Building a Marketplace these days is very much in vogue.
Marketplaces seem to be springing up like mushrooms. Marketplaces are platforms that bring different buyers and merchants together. Some examples of marketplaces are Airbnb, Amazon, and Uber.
Like any business, however, Marketplaces also possess entrepreneurial risks.
When I started writing this list, I initially based it on my professional experiences in eCommerce management. In the meantime, Airbnb submitted a Form S-1, where they pointed out a slew of additional risks that I hadn't thought of.
If you're building a marketplace or want to analyze one, I recommend:
I have grouped the risks into three categories:
This is the most specific risk category for Marketplaces.
The mother of all risks in a marketplace is disintermediation. This is such a significant risk that I may devote an entire article to this risk alone.
Disintermediation is the fact that the buyer and Seller can agree not to execute the transaction on the marketplace.
In this case, the Seller receives the payout but can get the goods back in one way or another.
The loss is twofold for the marketplace because it has to deliver goods and has lost the transaction fees.
In this case, after receiving the goods or service, the buyer can get back the payment made for the goods obtained. This is a more critical risk for service companies, as the credit card guarantee on services is lower in case of chargebacks.
In this case, the buyer and Seller together coordinate to defraud the platform. There are many ways to execute these frauds. It depends on the type of service or goods offered by the platform.
For example, on a technology service exchange platform, such as Fiverr, the buyer may purchase a service. After the service has been paid to the Seller, the buyer can request a refund on their credit card. The credit card will then remove the money from the marketplace.
In this case, a third-party agent can access the buyer's account and perform activities on behalf of the buyer, generally completing the purchase of goods or services with the payment methods linked to the buyer's account.
This case is where the buyer shares their account with other people. It may not be a risk, but it impacts revenues, depending on the business model adopted.
For example, on Spotify, if multiple users share the same Family account but are not part of the same family, there is potential revenue lost by Spotify.
In this case, the Seller shares their account. It may or may not be a real risk, but it may give a ranking advantage to specific sellers.
Generally, there should not be too big or essential sellers in the interest of the marketplace, which would monopolize the marketplace.
If sellers do not deliver quality goods or services, the whole marketplace loses its reason to exist. It is perhaps one of the most critical risks after disintermediation.
The reason for the existence of marketplaces is to optimize an exchange process that is currently suboptimal.
This case refers to the situation where the buyer is never satisfied with the service or goods received.
It is practically impossible to eliminate this risk. However, there are ways to minimize the number of people who are not satisfied with the goods or services.
One of the most used ways is to create a straightforward user experience, with accurate messages of what is going on and communicate at important points what actions the user can perform or not perform.
You need to be able to keep the Seller on the platform. The marketplace has to be structured to grow each Seller organically.
On the other hand, the marketplace must ensure that a few huge sellers do not monopolize it. See risk number 7.
You have to be able to increase sellers to be competitive with other marketplaces.
The diversity of sellers in terms of geography, language, and skills makes a marketplace genuinely competitive.
You have to be able to keep the buyer on the platform. Retention marketing, i.e., all the marketing techniques to keep a customer who has already bought, requires an article all to itself.
You have to be able to increase buyers to be competitive with other marketplaces.
One of the significant difficulties for a marketplace is to have a balanced supply of sellers and buyers at the same time.
Failure to comply with the laws of the various countries you operate in can result in lawsuits from third parties or fines from local or national governments.
Each industry sector has specific risks that it is impossible to include in this list without sector-specific analysis. It is crucial to find, analyze and minimize these risks as well.
Apart from the various types of payment fraud already mentioned above, there can also be other types of users who want to commit criminal activities on the marketplace.
Depending on the legislation, the marketplace could be held liable if criminal acts are carried out through the platform.
For example, there have been cases on Airbnb where properties have been used to perform illegal acts, such as drug dealing or prostitution.
