Build something people want with Lenny Rachitsky (ex-Airbnb)

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Sjoerd Handgraaf: [00:00:23] Hello and welcome to two-sided. I am Sjoerd CMO at Sharetribe, and I'm your host. And this episode I talked to Lenny Rachitsky. He first founded his own marketplace company, then sold it to Airbnb, worked there for seven years until last year. Since then he has been writing fantastic content about marketplaces, which you can find at lennysnewsletter.com. I talked to him about his time at Airbnb about his framework for evaluating which marketplace to invest in, why Shopify still has a lot of work to do with their new shop app. Why Neighbor the Airbnb for storage might just work, but most importantly, we talked about how to kickstart and scale a marketplace business. I really enjoyed talking to Lenny and I hope you will as well. Hi Lenny, welcome to the podcast.

Lenny Rachitsky: [00:01:17] Thanks for having me.

Sjoerd Handgraaf: [00:01:18] Like I already mentioned in the introduction, so you worked a long time at Airbnb. Nowadays, you read a lot about marketplaces. I'm curious what got you first into online marketplaces. I dug a little bit into your history and I saw that Localmind was maybe the first one. Can you tell us a little bit about that?

Lenny Rachitsky: [00:01:35] Yeah, you bet. So Localmind was a company that I started in 2010. I was working as an engineer before that for about 10 years, engineering dream manager. And I always had this goal of starting a company and it was randomly in Montreal visiting a friend at a conference, and we were talking in this idea for what Localmind turned into kind of spring out of that. And so I moved to Montreal to start this company and stayed there actually for eight months and then moved to the Bay area. And with the company was all about, was. It was around the time Foursquare was really popular and everyone was going to check it in. And there's all this data around location and where your friends are at and where you're spending time. And so we had this idea, what if, what if we could connect people that are at any place in the world with people that want to know what's happening there because everyone's got this phone in their pocket. There's a way to reach them. Now there's all this data about where people are and if they opt into, but if we could connect people at a place where people want to know what's going on at that place, and that's what Localmind was. You open up the app, you choose a place that you're thinking about going to, and then you ask questions and we route it to somebody there. Right now that's check in on Foursquare, Google or Facebook or someone that knows a lot about the place and that's what it did.

Sjoerd Handgraaf: [00:02:43] And then questions like, you know, who's deejaying or like what's on the menu? Or like those kinds of things.

Lenny Rachitsky: [00:02:50] Yeah. The most popular was like, how long has the line at this club? Is it busy at this restaurant? Or like, yeah, that kind of thing. And in the end we found it wasn't a big enough problem for people, so it wouldn't last as a standalone business. And that's how we ended up selling therapy and B. But it was fun and it might be possible now. It might be worth trying to have some time.

Sjoerd Handgraaf: [00:03:10] Yeah. What's your, something with Localmind, because it is a kind of marketplace, but was there something that you learned there that you still feel like, Oh yeah, that is a huge lesson that I learned there.

Lenny Rachitsky: [00:03:18] I rarely look back at local. Mine is kind of building a marketplace, but it definitely was, and we should probably spend more time on this, but I'd say the main takeaway is a marketplace, maybe like 90 I don't know, maybe 99% of the success of a marketplace is the same as the success of any business, which is just, does anybody even want this thing? Is this actually solving a problem for anybody? And so with Localmind, we basically eventually realized this is not a big enough problem. People wanting to go out and really needing to know what was happening at a place. So most of the learning there is just how could we have earlier knowing that this is not a frequent enough problem for enough people and maybe just a course or not.

Sjoerd Handgraaf: [00:03:58] Yeah, because now while you were saying this, my question that was straight coming to am I like, okay, is there any other way you could have validated this without actually building a whole product?

Lenny Rachitsky: [00:04:07] Yeah, maybe like we could have had text messages or something initially. But you know, it wasn't years of work and we built it pretty quick. Maybe the other lesson that's interesting is one of the more common ways to build a marketplace and to bootstrap a marketplace is to piggyback off of an existing network. Like the way Airbnb allegedly is, Craigslist and Uber, and a lot of other companies use Craigslist. So what we did is we bootstrapped off of Foursquare's data. We basically let you connect your four square account, and then we knew about every check in that you made, and as soon as you checked it on Foursquare, we had you. At that location in our app, and that made it a lot easier to scale. And with the work that I've been doing recently, looking into how the marketplace has worked, that's one of the more common strategies that worked back then and still works.

Sjoerd Handgraaf: [00:04:50] And then, so Airbnb bought Localmind Was it like an acquihire? Did you then straight move into Airbnb?

Lenny Rachitsky: [00:04:57] It was not technically an acquire. They acquired the whole company. All of us went over except for one person who decided to do some different, and they bought us as a team and they wanted us to. Work on a specific need that they had at that time, which was based on, so at that point, the kind of the strategy of the company was focused around what was called snow white snow white frames, which there's some articles about this. And the way that worked is Brian, the CEO over the holidays, red. Walt Disney's biography, and he learned as he was reading that, that the movie, snow white, was the first animated feature film. And to make that possible, they have to use storyboards in order to kind of map out the story. And when you make a storyboard, you basically map out the key frames of a story to understand where it goes and how it all fits together. And what Brian kind of realized while he was reading it as a trip on Airbnb is just like a story that unfolds. There's a beginning, there's a middle, there's an end. And what he ended up doing is hiring a storyboard artist from Pixar to come work at everybody full time and to map out the story of an Airbnb guest and an Airbnb host. And so if you go to the office at Airbnb on CDs frames on the wall, and it's something that folks look to when they're thinking about what to focus on, how to think about the user. And so this happened right around the time they acquired us. And the reason they wanted us to work at Airbnb is they wanted us to nail the, I'm out and about in a city. What should I do? How do we make that experience amazing? And they wanted to make every one of those key frames amazing. At week. And so they acquired us, focused on that problem, and we ended up building something that ended up not launching later. But that's its own story.

