In many ways, online marketplaces are the perfect business model. Since
they facilitate transactions between independent suppliers and customers
rather than take possession of and responsibility for the products or
services in question, they have inherently low cost structures and fat
gross margins. They are highly defensible once established, owing to
network effects. Yet online marketplaces remain extremely difficult to
build, say Andrei Hagiu of Harvard Business School and venture
capitalist Simon Rothman of Greylock Partners. Most entrepreneurs and
investors attribute this to the challenge of quickly attracting a
critical mass of buyers and suppliers. But it is wrong to assume that
once a marketplace has overcome this hurdle, the sailing will be smooth.
Several other important pitfalls can threaten marketplaces: growing too
fast too early; failing to foster sufficient trust and safety;
resorting to sticks, rather than carrots, to deter user
disintermediation; and ignoring the risks of regulation. This article
draws on company examples such as eBay, Lending Club, and Airbnb to
offer practical advice for avoiding those hazards.
[ABSTRACT FROM AUTHOR]