At some point, most early-stage online marketplaces reach a point where it makes sense to look for investments to continue accelerating their growth. Only 6% of new companies manage to secure the investment needed every year. If you want to succeed in getting funding it’s important that your business is properly prepared and ready for investment.
In our webinar ‘what VC’s actually look at before investing in an online marketplace‘, investors Mathias Ockenfels and Daniel Hoffer share exclusive insights and thoughts on how marketplaces best prepare to get funded.
Expert Q&A on how to secure funding for online marketplaces.
Following the webinar, the audience had an opportunity to ask questions of the investors. Now we are sharing all the answers to help other marketplaces prepare for investment.
Q: How do speakers validate the valuation of pre-seed or seed level startups?
A: The actual “validation” of a company’s valuation that we have used when investing happens in the following round when new, external investors come in and set a price that is – hopefully – higher than the price we’ve previously set. If the question was geared towards the way how we “set the price”: It happens based on fundamentals of the business, such as e.g. revenue & user growth and absolute (monthly) revenue number and other relevant KPIs as well as simple “market dynamics” – demand drives the price so several investors competing for a deal can drive the price (= valuation) of the company.
Q: What’s the future for online marketplaces? Is there still space for new players?
A: The answer to this question would probably require and merit its own “webinar” so I am just trying to keep it short and crisp here: New technologies such as blockchain or also AR/VR devices enable new opportunities to build marketplaces in areas that do not even exist today. It also allows new entrants to disrupt incumbents in already existing fields by applying new solutions to better solve an existing problem.
Q: From an investor’s point of view, is it better to have good traction in a single smaller area or to have a broader global presence?
A: These are not mutually exclusive. You can start from a smaller niche, e.g. in order to test and prove your approach and model, and then branch out into a bigger geographic area, once you have found product-market-fit and the right go-to-market strategy. The question is whether your model is scalable and still has the potential to grow into bigger (geographic) markets that are not yet covered. On the same topic, you may also enjoy this blog post: www.startupsventurecapital.com/building-hyper-local-multi-country-platforms
Q: Should I implement monetization before I look for funding?
A: Without knowing the details of the particular business, it is hard to generalize. As mentioned during the webinar, we, at Speedinvest x, are also investing pre-revenue and even pre-launch. Generally speaking, the more “proof points” the better and being able to “make money” (= monetization) is definitely a strong proof point. That said, often trying too hard to optimize monetization too early can harm your growth and overall potential of the business.
Q: Is there a difference between go-to-market strategies for Europe and the US?
A: Again, it’s very hard to generalize as it very much depends on the particular business. Overall, there are, for example, different regulations and mentalities between countries and regions which may require adjustments in the product and/or go-to-market that might differ significantly from each other. For example, Uber faced strong headwinds from regulators when they tried to expand their US-American model to Europe and tried to “copy it 1-to-1”. In many cases (i.e. countries) this did not work, and Uber failed to expand to these countries (e.g. Germany) and eventually lost those to local champions that adjusted – or better – “localized” the model to local “standards”.
Q: Will I have to give up control of my company if I accept funding?
A: Venture Capitalist typically only take a minority stake in the company and do not aim “to run the show”. If I believed that I would be better at doing something, I would found the company myself and not invest in another entrepreneur or team. We look for founders that are specialists in their field and understand their business better than we, as investors, do.
Q: How do I calculate market size?
A: The answer to this question would require and merit its own “webinar” or workshop. If there is general interest in doing a webinar on market sizing, I am happy to do so. Meanwhile, I can recommend these articles to learn more:
Q: What’s the best way to prove product/market fit to an investor?
A: See more on this below in my answer to the last question. In general, the usage and hence engagement of the users of our product should be “in line” with the use case the product is targeting and hence the problem it is solving. This might differ significantly based on what market you are in, whether it’s a B2B or B2C product etc. Strong, supporting references from first users/customers are an important indicator, too. Besides, people paying for your product is always a strong signal as it shows general willingness to pay and that the product is actually solving a real problem worth paying for.
Q: How do I prove the network effect of my platform if it hasn’t taken off yet?
A: Network Effects typically only unfold and become more “tangible” after a certain, critical mass of users or data is reached. Then they become traceable through cohorts (retention of users by activity & revenue). Until this is not the case, you may use indirect indicators such as (a high) buyer-seller-ratio, active users from organic traffic growing quicker than those coming from paid, (a high) virality coefficient, high NPs (as indicator for word-of-mouth) or engagement of your community (if applicable) through ratios of MAUs vs. WAUs vs. DAUs (more on that below).
Q: You mentioned engagement numbers earlier as one of the KPIs you look at before investing. Could you give some more details on which numbers are important and perhaps how marketplaces you have invested in achieve great numbers there?
A: Pls see my answers to above and below questions. The “benchmark” very much depends on the problem your product is trying to solve. What usage pattern would you expect based on the e.g. buying behavior of customers on both sides of the marketplace? That`s your benchmark!
Q: Do investors look at how prepared my company is for scaling?
A: The easy answer to that question is “Yes”. The crux is what does “scaling” or “scalability” actually mean? As a general thought, it basically means that the business is ready to grow x-fold in size (in terms of revenue, customers, users) in a given period without having to add the proportional amount of manpower/headcount and, at the same time, maintaining healthy unit economics (CAC to CLTV-ratio etc). Usually, this can only be achieved through product automation, a scalable technology platform and efficient marketing/sales.
Q: What does an early-stage startup need to achieve before they begin looking for investments? What would be the first signal?
A: It very much depends case by case. If you want to learn more about how to prepare for your Series A financing, you can read more from me on this topic here. For more early-stage seed-funding, I would recommend this transcript of my interview with Besedo. Generally speaking, it’s always helpful to show early signs of product-market-fit with a minimum-viable-product that customers/users actually use along the usage patterns you would expect from the particular use case the product is addressing – or better – the problem it is solving. For that we look at Monthly, Weekly and Daily Users (MAUs, WAUs, DAUs) and their ratio to each other as well as related cohort analysis.
Prepare your marketplace for funding.
To help you prepare your site for funding we encourage you to download the checklist on how to optimize your marketplace for funding.
Success comes from user engagement, and engagement increases with the quality of your content. Get started with your moderation at an early stage to ensure high quality user-generated content on your site. Our all-in-one content moderation tool, Implio, is available for free and will help free up your time to do what you do best – growing your marketplace.