Sjoerd Handgraaf: [00:06:33] Yeah. So what's your journey within every MBA? So you started with that then for you moves into growth.

Lenny Rachitsky: [00:06:40] Yeah. So first we built that, then we moved into building a community platform for the host community. To help them connect with each other and share stories and tips and tricks. So we built out what we call the groups or maybe groups, and then we moved into just building courthouse tooling. And then that morphed into both kind of a combination of host quality work. So I led a team that built things like the super host program and a few other programs that launched around that time. The review system helped make some changes there. And then in parallel, we worked on, or our team worked on a product called instant book. That made it a lot easier to book on Airbnb. So that was two and a half years of my life growing in some book. And then the last thing I did is for two and half years also was leading the supply growth team at Airbnb and then moved to the product. So originally as an engineer, I moved into product. And so I was doing all that as a product manager.

Sjoerd Handgraaf: [00:07:27] Yeah. And so for those who don't know, instant book was to move to direct booking. Right. Rather than having to wait for approval from a host and as a growth lever, it was huge. Right?

Lenny Rachitsky: [00:07:37] Yeah. I'd say looking back, if we didn't make that bet, Airbnb would be in much worse shape. But there's a lot of work and very nuanced and. Tricky, but it worked out really well.

Sjoerd Handgraaf: [00:07:47] So would you say, is it because I had a question here, which I'm not sure applies, but would you say that you've been running growth teams because you're often associated with the growth part? I mean, I know you're a product manager or like most recently there, but would you say that you've been running growth teams? And the reason that I'm asking this is because I'm really curious to hear. Like because you've been there, I mean, it's a relatively long time for that kind of company, and so I'm curious to see how different was it to run a growth team when you started towards the end?

Lenny Rachitsky: [00:08:17] I would say maybe the last three or four years of my time at Airbnb of the seven I've worked on growth growth in quotes. Prior to that, it was not growth. It was things like the quality of the marketplace, just like core product for the host community. The community stuff I mentioned, and then for the last couple of years, focused on conversion of the guest experience, host supply, things like that.

Sjoerd Handgraaf: [00:08:41] You mentioned, I think it was in the below the line podcast, which was a lot of, I think inside Airbnb talk because Ellis had also been in Airbnb. But I think something that I really, really like to bring that out is that Airbnb had basically a non-existing data driven culture, or like data-driven wasn't really a thing at Airbnb. When you joined in 2011 2012. And not for a long time. Right.

Lenny Rachitsky: [00:09:11] Yeah. So I think part of that is it was still small enough for her. There's only so much you can do with data. There was just not enough data to make conclusions around. That's part of it. I think part of it was like, I don't know how long ago was that? 2012 like eight years ago. And so a lot has changed since then. A lot more people understand how to run experiments and work with data and build tools that make it easier to work with data. And so yeah, that was, I think that was part of the reason. But yeah, so when I came into Airbnb. There was not a clear sense of why or BB was growing. And what we were doing and the impact that was having on growth, which is mind blowing

Sjoerd Handgraaf: [00:09:45] because there's so much like survivorship bias. I think we're like, you know, there's so much myth and legends around these, like what do you already kind of refer to that earlier, like the legit Craigslist hack? And it's so refreshing to hear that. Well, actually, you know, like it worked and there were some suspicions, but nobody was like quite clear on why except for the fact that it was probably in magnificent product.

Lenny Rachitsky: [00:10:07] Yeah, that's exactly right. There's like a sense of what's working, what's not. But if you were to try to go back and be like, okay, these three things were extremely important and these three things weren't. It's really hard to say and yeah, and to your point, I'd say a lot of the reason Airbnb was successful is it was just a really great product and experience, and that's why word of mouth is so strong and it's a lot of the reason people came back to it. There's still a lot of stuff you had to get right at the beginning to make anyone even aware it existed. And to get hosts onto the platform, which we'll probably talk about, but yeah, it was not obvious what we should be doing and what we were doing that week. That was continuing to drive growth.

Sjoerd Handgraaf: [00:10:42] Yeah, I did not at any way. I mean to say it was easy. I mean like marketplaces are notably hard and for every beat it was no different. But I just liked that because nowadays, if you would start a company of that size, and you know, if at let's say 12 people, you haven't hired a data engineer, people are like, well, do you even know what you're doing? And it's kind of like nice to hear it. Well, you know, if you just focus on the product and the experience like. Coming back to the snow white story. You can get a long way,

Lenny Rachitsky: [00:11:10] although I will say, I wonder what would've happened if Airbnb did do that earlier, and if they were able to prioritize that kind of dive earlier and started to say, who knows all these counterfactuals, what would it happen?