Depending on the type of marketplace, it may be necessary to verify users operating on it. This verification has an internal management cost and an external cost if technology and databases are used to verify user information.
The anti-money laundering, anti-terrorism, and embargo rules applicable to transactions between buyers and sellers should be borne in mind.
The law may hold the marketplace liable in case of non-payment of taxes for sellers on the platform.
In other cases, the jurisdiction might consider sellers, or other actors such as messengers, as employees of the marketplace. It is a global trend that needs to be taken into account.
If you have an insurance partner to cover some of the business and transactional costs, it may not effectively protect the damages generated. This effect could spill over as a financial risk to the marketplace.
Depending on the country and industry, there may be laws in place that prohibit or restrict the marketplace's operation.
Depending on the Marketplace Business Model, revenue may be recognized at different times during the transaction.
It creates a mismatch in the calculation of the marketplace performance.
Also, since there are costs to the marketplace, even if Buyer and Seller's transaction is not complete, this could have negative financial repercussions and undermine profits.
These risks are more general and applicable for the most part to technology companies.
If the content is exchanged or uploaded in the marketplace, it must be monitored. It is required to comply with general rules of "netiquette" and specific to the platform and the industry.
Also, content must comply with local laws in all geographies in which the marketplace operates.
The information contained within the company, specifically personal data of buyers and sellers, if not treated properly or worse still shared with third parties illegally, can generate fines and legal action.
The marketing department has the objective of bringing traffic that generates financial and economic results for the marketplace, with a positive ROI (return on investment).
Part of the long-term competitive advantage of almost any marketplace is to expand internationally.
Failure to do so means that local marketplaces can be created that are clones of your marketplace.
In the age of Big Data, most business decisions depend on data analytics. Misuse of these systems can have catastrophic consequences for a company's operations and performance.
Many expenses within a technology company can be attributed to research and development.
With diligent product analytics, it is crucial to link the use of marketplace features as closely as possible to the time and resource effort used to create them.
If new features do not bring positive financial results, the resources to create them have been wasted.
When Hackers gain access to Marketplace data, they can perform various actions that can damage the marketplace.
They can mine data, compromise data, or undermine the entire operation of the marketplace.
Depending on the marketplace's size, human and non-human resources are required to keep track of software and hardware bugs.
Failure to find and fix bugs can create many problems within the marketplace and multiply all the other risks mentioned in this list.
DDoS attacks are still a reality, although lately, with Cloudflare, they are gradually decreasing in importance.
A DDoS attack is, in short, a methodology to make a site unreachable or extremely slow. Performing this type of attack is easy if you don't protect yourself with dedicated technologies. The leading company on the market that protects against DDoS attacks is Cloudflare, which acts as a filter against this type of attack.
Every technology company relies on third-party services to function.
It is one of the most challenging risks to mitigate financially, as third-party services require an enormous effort to create and maintain.
To mitigate this risk, it is best always to have a backup service if the leading service fails.
In many jurisdictions, taxes are paid after the date they are generated. The company should calculate these amounts in real-time and set them aside to be paid at the right time.
Also, many jurisdictions, such as Italy, require you to prepay next year's taxes based on the last fiscal year's growth. It can mean that a significant earnings growth can cause the financial impact of taxes payable in the current year to grow dangerously.
Tax legislation around the world is continually changing, particularly about services and marketplaces.
The impact of these changes can be damaging on earnings.
With the advent of new platforms, such as voice, it is necessary to be present everywhere. Missing out on an emerging or mainstream platform can cost you in terms of lost revenue and leadership.
Technologies change all the time. If a technology on which the company is based becomes obsolete, it may be necessary to replace or create that technology from scratch.
If marketplace players (or worse, employees) succeed in defrauding the company, this cost falls on the company itself.
In many cases, it is not worth it in financial terms to sue the people defrauding the company.
Payment method rules, especially those related to credit card schemes, are continually changing. Specifically, there are more complex rules for marketplaces from the credit card industry.
