Crack the Chicken-and-Egg Dilemma — How Startups Can Thrive Against the Odds

In the high-stakes world of startups, founders often find themselves facing a paradoxical challenge: how to attract buyers without sellers and sellers without buyers.

This chicken-and-egg problem has derailed more promising startups than we care to count. The truth is, you can overcome this dilemma. Successful marketplaces like Airbnb, Uber and Etsy have already achieved this by creatively laser-focusing on one side of the market before moving on to the other.

Single-player mode

The key to solving the chicken-and-egg problem often lies in temporarily ignoring it. Instead of trying to build both sides of your marketplace simultaneously, focus on creating value for one side first.

Airbnb, now a household name, started targeting hosts in New York City during major events. They manually reached out to potential hosts, helping them list their properties and even offering free professional photography services. By ensuring a reliable supply of attractive listings, they created a compelling reason for travelers to use their platform.

As a rule, identify which side of your marketplace is more vital to acquire and start there. We are launching an ad network soon and faced the same dilemma months ago. So, we acquired several niche products that attract creators, such as newsletter directories. As a result, we have a creator network that can sustain the launch and further growth of our platform for the foreseeable future. Now, all we need to do is get advertisers to also come on board. So, in similar cases, create an offering that provides value to one group even without the other side present.

Related: Why You Need to Pick Your Co-Founders Very Carefully to Ensure Startup Success

Fake it till you make it

In the early days, your marketplace might look a bit empty. Don’t let this deter you. Instead, roll up your sleeves and start curating content manually.

Reddit, in its early days, faced the challenge of appearing active and engaging without a user base. The solution? The founders created numerous fake accounts and populated the site with interesting content themselves. This created the illusion of an active community which attracted real users who then contributed their own content.

The piggybacking strategy

Why build a network from scratch when you can tap into existing ones? This strategy involves identifying platforms where your target users already congregate and bringing them onto your marketplace.

PayPal executed this brilliantly by integrating with eBay. They targeted power sellers and offered a more efficient payment solution. As these sellers adopted PayPal, buyers naturally followed, and both sides of their payment marketplace rapidly grew.

Related: How to Build the Perfect C-Suite for Sustainable Business Growth

The exclusivity gambit

Nothing drives demand quite like exclusivity. Limiting access to your marketplace can create a sense of scarcity and desirability that attracts buyers and sellers.

When Spotify entered the U.S. market, it used an invite-only system. This allowed them to manage growth and created buzz and anticipation. People clamored for invites and were more likely to actively use the platform when they finally got in.

Plus, this way, you are not building expectations of immediately going mainstream. A quieter marketplace would be acceptable and expected by your existing users.

The loss leader

Sometimes, you must sweeten the deal to get your first users on board. This might mean operating at a loss initially, but it can pay off in the long run.

In its early days, Uber offered heavily subsidized rides to passengers and guaranteed minimum earnings for drivers. This dual-sided subsidy quickly built up both supply and demand which created the network effects necessary for sustainable growth.

The network effect

Design your product with viral growth in mind. Make it not just easy but advantageous for users to bring others onto the platform.

Dropbox nailed this by offering additional free storage to users who referred friends. This incentivized users to become advocates for the platform, and it rapidly grew the user base at minimal cost to the company. The beauty of this approach lies in its simplicity and scalability — each new user became a potential vector for further growth and created a self-perpetuating cycle of expansion.

Related: 5 Ways to Network Your Way to Business Growth and Wealth

Trust and credibility

In the world of marketplace startups, trust is your most valuable currency. Without it, buyers and sellers will not feel comfortable transacting on your platform, no matter how slick your UI or how vast your offerings.

Etsy faced this challenge head-on. They implemented a review system that allowed buyers to rate products and sellers. They also introduced secure payment methods and buyer protection policies. These measures created a safe environment for transactions and encouraged more buyers and sellers to join the platform.

Another great example is Airbnb’s implementation of host and guest verification processes. Requiring users to verify their identities significantly reduced the perceived risk of peer-to-peer transactions in the short-term rental market.

Solving the chicken-and-egg problem in marketplace startups is no small feat. It requires creativity, persistence and a willingness to experiment. By focusing on one side first, manually curating initial offerings, leveraging existing networks, creating exclusivity, offering irresistible incentives, designing for viral growth and building credibility, you can overcome this hurdle and set your marketplace on the path to success.