Sjoerd Handgraaf: [00:11:22] Yeah. Who knows? Who knows? So that was an Airbnb. Nowadays, you're doing a lot of things. You're advising marketplace startups and you're writing your own newsletter, and we're going to do a heavy plug on this because that is some seriously good contents. We can do a plug in the end as well. First, a quick medic question. Why do you think there is so little content on marketplaces if you couldn't compare it, for example, software as a service SaaS businesses, like right now you wouldn't start a newsletter. I mean, the whole reason why we're starting this podcast because I feel that there isn't any podcast who is specifically around these kinds of businesses, even though so many of the startups are having these kinds of mechanics. Why do you think that is?

Lenny Rachitsky: [00:12:01] If I had to guess, I think it's maybe pun intended. I think it's just a lack of supply. In terms of how many marketplace companies there are compared to SAS companies. So if you think about like how many huge marketplace companies are there, there's maybe Uber, Lyft, Airbnb. Alibaba is the biggest, and like maybe eBay part of Amazon. And then if you think about how many big like subscriptions cloud SAS companies are there, there's so many more. You know, there's like Salesforce and Twilio at LaSeon zoom Workday. And so I think it's because there's fewer marketplace companies and then SAS companies. There's fewer people coming out of those companies that have lessons to share and learnings. And I think there's just less people to talk about them.

Sjoerd Handgraaf: [00:12:46] Yeah. Because I have another theory as well as that. I think that a lot of marketplace businesses don't realize that they're a marketplace business. Like we get that all the time at Sharetribe, where we, you know, I go out to events to meet people there, or we get prospecting and day, you know, very simplistic example. But of course the very popular marketplace has always like second hand clothing and they see themselves as a fashion business. And so when they look for business advice. They just look for fashion, business advice. They don't realize that, you know, they're a marketplace basis or they are matching demand and supply or any kind of these things.

Lenny Rachitsky: [00:13:17] That makes a lot of sense to me. Like when I was at Airbnb, I was not like looking up how to marketplace businesses work and how do we grow a marketplace business. I was just, how do we make this work? How do we make like the thing that we're working on work in practice and not like the theory of what this kind of business is. And so I think to your point, people often don't think about it as this like umbrella type of business. Until they either leave a company and just like read pontifications about anything. That is probably part of it.

Sjoerd Handgraaf: [00:13:47] Yeah. Well that's how we can make change with this podcast. Absolutely. So how do you recognize a great marketplace idea?

Lenny Rachitsky: [00:13:53] Yeah, so the way I think about this, and I have my little list that I'm going to use because this is often hard to remember.

Sjoerd Handgraaf: [00:13:59] Yeah, go ahead.

Lenny Rachitsky: [00:14:00] Yeah. But the way I think about it, there's two parts you should be thinking about. One is. We talked about this earlier, is this like just a good business in general? And then I'll talk through what I look for there. And then is this a good marketplace business? And I'd say most companies fail, not because they're a bad marketplace business, but because they're just not a good business in general. So most of my evaluation is just like, is this good at all? And then there's just, what are the attributes that will make this work as a marketplace? So within the first book, is this a good business in general? There's about seven things I look at. The first most important is just like, is this something anybody wants? Does it have any sort of product market fit? And so what I look for there is, is their attractions, their early amazing feedback is retention high. That's the most important metric if you have that. So one is, is this something anybody wants to, is the market big enough for this to become a really big business three years? Why this team and where are they the right team to build it? What's unique about their insights or their experience. Then why now? What's changed about the world or technology or the market that allows for this to exist now? The next is just what modes do they have? What's going to keep somebody from coming in and just squashing them and winning? And then how strong has just the business model in general. So the reason software is eating the world is because the business model is amazing. The margins are really high. You can scale it efficiently. You don't have to raise tons and tons of money. And then the last piece is just they have a growth strategy. Do they know how they're going to grow? Because that's often taken for granted. So that's the first bucket to helps me understand, is this a good business in general? And then is this a good marketplace business? So the first piece, similarly to the previous bucket, is this something both sides of the marketplace want? Because unlike a regular business that's not a marketplace, you have to find product market fit on both sides. You have to make supply and demand happy about what you want. And so on the demand side, the question you want answer is, is this better than the alternatives? That's maybe not a marketplace company. And then on the supply side, the key question I look for is, is this meaningful income for supply? So like, can I make enough money to make this worth my time? So for example, here being be on the one side, travelers want amazing places that are cheap to stay around the world. People with homes want to make some extra money. Both sides want that. And you can match those things up where it's enough money on both sides. Maybe an example of marketplace that didn't work is something I think about is a company called cherry. Which was car washes on demand where they come to you and they wash your car, and so on the one side, sure, I'd love someone to come to my house and wash my car for sure. And then on the other side, sure I can make money in wash people's cars, but the problem is the amount of money you have to charge to make that business work is too high. And so people don't want to pay that much. I forget what it costs, but they don't want to pay so much for someone to come to the house and wash their car. So that's an example of customers don't want that.

Sjoerd Handgraaf: [00:16:43] Yeah, indeed. Like you've mentioned in your previous buckets to thing, like the time is now because like I'm gonna straight hop into sort of a topical thing, but like not too long ago, this Margaret has got an investment from Andreesen Horowitz called neighbor.com which is like. The Airbnb for storage, and I don't know about you, but I've seen that idea quite a couple of times. Why do you think, I don't know. And do you think they're going to make it this time? If so, like what has changed, why now this might be possible? Have you looked into that one?

