookseller, while Uber started as a black car service. DoorDash launched as “Palo Alto Delivery” (reflecting its narrow geographic range), while Booking.com exclusively helped travelers find hotels in the Netherlands.
This type of focused launch makes sense — it allows a marketplace to start building network density and find product-market fit. But as things start to work, most marketplace companies feel pressure to grow. Marketplace operators have to make choices about how to use their limited resources: do they further penetrate their existing market or try to expand into something new?
We talked to over a dozen marketplace operators from companies like Uber, Instacart, and Airbnb and synthesized their learnings on when, where, and how to expand into new geographies and verticals.
When to expand
The type of product or service the marketplace sells and how it’s delivered have a meaningful impact on the resources required to expand — and thus, the ideal timing.
Some marketplaces, like Good Eggs or GoPuff, hold physical products in warehouses and deliver them to consumers — they have infrastructure needs in each new market that require time and resources to build out. Other marketplaces, like Etsy and Poshmark, are asset-light, meaning launching a new market or product category may only require marketing spend to seed supply and demand.
A few other factors that marketplace operators should consider when thinking about timing for expansion:
1. Competitive pressures — are competitors launching into markets or categories you plan to play in? Is there a significant first-mover advantage? This might encourage you to expand more quickly in order to avoid getting left behind.
A former exec told us that Airbnb was pushed to expand into Europe when a clone called Wimdu (funded shortly after Airbnb broke out in the U.S.) started to gain market share in the region. Interestingly, Airbnb had the opportunity to acquire Wimdu, but chose to spin up its own local operations instead.
2. Funding: Do you have the capital you need to fund expansion? Expansion often requires hiring new employees, adding features to your existing product, and spending money on marketing, especially if you’re entering a space with strong existing competitors or need to build your brand.
3. Product-market fit: Do you have product-market fit in your first market? You want to have a truly “sticky” product to justify moving into a new category or geography — otherwise, you should focus your resources and time on nailing your initial market.
TaskRabbit co-founder Leah Busque has spoken about the dangers of expanding before finding product-market fit. TaskRabbit was consistently churning through users and had to redesign and relaunch its product when it was already live in 20 markets. This was not only a waste of resources, but eventually required retraining the entire supply base, which Busque described as “a massive undertaking.”
4. Impact on existing supply and demand: How will existing suppliers and consumers be affected by the expansion? Does it provide opportunities for suppliers to grow their business on the platform? Will it serve more of consumers’ needs?
Rover started as an app for dog owners to book sitters when they traveled. The company soon expanded into other categories of pet care — dog walking, daycare, cat sitting, and drop-in visits — because customers were already trying to use the app to book these additional services, according to CEO Aaron Easterly. The expansion made Rover more valuable to these customers.
5. Scalability: Are you concerned that something about your initial market or vertical is unique, and that your current model won’t scale elsewhere? This may be valuable to know sooner rather than later, especially if TAM concerns will likely force you to expand.
Where to expand
You can be either proactive or reactive in identifying expansion opportunities:
Proactive growth means you’re actively seeking opportunities for expansion, often to serve a mission of fueling growth. This typically involves brainstorming potential new markets, verticals, or product lines, and then evaluating them using the following matrix.
Most companies are seeking opportunities in the upper left quadrant: high-impact and low-effort, otherwise known as low-hanging fruit.
When you think about what it means to be “low effort,” consider whether the new vertical or market can leverage your marketplace’s current traffic or transaction flow.
Whatnot expanding from Funko Pops into Pokemon cards is an example of this. The company’s existing buyers had demand for these cards, and many existing sellers had supply — it didn’t require onboarding a new customer demographic.
However, high-impact and high-effort opportunities can be valuable investments to expand a marketplace’s TAM.
Reactive growth means you react to expansion opportunities presented by competitors, partners, or even customers. Keeping an eye on what your competitors are doing may be obvious, but it’s also critical to watch for signs from your customers. Are they “hacking” the platform to transact in categories that you don’t currently support?
Early eBay team members told us that they regularly looked for signals from the community to decide which verticals to add next. eBay Motors was created when then-VP of U.S. Operations Simon Rothman was searching for collectible cars and found that people were using eBay to trade real ones.