Changing payment system rules can have a financial impact on the marketplace or even shut it down.
Especially if the marketplace is B2C (business to customer), the transactions take place with external payment processors' support. These services may not work for some time or have sudden bugs.
It is always better to have more payment processors to use if the main one(s) does not work as expected.
As a vertical integration decision, or to "eat" a competitor or make an "acquihire," companies can buy other companies.
Acqui-hire refers to acquisitions designed to integrate the team the company has built rather than the product itself.
Failure to integrate bought companies within one's own company creates a cost without value creation for the company.
Part of the essential assets of a company is intellectual property and data. Both create a competitive advantage.
In software, it is more ambiguous what intellectual property is. For example, when Instagram introduced "Stories," blatantly copying from Snapchat, it did not violate any intellectual property laws.
Users may trade or use intellectual property without the permission of the right holder.
All digital projects use underlying open source projects in some way. Open source projects come with a license that obliges users to behave in specific ways according to the different types of licenses.
Failure to comply with the rules of open source licenses can have legal repercussions on the company with consequential damages.
These risks are more general and applicable to all existing businesses.
Several market research studies have recently shown that a loyal customer base no longer exists. For this reason, competitors represent an increasing risk.
Lawsuits by third parties can cause considerable financial and image damage. The company should avoid patent trolls and class actions.
Patent trolls are individuals who make claims of patent infringement to win court judgments for profit.
Class Actions are lawsuits in which one of the parties is collectively represented by one or more members of that group. They are dangerous because, with a single class-action lawsuit, a judge can calculate damages owed to many people at once.
Negative publicity is another risk.
The inability to pay the company's debts.
Increased privacy regulations globally may expose the company to legal action or, in some cases, the inability to conduct business in specific geographies.
Natural disasters and global pandemics can hurt the company's performance.
I have classified this as a risk for any business. However, it is even more important for technology companies.
Changes within the market can have a significant impact overnight for many companies.
A recent example is Apple's approach against user tracking by third parties. Many AdTech companies will be affected.
One of the marketplace goals is to make the transaction between buyer and Seller as fast, safe, and pleasant as possible. A central part of this goal is customer support.
A low service towards the customers, buyers, and sellers, has an immediate effect on every user's long-term value (LTV). LTV is a measure of how much revenue a user will bring to the company over their lifetime.
Depending on the company's cost structure and financial maturities, currency fluctuations can impact the company's bottom line.
Some legislation allows losses generated in past years to be offset against future taxes. However, this possibility, which has a tax advantage, has time limitations in the future.
The development of Marketplace platforms and companies in the technological field have as their primary resource people.
Given the high demand for these specialized human resources, they have a high cost and can easily change companies if not adequately remunerated.
Poor management of funds and financial deadlines can lead to borrowing money and making capital increases.
In the worst cases, it can lead to bankruptcy.
Suppose the receivables that the company holds are to be written off. In that case, this decreases the company's value and can lead to financial problems if short-term availability is also based on these receivables.
If a company operates in countries with a high level of corruption, this can generate extra costs to adapt to the de facto situation.
Also, a high level of corruption could block the company from operating in the country or undermine profitability.
Short-term objectives, generally focused on profitability, and long-term objectives usually are conflicting.
The ability to extract profits for investors. Profitability risk has sadly become a reality for many startups, even listed ones. Nowadays, many are betting on increasing the value of the stock on the stock exchange. This risk deserves an entire article, if not a book!
EBITDA is an index that measures the performance of a company. It is one of the most widely used because it is little affected by accounting standards.
Accounting standards are methodologies with which to carry out company accounting. They vary from country to country, and the two most internationally recognized are GAAP and IFRS.
If the company has no cash flow, it cannot continue to operate.
The continuous increase in sales is essential to operate economies of scale and succeed in making the invested capital profitable.
PS: Thanks Pietro for reviewing it!