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Why Online Marketplaces Fail

It’s that time of year again: cottage food laws being introduced, home bakers starting CFOs, and some entrepreneurs launching their cottage food marketplaces. As I’ve written before, Forrager was initially intended to be a cottage food marketplace, but now we have abandoned that idea.

However, on the face of it, the idea seems to be a good one, which is why many people continue to try to bring this idea to market. I generally see a new cottage food marketplace surface once every few months (at least), and none of them have taken off. As a direct consequence, these efforts have had little visibility, so entrepreneurs can’t see that it’s been tried many times before.

My goal for writing this post is to explain what I’ve seen over the past few years and offer some insight into why these marketplaces have failed. I love the fact that people are trying to build things to help the cottage food industry, but I’d much rather see people trying something new instead of making the same mistakes over and over again.

The Marketplace Ideal

Each startup I’ve seen has offered a unique flavor of this “Etsy for cottage foods” idea, but here are some of the reasons people get excited about it:

  • Give more people easier access to local, homemade, and healthy food
  • Let CFOs expand their availability beyond limited local markets
  • People can earn extra income by doing something they love with the tools they already have
  • It’s a no-risk proposition for CFOs
    • CFOs only need to commit to making an item after they have make a sale
    • The online marketplace only makes money if the CFO does (by taking a cut)
  • The built-in rating system builds trust and accountability in the community (like Yelp)
  • Increase diversity and creativity in the food system
  • Create jobs and empower people to make a difference in their local communities

Why the idea is enticing to startup founders:

  • The marketplace should market itself, with people telling their family and friends about it
  • As the marketplace grows, the platform will generate more and more income, automatically
  • The first-to-market will experience “network effects” (just like eBay)

Past Marketplace Efforts

Despite the commonalities between them, I’ve seen plenty of variations:

  • Most marketplaces focus on local and direct sales, but some focus on shipping (like Etsy)
  • Some focus on being completely legal, while others disregard laws to get off the ground (like StubHub)
  • Some focus on existing CFOs, and others focus on bringing new people into the industry
  • Some are mobile apps, some are websites, and some try both
  • Most try the concept in a specific local area (like the Bay Area), but some launch nationally
  • Some are well-funded and have a team, and some are bootstrapped by one person
  • Some try to be cottage food only, while others incorporate commercial products too

But the main thing that unifies all of these efforts is that, no matter their approach, they’ve seen almost zero adoption. The best I’ve seen a startup do is get about 15 to 20 CFOs listed in their marketplace (with one exception where the startup paid CFOs to join). Eventually, these marketplaces either close shop or change their focus to the commercial food space.

I’ve been collecting a list of all of these ventures over the years, and I thought it would be good to make it publicly available. Here is the list: Trello Board for Cottage Food Startups

Marketplace Problems

So we now know that there is no magical “build it and they will come” model with this startup idea. “Build it and be ignored” appears to be more accurate! But why is that? Here are some of my perceptions:

The Chicken/Egg Problem

Marketplaces always face the chicken/egg problem, meaning that if a marketplace has few sellers, it’s hard to attract buyers, and vice versa. It’s not as if CFOs are universally against marketplaces… you can often find them at a farmers market or local market because:

  • It gives them access to a known quantity of potential buyers
  • It allows them to interact with buyers face-to-face and build customer relationships
  • It gives them exposure, which helps market their business for the future
  • It gives them a strong sense of participation in their local community

However, a startup cannot provide almost any of these benefits early on. Most new online marketplaces don’t have the ability to guarantee immediate buyers or sales to a CFO, so signing up for it is seen as a waste of time. People are too busy to sign up for a service that might be profitable for them down the road.

Core Value = Freedom

CFOs are very independent people, with a core value being freedom. This value is likely a major contributing factor as to why they started their business in the first place. How freeing do you think it is for them to tie themselves to someone else’s startup? Regardless of whether it has the potential to boost their business someday, it feels like giving up some sense of independence, especially if the marketplace plans to take money from a sale.

Misunderstanding Markets

Farmers markets are open for a limited time, and many entrepreneurs assume that this is a problem that needs to be solved. Online marketplaces are often pitched as “sell for the other 90% of the year” and “a farmers market that’s open 24/7”. The farmers market in my hometown (Lodi, CA) is literally open for less than 1% of the entire year. But you know what? That’s not a problem… that’s its secret weapon. Everyone knows that it’s only open on Thursdays from 5-9pm during the summer, so you better put it on the calendar. And since it’s only one day per week, it feels like the whole town is there. Would it be more successful if it were open every day?

