I just got an email from a founder. I thought I might share it here along with my answers in case it might help others:

Her email:

1. Can a services marketplace be (financially) sustainable in under 5 years?

2. Should a services marketplace be (financially) sustainable in under 5 years? Or would this stifle the whole aim of a thriving marketplace with network effects?

3. Recently a services marketplace IPO-ed and they showed a loss of millions of dollars on their books and their rationale was basically 'its a land grab.'

I've heard it said 'winner takes all' ie someone gaining the most market share the fastest, but how does that work in a pandemic? We still aim for an acquisition cost that is low, but it is not the fastest way to grow.

My reply:

Hi [Redacted]

Have you seen my “startup scale” material? It should address most of your questions at a high level: https://www.chrissaad.com/startupscale

In short: The goal of an early-stage, high-growth tech startup is scale. Not sustainability.

There are many reasons for this articulated in the deck, including:

1. Software scales in ways that traditional business operations do not. This creating massive profit potential at later stages at larger volumes when revenue becomes exponential while costs remain linear.

2. Tech startups operate on aggregation theory (https://www.google.com/search?q=aggregation+theory)

3. As you mentioned, marketplaces are often “winner takes most” and network effects make them hard to beat once they achieve scale

So the answers to your question are:

1. Maybe they can be sustainable under 5 years but that’s not the goal

2. Not if your goal is either a) build a high growth tech startup or b) not be disrupted by a high growth tech startup

3. They’re correct.

4. How does it work in a Pandemic? Better than without a pandemic because people are more hungry for opportunities and work.

5. Cost of acquisition should not be “low”, it should be understood relative to “lifetime value”. During early growth phases, It’s ok for acquisition costs to be higher than lifetime value. That’s what capital raising is for. It’s not “unsustainable”, it’s called “investing in growth”. As long as you have a line of sight for how to drive down costs and increase revenue once you hit scale.

6. Driving costs down should include operational efficiencies, improved conversion through product improvements, and organic growth through killer network effects (supercharged by deliberate product features that create them and take advantage of them)

Hope this helps

Chris