Lenny Rachitsky: [00:17:13] Yeah, I really liked those guys actually. I've chatted with them on and off and I really liked what they're doing, so I think we can almost use this as going through the kind of the checkmarks of things that I look for in a marketplace. Let's do it, but just maybe to describe a neighbor is, it's basically like Airbnb for storage. It's just like a cheap way to store your stuff and then ends up being in people's houses. And so people make money storing things in their homes and their garages wherever. Right? Yeah. So if you think about this first question of, is this something both sides of the marketplace want, people want storage that's already a business. And then on the supply side, people want to make money storing things. So then the question is, can you give people enough money and can you make it cheaper than the alternative? And I think they've, they're doing both. Well, from what I understand, it's cheaper than a self storage company. And I think it's so easy for supply. It's even. Use it that even if it's not tons of money, I think enough people will be interested in it. So I think it checks that check box

Sjoerd Handgraaf: [00:18:05] because I would be straight worried about supply because I have a garage, but I don't have any space. Yeah. And I think I read once a postmortem from some other company who tries to do that and they said like, well, most people with like storage facilities don't actually have space.

Lenny Rachitsky: [00:18:18] With like a garage or

Sjoerd Handgraaf: [00:18:20] anything like, I don't know what kind of stuff people store with neighbor, but like, because my immediate worry would be okay, like it's supply constraint because it's hard to find those. Then it's in order to make it cheaper than those self service one, you don't have a huge margin to actually put on a transaction. And then finally, like the frequency, you know, if you store something, you'll do that like once a year or like, I dunno, two times per year with seasonal.

Lenny Rachitsky: [00:18:44] Well. Yeah. So I think with frequency, it's a subscription service. So even if you only store something once, it's going to charge you every month forever. So I think that gets around that problem because you don't have to bring them back every month to buy more. Yeah. Yeah. And then on the supply side, if it's like worth it to you to make, I don't know, 25 bucks a month or 50 bucks a month, maybe you'll clear up some space in your garage. So that's the question. Is there enough money that'll incentivize you to create space slash are there enough people that don't have your problem that have space. That can, you know, store something for whatever, 50 bucks a month. So that's an open question, but I wouldn't be surprised if there's enough people with space that. Can you use some extra money? And then on the frequency piece, so there's always been this theory that there's kind of these two things you want to look at, and this is one of the attributes, so we'll skip ahead to this, but you want it to be high frequency and high average order value. So those are two key things to look for. You want it to be something people use all the time and that they spend a lot of money on. And the more of both you have, the better. And so I think the assumption has always been you need to have at least one of those, right? And ideally both. But just recently, maybe a month or two ago, Andreessen Horowitz put out this really cool reports looking at the top hundred marketplace companies, and one of the posts they put out by Darcy hooligan, that's how you pronounce his name, is he basically went through the top hundred and figured out which ones are high frequency, which ones are high average order value. And what he found, and it's really surprising that one, not a single company, is both in the top hundred that's both high frequency and high average order value. And also more than half were neither of those friends, more than half were not high frequency or higher average order value.

Sjoerd Handgraaf: [00:20:23] So would read that post because that blows my mind. So yeah,

Lenny Rachitsky: [00:20:26] that's how I felt

Sjoerd Handgraaf: [00:20:27] when I saw it. I'm like, so stocks you dose. Yeah,

Lenny Rachitsky: [00:20:29] yeah, exactly. So one is just, there's actually a big opportunity if you can't meet those things. But you have to get a bunch of other stuff. Right. And so the post has all the details, but it's things like you need to have an efficient way of acquiring supply because you're not making a ton off of each user and things like that. And then, Oh yeah. I think the other is you have to have a big market for this to be possible.

Sjoerd Handgraaf: [00:20:50] Yeah. Because you need volume because the income per transaction is so incredibly low that he really need, yeah. Yeah.

Lenny Rachitsky: [00:20:56] So like cameo is one example that he talks about is. Where you get a celebrity to make a video for you, like flavor, flavor, people like that. And so it's like 50 bucks or whatever. People use it like once or twice a year, but they seem to be doing all right.

Sjoerd Handgraaf: [00:21:09] Yeah, just imagining flavor flavors sitting in the garage, like suicide videos in an hour. Funny. Yeah.

Lenny Rachitsky: [00:21:16] There's some crazy stuff in there. Alright. And then let me maybe cover a couple more attributes of things. Yeah, absolutely. So we talked about just like, is this something people want. We talked about high frequency and high average order value. Another is, is supply highly fragmented. A couple of these come from bill Gurley who is a partner of benchmark, put out this really great list of things you've looked for marketplaces. So a lot of this is kind of building off of stuff he's done in the past. And one of those is, is supply highly fragmented, which just means like if I wanted something, can I just go and get it myself? Or is it like very hard to find? Yeah, so an example, Airbnb, it's hard to, for me to go find a home to stay in when I traveled to Italy. Yeah, I'd have to like search on gray clusters. I don't even know how it's possible. This is like an airline. There's like a few airlines and I just go to their website and book them. So there's no need for someone to aggregate them. So that's one is supply highly fragmented. Another is the relationship between supply and demand. Non-monogamous. It's just means when I use your site, am I done forever or do I need to come back and keep using it over and over? So it's kind of like Uber versus like a nanny is the way I think about it. When I use Uber, I don't want the same mover every time. I want whoever's closest to me. Yeah. As a nanny, I use it once I found my name and I'm done.