But more importantly, consider this from the seller’s perspective. When a CFO commits to a farmers market, they know they need to plan for a certain number of sales, and only for the hours that the market is running. They gear up for the event, sell sell sell, and then, they’re done (for now). Joining an online marketplace is like an employee taking their work home. Regarding that core “freedom” value, most CFOs don’t want to be on-call 24/7 (or even during select times of weekdays), especially if it only means that they might get a sale. It’s like saying “Hey, we don’t have many buyers right now, but just in case you do get an order, you’ll be ready to make it, right?”

Startup Mistakes

Clearly, there are some major barriers to getting an online marketplace off the ground, but entrepreneurs don’t always help their cause either. I know — because I’ve made all of these mistakes myself:

Lack of Trust

One thing I see entrepreneurs do time and time again is launch their app or website and say “Hey everyone, look what I built… come sign up!” There’s a problem with that: nobody knows who you are. You want the CFOs to be thinking “Wow, I totally get your vision and am 100% on board”, but what they are actually thinking is “Who is this person? Can I trust them? Is this a scam?”

Being Resourceful

Quite simply, entrepreneurs almost always underestimate the resources required to build a marketplace. They think they have all the tools they need: WordPress, Woocommerce, RoR, Stripe, iOS/Android, AWS, JS, etc. etc. — put the pieces together and you have yourself a marketplace ready for the masses. But remember this: without people, you have no marketplace. The buyers and sellers in a marketplace are the #1 resource you need; do you have the resources to convince them to use your app? (hint: your technology is not a sufficient resource)

Before a startup works on their product (and this applies to you too, CFOs!), they need to get out and talk to people. Ask questions. Listen. Understand. Build trust before building anything else. But what do they do instead? They hide! I am not joking… startups typically hide behind the Iron Curtain and build their product in secrecy for months until they feel it is “ready” for launch (we were particularly guilty of this with the initial version of Forrager). If you ask them what they are building, they won’t tell you because they don’t want anyone to “steal the idea”. Just to be clear: the idea was “stolen” a long time ago… now it’s time to get out and start talking to customers.

The Buyer Problem

The truth is that most of these marketplaces are started by young people (especially men) who are buyers first and cooks second (or not cooks at all). When I ask entrepreneurs what problem they are solving, the answer usually includes something like this: “I don’t have the time to go to the grocery store and make some decent homemade food. I’d rather buy my neighbor’s lasagna than Stouffer’s. How great would it be if the best meal in town was a block away?”

In other words, people want access to homemade food without the inconvenience of making it themselves. They have correctly identified a real problem for a growing segment of this country: people are getting tired of the chains, the packaged goods, big food, etc. But they also don’t want to abandon the ease that those things have created. Therefore, many online marketplaces are built with a buyer’s mindset and do a good job of addressing a buyer’s needs. But this ignores the fact that a marketplace must meet the needs of two groups, not just one.

Step #1: Start A CFO

The “buyer” entrepreneur wants more people providing their community with local, healthy foods, but they don’t want to be one of those people. When marketplace entrepreneurs have asked for my advice, I often say “Start a CFO”. How else are they going to understand the CFO’s viewpoint? “Oh no”, they say. “I couldn’t start a CFO. I don’t even like to cook.” Of course you don’t. See, that’s why the app is so amazing… it’s tailored to tell them exactly where to find people who will cook for them.

I hope the alarm bells are going off in your head. The entire premise of the startup is that our country needs to get back to basics and give more to each other, and yet the founder has a “take take take” mindset. This is a recipe for disaster.

But even if the founders do like cooking, there’s another reason they’d be disinclined to start a CFO. The reasoning goes something like this: “Why would I sell just a few products to a few people, when I have the ability to create a platform that can help so many more people?” The subtext of this is “I’d rather build a pipeline than haul buckets“.

I’m all for people building pipelines, but they obviously need to be built in the right direction. They need to be something that people will actually use. A marketplace founder must have a full understanding of the needs of both the buyer and the seller. And how do you understand what it’s like to be a seller? Start a CFO.