Go-To-Market Moves for a Marketplace

Venture investors spend a lot of time talking about TAM, a company’s “Total Addressable Market” of customers that could eventually adopt the product if everything goes according to plan. VCs make a big deal about having lofty TAM expectations, often using a $1B TAM as the minimum requirement for a potential new venture. Although it’s true that startups must target a large market opportunity to achieve a venture-scale outcome, investors’ fixation on finding massive TAMs can sometimes overshadow a more important business fundamental for scaling an early-stage company. 

Early-stage startups are almost always more successful in the long-term when they initially go to market with a very narrow or niche focus. This idea is one that Peter Thiel advocates for in his well known book Zero to One, which offers detailed advice on how to build successful startups. Thiel believes that creating and dominating a niche market is the most effective way to start a business that will then have the success and durability to expand into related, broader markets. Alternatively, starting too broad creates thin and weak adoption from a product that lacks direction and purpose.  

At Interplay, we believe this principle is particularly vital when building marketplaces because strong adoption and engagement in the initial market is critical to starting the flywheel for network effects. 

When building a marketplace, it’s critical that the platform is effective for its users, i.e. supply and demand can match and transact seamlessly, incentivizing them to return to the platform on a recurring basis. The best way to build a marketplace that provides value to its users is by nailing the value proposition for a very small initial network. Once you have a devoted user base with strong network effects in one segment, you can start to add sub-sectors and leverage the existing network effects to build out the base in an effective manner. Again, if a marketplace is started with too broad a focus, the value to its users will be too weak and network effects will be slow and ineffective. 

One of the most famous examples of this go-to-market motion is eBay, which launched its marketplace in 1995 by focusing on select interest groups, such as people buying and selling Beanie Babies. Once eBay dominated Beanie Babies, they moved across other hobbyist groups, eventually becoming a dominant platform across online trade. Our portfolio company Safi is a B2B marketplace for global recyclables, but they’re first focused on dominating the used beverage cans and PET plastics market before they move to the broader $290B+ post-consumer recyclables and post-industrial scrap metal trading market. 

Instead of having an industry focus, it’s also possible for a marketplace to start with a specific geographical focus where they acquire meaningful regional share before expanding nationally or globally. This was the case for our portfolio company LeafLink, which operates a B2B marketplace for wholesale cannabis commerce in the United States. LeafLink initially launched in Colorado, where they were hyper-focused on dominating that particular market thriving under decreased cannabis regulation. When more states started legalizing cannabis, LeafLink expanded into new markets with their existing suppliers that all had strong connections to the broader ecosystem. LeafLink’s loyal user base, solidified in their early effort to dominate Colorado, allowed them to quickly move into and dominate new markets, accelerating network effects. Today, LeafLink owns 50%+ of the wholesale cannabis market in the U.S.

TAM is obviously still a worthwhile metric to measure when evaluating a startup; however, it is a future estimation and will always involve some subjective analysis. More importantly, founders and early-stage investors should make sure that there is a viable path to achieving wider scale, which almost always involves starting small and then thoughtfully expanding.