Sjoerd Handgraaf: [00:22:29] Yeah. No need to bring their business to the platform with those kinds of transactions. Hmm. Yeah. Like, because then the risk of this intermediation or platform leakage or increases.

Lenny Rachitsky: [00:22:38] Yeah. And so maybe I'll, let me do the last few real quick just to finish up there and we can move on from

Sjoerd Handgraaf: [00:22:43] this. I mean, this is great. I think everybody listening will be very happy to have their list once and for all. So.

Lenny Rachitsky: [00:22:49] Cool. So what's your point? Is there a reason to stay on the platform to avoid disintermediation? Like why would I use your site to book this thing versus just kind of going directly? It's usually things like there's insurance policy or it's just like really easy to use because of this. Another thing that I try to look for is are you paying through the platform versus paying directly? Like would there be be you're paying Airbnb and then Airbnb pays the host versus I just pay the person when I arrive. And I think this is partly why Craigslist is slowly getting disrupted more and more is. All the transactions happen offline so they don't make as much money through it. And you can only grow so big without being able to do that. And then maybe the last one is just, is this better than the non-market place alternative? Like there's nothing magical but a marketplace other than it's more efficient way to run a business. And so if there's something that provides a better customer experience, that's not a marketplace. That's going to win. It doesn't matter what you're doing. So that's something I look for. Yeah.

Sjoerd Handgraaf: [00:23:43] All right. Thanks. That's super insightful actually right now, like just coming back quickly to what sort of kicked this question off, investing into current situation, Colgate, the whole endemic sort of odd situation that we're in now. How do you evaluate, are you evaluating investment in certain categories that are affected or do you have any specifics on stages or experiences that have changed basically? I mean, do you see opportunities for marketplaces now or are you judging like marketplaces differently because of what's going on right now?

Lenny Rachitsky: [00:24:12] I'd say the main thing that I think is going to change, and I don't know, like I'm not, I'm no expert on macro economics and. Things like that. But I think the main thing that'll change as we've already been going through this mode of the software eating the world, and I think with this is going to lead, is just to more of that and even an acceleration of software eating the world with things like, you know, working remotely more, being online, more buying things online, more collaborating online. And so I think just the trend of more and more software taking you over non software businesses and most marketplace companies are software businesses. And so I think they automatically fall into that trend. And so I don't know if there's anything specific within the marketplace segment, but I think in general, marketplace businesses are in a good place. Mostly just because they're software businesses.

Sjoerd Handgraaf: [00:25:01] Yeah, but not because they're a marketplace specific in any

Lenny Rachitsky: [00:25:03] way. I don't, I don't see anything specific, but they're better off than a lot of other types of businesses for sure.

Sjoerd Handgraaf: [00:25:09] Well, I mean, yeah, I was just thinking like, I don't know. Have you, I assume you heard the, the Matias of scale episode where Brian Chesky was saying that they lost like 1 billion worth of bookings in like 14 days or somebody like that. They refund that grade.

Lenny Rachitsky: [00:25:22] It's not a great time. That'd be just,

Sjoerd Handgraaf: [00:25:25] have you listed that one.

Lenny Rachitsky: [00:25:26] I haven't listened to that, but yeah, but I'm a similar to Brian. I'm a believer that travel will come back, but you know, when you ask anyone what they want to do, if they had all the money in the world, the number one answer is always I travel more. And so I think travel is kind of a part of human nature and something we always will come back to. To me, it's just a matter of how long. Until we get back to it and yeah, and how long it takes. But I'm optimistic about the future of travel.

Sjoerd Handgraaf: [00:25:49] Yeah. Dove, absolutely. I didn't mean to say that, but I mean, I can totally recommend the pause cause like I obviously haven't worked with Airbnb and never spoke to Brian and I don't have undecided praise for everything every be necessarily, but like the podcast was fantastic. Like that was like true leadership. Like I've felt very sort of felt serious like after that, like, Oh, this is going to be great. So that was can recommend it.

Lenny Rachitsky: [00:26:10] Yeah, I will check it out.

Sjoerd Handgraaf: [00:26:12] Yeah. So this was an idea. So do you have a marketplace idea? Next thing is to kickstart and scale of marketplace business. Now, that also happens to be the title of a fantastic collection of content that you dropped on the world last year. Maybe you can tell us a little bit about what you did because you've done a ton of amazing research for it. But then most of our audience is probably early stage or even idea stage. Could you explain the three phases that you sort of discovered and then specifically like could you talk us into a little bit more detail through phase one?

