1 9 T A C T I C S T O S O L V E
T H E C H I C K E N - O R -
E G G P R O B L E M
When the harder side (supply or demand) reaches its boiling point of
activity, network effects kick in and value will be created organically for
the easier side. In most markets, either supply is harder to get to
participate in your marketplace or demand is. You can figure that out by
testing the sales and onboarding process. Typically, whichever side is
hardest is the more valuable, and once you get enough of them, the other
side is 2-10X easier to bring onboard.

Examples: Outdoorsy is the RV rental marketplace. They figured out that
getting the supply—the RV owners—was the harder side of the market.
Once Outdoorsy convinced the RV owners to join their platform, the
demand came 5X faster and cheaper, and Outdoorsy became the online
mecca for mobile lodging.
Find the small groups in your community that care most about your
marketplace—what we at NFX call the “white-hot center”—and go after
them. You typically figure this out by going broadly enough to gather data
which shows the highest activity.

Examples: eBay first got traction with Beanie Babies. Craigslist started as
an email list to Craig’s friends who wanted apartments for rent and jobs.
Uber started with “rich bros” getting black cabs in SF. Poshmark started
with urban female professionals.


1 . G E T T H E H A R D E S T S I D E F I R S T .
2 . A P P E A L T I G H T L Y T O A N I C H E
A N D R E P E A T .
Pay cash to the most valuable side of the market—or the most valuable
niche within the most valuable side—to join your marketplace.

Examples: Uber initially paid the supply-side—drivers in key cities—to be
on their app so that riders always had a car to book. Helix subsidizes the
demand-side by covering a portion of the costs of genetic
tests. ClassPass paid the supply-side—gyms—upfront cash to join their
platform.
3 . S U B S I D I Z E T H E M O S T
V A L U A B L E S I D E O F T H E M A R K E T .
4 . M A K E T H E S U P P L Y L O O K
B I G G E R W I T H A U T O M A T I O N .
This is all about kickstarting the supply-side by aggregating as much data
from the web as possible to create a perceived “aura of activity.”

Examples: Yelp, Indeed, and Goodreads all collected data—on local
businesses, job postings, and books, respectively—into their platforms to
create a useful supply-side without so much activity there at the start.

Tactic 4A: Founders often ask if they should take Tactic 4 to the next level
and “fake” activity?
For example, it’s now known that Reddit used fake persona accounts to
plant interesting questions. And Paypal built a bot that posed as a human,
purchased things on eBay, and insisted on paying with Paypal. These

tactics were certainly effective at demonstrating their product’s value to
potential users and thus helped the company solve the chicken-or-egg
problem. But these tactics probably risked these companies. Had they
been caught at the time, they probably would have taken a big hit in the
press and social media. Make sure whatever you do, you wouldn’t mind it
being on the front page of the Wall Street Journal.
5 . B U I L D O N E S I D E A S A N E M A I L
L I S T .
An easy and cheap way to start a marketplace, particularly if many of your
buyers are also sellers and vice versa.

Examples: This is famously how Craigslist started; Craig started with an
email list of friends with a supply of widgets. Threadless also started as an
email list.
6 . H O S T M E E T U P S A N D
G A T H E R I N G S .
It’s tough to scale events. However, at the beginning, they can be effective
to generate community, demonstrate activity, and give you direct
customer feedback, particularly when you’re loud about it on social.

Examples: Poshmark hosts “Posh Parties” where guests gather and
exchange fashion goods. The guests use the Poshmark app to solidify their
new, real-world connections. In 2004, Yelp famously threw parties when
they were getting going. Attendees went home loving Yelp, and wanting to
be members of “Yelp Elite,” the heavy reviewer community.
7 . B U I L D A S A A S T O O L F O R O N E
S I D E O F T H E M A R K E T .
When you give or sell one side of the marketplace a SaaS tool, it helps lock
them in so you have time to attract the other side.

