The Scaled-Liquidity Smell Test
Before calling yourself a marketplace, prove you have scaled liquidity on both sides.
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 4
- Confidence
- 95%
A limit test for founders who claim to be building a marketplace: do you actually have a lot of buyers AND a lot of sellers? Most self-described marketplaces fail this test. Johari argues you should diagnose which of three states you are in and then act accordingly, dropping the marketplace framing entirely until liquidity exists.
Origin
Ramesh Johari, Stanford professor of data science for online marketplaces, drawing on advisory work with Uber, Airbnb, Stripe, Bumble, upwork and odesk.
Core principles
- 01A marketplace is fundamentally a business that removes the friction (transaction costs) of two sides finding each other, which only exists at scale
- 02If it fails the smell test, no amount of data science will save it
- 03There is no shame in not being a marketplace; scaling one side of a business is still a real business
- 04Ego about the 'marketplace' label blinds founders to ordinary startup-scaling advice they should be taking
How to run it
- 1
Run the smell test on both sides
Ask: do I have a lot of buyers AND a lot of sellers, only one of the two, or neither? This is the qualitative gate before any quantitative liquidity analysis.
Pro tip Do this before hiring data scientists to optimize pricing or search; if there's no liquidity, those are the wrong problems.
- 2
If you have neither side, stop calling it a marketplace
Drop the marketplace framing and focus on a bespoke non-marketplace value proposition that solves a real problem at your current tiny scale.
Watch out Telling someone you'll help them find drivers when you only have three drivers solves a friction that doesn't exist yet.
- 3
If you have one side scaled, decide: lean in or bootstrap the other
You've won one side. Either keep scaling that side as a normal business, or deliberately use the scaled side to attract the other side.
Pro tip Uber walked into new cities and handed out free-ride coupons, using its subsidized driver base as the scaled side to attract riders and start the flywheel.
- 4
Only then engineer the flywheel
With both sides present, invest in the three data-science jobs of a marketplace: finding matches, making matches, and learning from matches.
In the wild
In the Uber Black era, Uber handed out coupons for free rides at events and parties, subsidizing its driver base as the already-scaled side and using it to pull in riders.
→ The subsidized supply side became the lever that ignited the two-sided flywheel in each new city.
Common mistakes
Thinking about a marketplace before you are one
The single biggest failure mode: founders optimize for two-sided liquidity mechanics before they have any liquidity, solving frictions that only exist at scale.
Letting ego attach to the 'marketplace' label
Insisting on being a marketplace closes you off to the large body of ordinary startup-scaling advice you actually need at your stage.
Is it for you?
Best for
Early-stage founders who believe they're building a two-sided marketplace and need to sanity-check whether that framing is even valid yet
Not ideal for
Mature platforms that already have proven liquidity on both sides
From the transcript
“do I have a lot of buyers and a lot of sellers on my platform”
“you can call yourself whatever you want to call yourself but at this moment in time you're not a Marketplace”
“the choice you're facing is how do I take advantage of having that one side scaled to attract the other side”
“they just hand out coupons for free rides at kind of you know events parties things like that”
“if you don't (25:00) have either side don't worry about it don't worry about being a Marketplace worry about scaling one side”
From the episode
Marketplace lessons from Uber, Airbnb, Bumble, and more
Ramesh Johari (Stanford professor, startup advisor)