Lenny Rachitsky: [00:26:42] Yeah, you bet. It's maybe a little background on this work. I left Airbnb me a year ago at this point and I started writing a little bit about what I learned and answering people's questions about what are right and wrong in ways that. I think we're teetered at being successful. And I found that one, I didn't have all the answers to all these questions. People are sending me, and two, as weird that people are going to rely on just kind of this one experience of Airbnb. And so I started talking to founders and early growth people at all of the biggest marketplace companies to learn partly for myself and partly to have better answers for people that were coming to me. And what that ended up leading to is animal like hundreds of hours of research. And interviews and synthesis of what kind of emerges from all of these interviews, from all these founders and groups of people. And so I ended up talking to 17 different companies, maybe 24 people at all of these total for what worked, basically to get these companies off the ground. And so, you know, I talked to people at Uber and Thumbtack and. Lyft and TaskRabbit and door dash Angeles and Etsy, and basically every major marketplace company, and turned it into this kind of thing. It was 800 blog posts, and the way it broke it up is kind of these three phases of kick-starting our marketplace, scaling your marketplace, and then a part I haven't written yet that will come someday evolving your marketplace. And so within phase one, which is around kick-starting your marketplace. It's essentially how to crack the chicken and egg problem, which is one of the key problems that marketplace has faced initially and were most of them died. And so there's an interesting, like maybe the most interesting learning out of this work is just that there's essentially four steps that every marketplace goes through to get started and to crack the chicken and egg problem. So the four, I'll go through all four and then I'll kind of dive into each one. So the four steps turned out to be constrained your marketplace to the smallest kind of the minimal viable marketplace. Then concentrating on one side of the marketplace, supplier demand, then build supply, and then build demand. So that was the four rough steps. And so to dive into each piece, constraining the marketplace, basically the first thing you want to do, and every marketplace did this except for one, which is kind of interesting, is find a way to reduce the size of your marketplace to either a market, say like New York or a category, say like antiques with Etsy or. Ikea furniture with task rabbit, and every marketplace did this except for Thumbtack, which very strategically decided not to. And the reasoning they had is to the point we talked about earlier, the frequency of use was so low. How often do you need a plumber or an electrician? They were just afraid people wouldn't use it often enough. And so they're just, okay, we're going to have every type of service that we're going to go everywhere to create this flywheel. And it worked out for them. But the feeling I got from folks is they probably should have constrained and would have been a lot easier. To get started if they had actually picked one segment or one market.

Sjoerd Handgraaf: [00:29:38] So did they go like U S wide so they didn't even constrain the geo?

Lenny Rachitsky: [00:29:43] Yeah, exactly. Oh wow. Yeah. And it took them a long time to make it work. And in theory, they would have moved a lot faster if they started in like at least a state, maybe a city, but it worked out. So you never know. So you know, that's one. Maybe that's just a step back a bit. It's important to. When I talk through this stuff, just to remember that this is just like what worked for all these companies. It doesn't mean it's going to work for you and it doesn't mean things are going to work just as well as they did in the past. So that's just an important point.

Sjoerd Handgraaf: [00:30:12] I think you've written a nice disclaimer on your blog, right?

Lenny Rachitsky: [00:30:15] Yeah. I forgot to add the disclaimer, but that's an important one. The other is all of them have really strong product market fit, and so none of this is going to work if you don't have something people want. Coming back to that point again. And so just always kept that in mind. Okay. So step one is constraining the marketplace. Basically picking a market or category to focus on. And then step two is figure out which side of the marketplace to focus your energy on. And it's either supply or demand. And maybe the second most interesting learning from this work is that 80% of the biggest marketplace companies. Focused on supply first and almost exclusively.

Sjoerd Handgraaf: [00:30:47] Was it unexpected for you?

Lenny Rachitsky: [00:30:48] Yeah, I didn't imagine being so kind of lopsided. And when you look at, there's only three of these 17 that I talked to you about it focused on demand first for all three. It was really obvious that supply was easy and not a problem, and that's why they focused on demand. So the examples are with Rover, they found that supply came really easily. And I think it's mostly because. The value prop to dog walkers was make 50 bucks for watching a dog overnight. Anytime you choose, if you want to do it or not. So it's a really compelling value prop. And similar with TaskRabbit, make meaningful money. You choose when you choose what jobs and it's not that hard work. So I think that's the core to when supply is not a problem as even your value prop is extremely strong and like a great pitch. And then the third company that also focused only on demand initially was. Zillow and the way they bootstrapped supplies, they basically used existing data that already existed of all the homes in the U S and just put that online. And so they just bootstrapped supply really easily like that. Not sure how easy it was, but they just did it and then they were able to just focus on the demand side. So those are the only three. Yeah.

Sjoerd Handgraaf: [00:31:56] Coming back to the point that you made with local mine as well, right. A great way to start a marketplace is to utilize existing data and build on that.

Lenny Rachitsky: [00:32:04] Yeah. So that actually gets get transitioned to the next point, which is how to drive your supply to create your supply initially, and in this kind of piggybacking strategy is one of those levers, but it turns out that the most common lever for early supply growth. Is just sales drive sales, like

Sjoerd Handgraaf: [00:32:21] people reaching out to supply on the phone.

Lenny Rachitsky: [00:32:24] Yeah, exactly. Or door to door or email. So a few examples. Door dash, just like go into restaurants, pitching them on door dash or open table. They just went around similarly to restaurants with like a desktop under their arm. To demo what they could do for them. And even Airbnb, the early folks just found homes that they wanted to put on Airbnb and call them, or I don't think they did door to door. I think that they called her, emailed them and convince them to go on Airbnb. So I think 60% of the companies I talked to that was maybe their, either a top lever or second to number one lever. Yeah, leather fairly supply group. Alright. So that was an interesting learning. The second most common lever is piggybacking what we talked about, where you go onto an existing network. And pull people off that Airbnb allegedly did that with Craigslist from tech, did that with other places. So that was on supply. And then on the demand growth, which is the last part of this chicken and egg problem, the number one lever that helped early marketplaces grow was actually word of mouth. Which was just people talking about how awesome it is and wanting to tell their friends about it.