Many marketplaces have too many ideas of where to expand and have to decide how to prioritize them. A few factors that should guide this decision-making:
1. Customer leverage (cross-selling potential): Do your existing customers benefit from your expansion? This primarily applies to new categories and product lines. Ideally, the expansion will make your marketplace more valuable to existing customers, increasing retention, transaction frequency, and LTV.
2. Supply-side leverage: Does your existing supply benefit from your expansion? Ideally, a new vertical or product line will create opportunities for suppliers to earn more money through your platform, which should increase retention and prevent multi-tenanting.
An example of this is Uber launching Eats. Several former execs told us that drivers benefited from increased trip volume — they could pick up food delivery trips when ride-hailing requests were slow. They didn’t even need to download another app, as Uber made it easy to toggle between Eats and Rides.
3. Competitive dynamics: What is the competitive landscape in the new category, geography, or product offering? If local density matters, are there existing local competitors with a meaningful advantage?
4. Unit economics: Is there anything about the new market or vertical that might meaningfully impact your unit economics (for better or worse)? You may initially see weaker economics post-expansion, but you want to chart a path to profitability.
For example, does your business model rely on high-AOV items to pay back your customer acquisition cost? Do you need extreme density (e.g. a college campus) to make your deliveries profitable?
5. Comparable market characteristics: Is the new market or vertical similar to the one where you currently have product/market fit? Are there enough of your target customers who live in the new geography or transact in the new category?
Many marketplace operators develop an “archetype” of their core customer (e.g. age, gender, household income) and assess whether there are enough consumers who meet this profile in a prospective new market. Instacart, for example, sought cities with high household income, fewer households with cars, and frequently inclement weather, according to co-founder Max Mullen.
How to expand
In talking with founders about executing successful expansions, we noticed several consistencies in their strategies, even across various types of marketplaces.
1. Build a playbook, but customize your approach in each market. Playbooks typically include guidance around topics like launch timeline, resourcing requirements, growth strategies, and legal considerations. However, a “one size fits all” approach almost never works — the playbook will need to be adapted based on local or category constraints.
For example, Uber launched in India with the same digital payments model that worked in the U.S. and in other international markets. However, a significant percentage of India’s population is unbanked and needed to pay in cash. To gain meaningful market share, Uber had to adjust its playbook to allow for cash payments.
2. Focus on recruiting quality supply. The best marketplaces tend to be supply-constrained. As such, it’s critical to recruit quality supply before launching a new geography or category. If your marketplace is known for having a wealth of quality supply, the demand side will come — and if they find what they’re looking for, your buyers will retain.
When P2P fashion resale app Depop launched in the U.K., the company went to independent shops and vintage stores in this market and convinced them to upload their inventory to the app. This enabled the company to onboard quality supply at scale. While an individual seller might upload a few items, stores uploaded hundreds of items at a time — often with more professional photos and product descriptions.
3. Ensure that your full team has bought in. Successful expansion requires coordination and buy-in from all functions within the company — not just the “launchers” or verticalized teams. Team members who aren’t directly responsible for the expansion need to be incentivized to put in meaningful effort on initiatives (e.g. new features, localization) that will make the expansion successful. This is especially true if the expansion might not benefit the existing business.
4. Be willing to kickstart growth with artificial levers. Otherwise known as “Do things that don’t scale!” You may need to use unconventional tactics to kickstart the flywheel in a new market or category, as your channels for acquiring supply and demand in an existing market may not work in an environment where you have no existing users or brand.
Tinder is a classic example of this — it hosted parties on college campuses and required attendees to download the app in order to attend. Meanwhile, Lyft went door-to-door at startups, giving away free cupcakes and donuts alongside coupons for free rides.
5. Stick to one type of expansion. Focus is critical. A single type of expansion — geographical, categorical, product — takes a significant amount of effort. Trying to handle two types of expansions at the same time is much more challenging, and may muddy your data. For example: imagine you launch a new category in a new geography. If the expansion isn’t successful, was it a result of the category or the market? It might be hard to untangle the impact of each.
* * *
For most early-stage marketplaces with limited time and resources, expansion feels like an existential risk. But when executed correctly, expansion has immense rewards: it can supercharge your business and put you on a new growth trajectory. Deciding when, where, and how to expand your marketplace is both a challenge and an opportunity.
Views expressed in “posts” (including articles, podcasts, videos, and social media) are those of the individuals quoted therein and are not necessarily the views of AH Capital Management, L.L.C. (“a16z”) or its respective affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.