Examples: OpenTable started by building SaaS reservation software for
restaurants. Honeybook built software for event planners and other
creative professionals to manage their daily proposals, billing, and
workflow. StyleSeat built reservation software for hairdressers.
8 . G I V E S O F T W A R E T O A T H I R D
P A R T Y W H O C A N B R I N G O N E S I D E
O F T H E M A R K E T .
Examples: Android built software for cell phone manufacturers who, in
turn, brought consumer demand. Now Android takes a significant
percentage of the app revenue. MySpace gave free profiles to bands who, in
turn, brought all their fans to the platform.
Example: Candex supplies software to Siemens who is a big anchor for the
demand-side. Siemens then requires its supply vendors to be on the
Candex marketplace in order to be paid.
9 . F I N D O N E G I A N T U S E R F O R T H E
I N I T I A L S U P P L Y O R D E M A N D .
Example: Square. In 2009, there were perhaps 10 other venture-backed
startups trying to own mobile payments. Why did Square win? Because
they only made one side—the merchant, supply-side—change their
behavior. The demand got to use their credit cards as usual.
1 0 . O N L Y M A K E O N E S I D E C H A N G E
T H E I R B E H A V I O R .
1 1 . M A K E S O M E T H I N G F R E E
S U D D E N L Y .
Taking something that used to cost money and suddenly making it free
will drive users to your marketplace.

Examples: Robinhood, whose making trading free, recently raised money
at a $5.6B valuation. Napster made music free. Skype made phone calls
and video calls free.
1 2 . M A K E A P R O D U C T F I R S T , T H E N
O P E N A M A R K E T P L A C E .
1 3 . C O N N E C T T H E T W O S I D E S B Y
H A N D .
Examples: Salesforce created a CRM tool before opening the Force
marketplace platform on top of it years later. Amazon started as a retailer
and then opened a marketplace. Now 50% of Amazon’s transactions come
from the supply-side of their marketplace instead of the Amazon
warehouses. Apple built the first 32 apps in the app store before opening
the platform up to developers. SmartRecruiters launched as a SaaS tool
for posting jobs before opening a marketplace to sell software to HR
departments.
Examples: In the early days of Zappos, when an order was placed, someone
at the company would fulfill the order by hand; they’d drive to the shoe
store, buy the shoes, and ship them out. This was critical because it
allowed Zappos to manufacture excellent initial transactions. This was
also true of eToys and Zenefits (health insurance).
1 4 . F A V O R M A R K E T S W H E R E
B U Y E R S A R E S E L L E R S T O O .
Another easy way to overcome the chicken-or-egg problem is to avoid it all
together by building a one-sided market.
Examples: The majority of people buying fashion on Poshmark are selling
it, too. And the same holds true for Match; the same person doubles as both
a “buyer” and a “seller.”
Restricting access and creating a fear of missing out among the demand or
supply can build strong word of mouth and a flood of participation in your
marketplace when the idea catches viral fire. However, let’s be honest: it
almost never works.

Examples: Gilt, Gmail, and Mailbox.
It’s easier to get a lot of activity going when you limit the surface area of
the operation at launch.

Examples: Lyft, Yelp, and Craigslist.
1 5 . C R E A T E E X C L U S I V E A C C E S S .
1 6 .   S E T A G E O G R A P H I C
C O N S T R A I N T .
1 7 .   S E T A T I M E C O N S T R A I N T .
You can actually program excitement into the marketplace with the help
of time constraints.
Examples: At launch, Tophatter only let people bid between 8-9pm PT.
During this hour the marketplace felt crowded. The same holds true
for HQ Trivia who uses time constraints to manufacture excitement.
1 8 . S E T A D E M A N D C O N S T R A I N T .
Examples: Groupon constrained the supply down to one Groupon a
day. Fiverr launched by constraining the pricing so everything was five
dollars. The idea here is to focus your marketplace on executing a single
value proposition well. And it gives everyone a simple reason to be there.
1 9 . P A Y U S E R S W I T H T O K E N S .
Most people don’t want to join a marketplace until everyone is there. If
there isn’t any activity on the platform, well, that’s a problem. If you create
a token for the marketplace, you can pay people to join, even when there
isn’t any activity.

Examples: OpenBazaar and Wemark.

NFX is an early stage venture firm based in San Francisco that is
transforming how true innovators are funded. As Founders ourselves,
we built ten network effect companies with more than $10 Billion in
exits across multiple industries and geographies.