Sjoerd Handgraaf: [00:33:25] Yeah. Was there anything anyone did to sort of, because word of mouth is sort of notoriously hard to track, right? It just happens, but did you hear of any sort of great tactics that people employ to, you know, once they figure that out, that's like, okay, how can we facilitate this to best?

Lenny Rachitsky: [00:33:42] The main thing that I've seen happen when you find that word of mouth is an important lever for you is to build a referral system, which sits on top of an existing word of mouth. Growth driver and creates more incentive to tell people about it. Yeah, so I haven't seen any tactics to increase word of mouth. Word of mouth just comes from your product is awesome. People want to talk about it, but referrals accelerates that even further. That's the main takeaway there.

Sjoerd Handgraaf: [00:34:05] Yeah, I got a great question from someone I reached out to ask like, Hey, what should I ask? Do you have, just as a sort of like a piece of candy to this podcast episode, like, do you know of any like non-scalable tactic that you've seen the marketplace is used lately in these early stages that like, wow, let us, not could be under any of these levers, but like that's something, just an idea so brilliant that you're like, Oh, that is, you know, it wouldn't make it to phase two, but that's great to get kick. Sorry.

Lenny Rachitsky: [00:34:31] That's a really good question. What's the one that comes to mind is subsidizing your supply is John the supply side? So Uber and Lyft, when they first started to make sure that enough supply, they paid their drivers just like a salary to be on the road. So it made no economic sense for Uber or Lyft, but it created enough supply where people downloading the app always had enough cars on the road.

Sjoerd Handgraaf: [00:34:51] Yeah, definitely not scalable. Like definitely hit the non-scalable Pontians

Lenny Rachitsky: [00:34:55] and CRE. So there's this concept of single player mode. That open table is famous for where they, so with this marketplace, you basically have to figure out how do you make it useful to both, to the other side before one side is there. So like how do you make Jordache useful to people wanting to eat before any restaurant is there? How do you make it useful to restaurants before any people are there? It's an open table. Their strategy, which very few companies have employed. It turns out, yes, let's just make something useful just to one side, just to the supply side, which was a reservation system, and then build up all the supply and then wants demand. It gets online, there's all this supply there. So that ends up being really effective when you can pull it off. But it's also not scalable and rarely used is what I found.

Sjoerd Handgraaf: [00:35:34] Would you say that that's the same as what people notice called like the SaaS enabled marketplaces, right? Where you sort of build a tool that you can even pay for it. And then on top of that I kind of like, I don't know, kinda like what up five soon, which up maybe, I dunno, like,

Lenny Rachitsky: [00:35:47] yeah, that's exactly right. Casey winners, if you know him, he wrote a really cool post that talks about this whole idea and something he points out is. A lot of companies that start off as a SAS business starts to think about, how do we turn this into a marketplace? Yeah. And it ends up being a lot harder than, than people think. So the key there is if you want to do that, just plan it from the beginning. More as a strategy to get to the market place, not as, Oh look, we can add a marketplace on top of this. As it turns out, it's not that,

Sjoerd Handgraaf: [00:36:14] yeah. Now that we're here, like let's talk about Shopify shop, like taking Casey's, because of course I know Casey's work. Taking that lesson into mind, like how do you think that's going to play out?

Lenny Rachitsky: [00:36:24] So it just makes me think a little bit about is Patriot who, and I talked to them about this research, one of the stories they shared is that. They initially thought they were a marketplace. They thought that they're going to connect artists and creators with people that want to support artists and creators. And so that was their initial business and they had this whole discovery. Roadmap and way for people to find creators and pay them, you know, like a few bucks a month to support them. But what they found is that people on the demand side just didn't want this. Nobody's like out there looking for people to pay money to. But on the creator side, they really wanted this. They wanted a platform to accept patronage and. And make money and make a living. And so what they realized is, okay, we want to be a marketplace. We want to send demands to all of these creators, but there is no demand. People don't want this. And so they moved away from that and they became just a SAS platform, just like the best way for creators to make a living and accept payments. And so it's interesting because now they pitched themselves as the Shopify for creators. And I hear that like Shopify for X all the time now because Shopify is doing so well. And so it's funny now that Shopify is. Going the other way. I'm like, ah, let's actually turn that as that marketplace. Yeah, and so that's the question is, is there going to be anybody that actually wants what they're offering and is it going to be better than the alternative, which is basically Amazon and Google, and I think it's two things to say. Yeah,

Sjoerd Handgraaf: [00:37:49] obviously speculating and I think they have done like remarkable things in the past, so I wouldn't put it past them, but I've been also thinking about it a little bit, and it also reminds me of something that bill Gurley actually very recently tweeted about that this, I think it was a general motors or like some company who has this Maven. Which was kind of like an Uber where they just owned part of the supply, which is like transferable to this idea of Shopify that well, they own the supply already. You have the supply on board. And I think bill Gurley's point was that like in any marketplace, like suppliers, table stakes, like where you make really the differences to demand generation, and I see that that's going to be problematic. And I think also that's what about Casey said on Twitter that. Getting the demand rights is going to be probably the biggest hurdle here.

