Evaluating a (marketplace) business idea - Issue 31

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Q: I loved your series about kickstarting and scaling a marketplace business. As an investor, I’m curious how you evaluate marketplace business ideas. What do you look for?

After looking at 100+ marketplace businesses over the past few years, I’ve learned an important lesson: First, forget about the marketplace part. Start by looking at the business.

Most marketplaces fail not because of the marketplace, but because of more fundamental reasons — not building something people want, too small a market, inability to acquire users, etc. So start by looking at the bigger picture before focusing on whether this works as a marketplace.

Let’s look closer at each of these areas.

Top 7 things to look for when evaluating a business idea

1. 🤤 Product-Market Fit ー Do people really want this?

“The only thing that matters is getting to product-market fit.” — Marc Andreessen

What to look for

  • High cohort retention

  • High MoM and YoY growth rate

  • A product that’s 10x better than the alternative

  • Passionate user feedback

  • Willingness to pay

Additional reading

2. 🌎 Market — Do enough people really want this?

“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” ー Andy Rachleff

What to look for:

  • A growing customer base being dramatically underserved

  • High willingness to pay

  • Customers who are desperate for this solution

  • Is there a $1B/year revenue opportunity

  • If the initial market is small, then large adjacent markets

Additional reading:

3. 💥 Why now ー What has changed in the world that now allows for this to work?

“The thing that I like to assume is every startup idea’s been tried … So, the question is not, has my idea been tried before? The question is, is it the right time for my idea to happen?” — Mike Maples, Jr.

What to look for:

  • Has there been an inflection in technology

  • Has there been an inflection in adoption of a technology

  • Has there been a change in regulation

  • Has there been a change in a long-held belief

  • A new distribution channel has opened up

  • Costs have fallen or price points risen dramatically

Additional reading:

  1. How to build a breakthrough by Mike Maples, Jr.

  2. Andy Rachleff and Startup Lessons of Greatness: You need a breakthrough insight

  3. How Can You Tell If Your Market Is A Good One?

4. 👋 Distribution ー Can you acquire these people efficiently?

“Most businesses actually get zero distribution channels to work. Poor distribution — not product — is the number one cause of failure.” — Peter Thiel

What to look for:

  • A clear growth strategy

  • A unique growth strategy

  • Unique access to to the target audience

  • A new untapped distribution channel

  • High LTV/CAC ratio

Additional reading:

5. 🤝 Team ー Is this the right team to build this?

“If you think about how do you get to the big idea, we call it an Earned Secret. You did something in your past, you tried to solve some hard problem, and you learned something about the world that not a lot of people in the world know.” — Ben Horowitz

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