All investors have their own vetting criteria when assessing the potential of a startup and run wannabe unicorns through their paces using that criteria when they come calling. But suppose those wannabe unicorns are a particular type of business — a matchmaker — the next “Uber of X.” Karen Webster and economist and author of “Matchmakers: The New Economics of Multisided Platforms,” David Evans, say that those investors need a whole new set of questions. The business idiosyncrasies of these powerful but extremely complex businesses require that even the most basic questions be taken to a whole new level.
In this week’s The Matchmaker Is In series, our hosts Karen Webster and David Evans go through the five key questions that an investor needs to ask any matchmaker wannabe who walks through their door.
What’s The Friction?
For matchmaker wannabes, solving a problem really isn’t good enough — or, at least, it shouldn’t be — to compel an investor to open their checkbook.
Evans said investors must go a step further and ask what friction these matchmakers are trying to solve. The only way for matchmakers to get multiple stakeholders on board, Evans explained, is to be absolutely sure that there’s tremendous value to them in having that friction solved for them.
But that’s not all. That friction must be important enough — and big enough — to many people to drive a market. The challenge many matchmakers face is that they might be addressing friction that’s not big enough to get all stakeholders motivated to join.
Webster pointed out that, though advancing technologies have enabled even more matchmakers to pursue platform businesses, they can’t rely on technology alone to get that business off the ground.
What’s The Solution Design?
Identifying a big friction is only as good as the design of the solution to solve the friction better than other entrants in the marketplace.
The technologies or devices used in developing a platform business is what will make it easier for various participants to interact and exchange value with each other and make themselves better off, Evans explained.
“It’s one thing to call yourself a ridesharing app company, but it’s an entirely different thing to develop a great app for drivers, a great app for riders and then incredible technology in the cloud that enables drivers and passengers to find each other and do business,” he added.
Much like the example Uber has set by embedding payments in its ridesharing capabilities to address the point of friction that comes with ride transactions, there are elements in the design that can help eliminate the pain points between the different sides of a matchmaker’s platform.
But oftentimes, it can be hard to reduce friction for one side without inducing friction on the other. Reconciling frictions isn’t easy, and it often involves a matchmaker accepting certain tradeoffs in order to get their matchmaker business off the ground.
Earlier this week in her column, Webster pointed out how mall operators would use the deliberate design of placing escalators to go up and down on opposite ends of their shopping centers in order to maximize the number of stores that consumers had to walk past. Though this action increased friction for consumers, it brought greater benefits to the merchants paying top dollar for access to shopper foot traffic.
Evans explained that, at times, it’s necessary for matchmakers to skew the design of their platform in an attempt to balance the interests of the participants and get all those being catered to to jump on board.
Provided, of course, that the benefits — overall — to all parties is great enough to accept those frictions.
What’s The Ignition Plan?
In the world of matchmakers, ignition is key. Without it, a platform will simply implode.
Ignition means that a matchmaker has reached critical mass — enough participants on each side of the platform, who experience so much value they don’t want to look elsewhere to eliminate whatever friction the matchmaker intends to eliminate.
“Matchmakers have to get just enough participants of both stripes on board the platform and generating value so that the early adopters want to stay and more people want to join in,” Evans pointed out.
Webster also raised the issue of time, an important currency in getting a matchmaker up and running and on its way to critical mass. The longer it takes, the more expensive it is and the more likely that something or someone else with a better design or execution can eclipse their efforts.
Though there’s no rule book about the timing of igniting a platform, Evans suggested that, if it hasn’t happened in about 18 months to two years, then it may be too hard for a matchmaker to actually get off the ground.
From the standpoint of investors, he added, it’s important to have an entrepreneur that understands how hard the ignition problem is and has a plan to address going from zero to critical mass in a reasonable amount of time.
Are The Prices Right?
Though price is just one dimension of the value proposition being presented to customers on the platform, it can be a powerful tool to help draw in a group of participants that may not be as ready and willing to get on the platform.
“Even though you may lose some revenue from that group by reducing the price you’re charging them, you’ll get more of them on board, which will make it more interesting to the other group of participants,” Evans noted, adding that this can lead to more transactions and exchanges taking place on the platform.
It really comes down to the tradeoffs.
Evans explained it like this: A matchmaker can charge one group a bit less in order to get them more excited to come to the platform, then make it up from the other group that will be more interested in effect in participating in the platform.
“The prices are basically a way to make sure you have enough balance on the platform and to make sure each group has access to the optimal number of the other group,” he added.
A skewed pricing structure — even offering free access to the the platform for a certain group or incentivizing participation with rewards — can create a buzz that will deliver greater value for the other side of the platform.
Can The Platform Adapt Quickly?
Just like any business, matchmaker businesses aren’t static, but being able to adjust constantly and incrementally as the matchmaker stakeholders get on board is critical. Matchmakers must remain nimble and able to adapt quickly.
Matchmakers, as Evans explained, are forced to deal with an increasingly complex and difficult environment and need to get so many more things right compared to traditional businesses.
“Matchmakers coordinate different sides of the platform, while trying to reach critical mass in a short period of time,” Evans explained, which is why it’s critical for them to adjust and react to real-time information.
Evans likened the matchmaking platform business to test piloting an innovative new fighter jet no one has ever flown before. It involves a certain level of skill, complexity and agility to perform in that type of situation. You have to know the basics but be willing to adapt instantly to unforeseen conditions as they arise.
“It is such a complicated beast that the entrepreneurs who tend to succeed are either incredibly lucky or, more generally, they just have to be extraordinarily skilled at making swift changes as they take on board information from the different participants,” Evans said.
To catch all the other Matchmaker episodes, click here.