Lenny Rachitsky: [00:38:36] Yeah. So we got, I was in a little mini debate with bill early in that tweet because another friend of mine looped me in cause he's like, Hey, but Lenny says this over here. I understand. Yeah. So, so bill Gurley was saying is in the end, I think what he's saying is like, demand is the most important thing. Which longterm. Absolutely. If you don't have customers and you don't become the place that customers go. Then you're not going to win. I think that's what he was saying, which for sure. That's absolutely right. The more of the market you own and the more you can aggregate all demand to your site, the better you're going to do. I think the trick is early on, it's not necessarily that early on, you may have to focus on supply first in order to even build anything that's going to last or draw any sort of demand. Yeah, so based on what I've seen that I, I don't know if he would disagree with this. Sometimes you've been focused on supplier early on to make something to get the flywheel going. But long term, you're only going to be extremely successful if you own the customer and you win the market, which I will not disagree with.

Sjoerd Handgraaf: [00:39:37] Yeah, so five, it's still some work to do there, but very interesting move. I didn't expect that because I had literally just been listening in preparation for this podcast to, well, one of the parts is for both. You and Casey were on a kind of recall the name where I think you really. Explicitly discussing that? No, no, no. They're not going to do this because,

Lenny Rachitsky: [00:39:55] yeah, I think patron had the same issue. Actually, this just reminds me of, as patrons become more and more successful on Patrion, the last thing they want is for their patrons to be targeted. And since to other patients. But as a marketplace, you need to do that because you make money by people coming back and using it more and more. And so they had this kind of weird incentive that weren't aligned with their creators. Shopify is going to start getting into that a little bit where the biggest Shopify shops are going to be like, Hey, why are you sending my customers to these other shops? Even if they're not competitive, you're just like, you're not helping me anymore. Cause their whole pitch has been, we're invisible. We're behind the scenes. Nobody even knows what Shopify is. It's just my store, and now they're going to be channeling people away. So I think it's going to upset their creators and then they also have to do something they've never done, which is drive demand and build a consumer product and a brand. Which I haven't done, but I'm so impressed with Shopify as a company and I wouldn't count them out. No. Same here. Yeah.

Sjoerd Handgraaf: [00:40:55] And surely, you know, we're not anyone from Shopify listening. Surely you've thought about this before you invested into this whole thing, but like. It's nice to speculate.

Lenny Rachitsky: [00:41:05] I don't know. Shopify.

Sjoerd Handgraaf: [00:41:06] Yeah. Great. Well, I think just covers more than enough material for people to give real listen to maybe listen to it again because I think we covered lots of stuff. Do you have any other advice for marketplace entrepreneurs who are really like at the beginning of their journey? Like let's say early product pre-product

Lenny Rachitsky: [00:41:21] yeah, I'd say one just like focus on making something people want more than, is this a market place that will work. Cause that's where most companies fail. That's just one I always come back to is this something people will want and pay money for it and come back to the marketplace. Question secondary to is when you look at what other marketplace companies did, it doesn't mean it's going to work for you. This is just like how things have been in the past and growth channels change and costs change and don't assume that what worked for others were worked for you. Don't just like do X, Y, Z, I'm assuming to work. And then three is something that I think about a Sarah Tavel who's also a partner at benchmark. Has this metaphor of trying to build a white hot center in your marketplace, which is essentially just like something that's working really well, even at a tiny, tiny scale. And only once you feel like they've got that working, does it make sense to expand and start growing? And so my advice there is just try to find something that is working well, where there's. It just feels like this is a working supply is meeting demand. People are happy, they're coming back. So you want to look for something like that. So I'd say those are the main three things in my mind when I think about just general advice.

Sjoerd Handgraaf: [00:42:28] Yeah. So the last part is really about sort of like having a super narrow focus where you have like high liquidity, high transactions fee or frequency.

Lenny Rachitsky: [00:42:36] Exactly.

Sjoerd Handgraaf: [00:42:37] Yeah. Focus. I mean, it's so like at Sharetribe. We try to help people as much as we can when they come to us with ideas, but people are so eager to conquer the world that it's very difficult to be like, well, you know, just, just, maybe try this in your neighborhood first, like that shouldn't teach you enough. So yeah, I totally agree with that.

Lenny Rachitsky: [00:42:53] That's really against human nature.

Sjoerd Handgraaf: [00:42:55] It is seemingly. Yeah. Hey, thank you so much for joining us and for spending time.

Lenny Rachitsky: [00:43:01] That's great chatting marketplaces.

Sjoerd Handgraaf: [00:43:02] I agree. I could go on even though it's past midnight. Where can people find you? Where can people find your newsletter? Where can they actually, I know. Read back your posts?

Lenny Rachitsky: [00:43:11] so easy. lennysnewsletter.com and then on Twitter, just @Lennysan, L. E. N. N. Y. S. A. N. All right. Thank you.

Sjoerd Handgraaf: [00:43:21] All right? That was it. I really hope you enjoyed that Lenny was kind enough to offer all listeners a special 20% discount on his newsletter. Go to https :// www.lennyrachitsky.com / sharetribe (← updated 12-03-2021: no longer valid) to get the 20% discount. It's a fantastic newsletter. I can't recommend that enough.

Lenny Rachitsky: [00:43:41] Thank you for listening to two-sided, the marketplace podcast. If you enjoyed today's show, don't forget to subscribe. If you listen on iTunes, we'd also love for you to rate and give us a review. If you got inspired to build your own marketplace, go visit https://www.sharetribe.com, it's the fastest way to build a successful online marketplace business. Until next time.