⚖️ Marketplaces - Zero Player Mode

OnlyFans, Gumroad and the most capital-efficient marketplace growth model

If you are a founder this post will help you grow your marketplace more quickly and efficiently. As an investor it will help you identify the best marketplace founders and invest in capital efficient businesses. If you’re not familiar with marketplaces and not interested I’d suggest you skip this post altogether… If you are interested in learning about marketplaces you should start out by reading my marketplace library and the beginner posts listed in the article here, as you’ll find this post extremely dry if you don’t 😅.

Marketplaces are very hard. Our first product at Velocity Black was a marketplace product trying to take on OpenTable at their own game. We ended up pivoting to a completely different business model (thankfully) but I understand first-hand how hard it is to beat the chicken-and-egg problem. As an investor and advisor more than a dozen marketplaces I’ve also seen the initial growth challenges across many other verticals.

Marketplace businesses are HARD. You could argue they are 2x as hard as a non-marketplace because you have to find Product/Market TWICE, for your supply AND for your demand. If you’re the founder of a marketplace business, you probably feel that’s closer to 200x as hard.

Lenny Rachitsky

Reid Hoffman likens building a startup to jumping off a cliff and assembling an airplane on the way down. Building a company is like assembling a Cessna. Building a marketplace is like assembling a Boeing 747.

Dave Lu

Go-to-market (GTM) strategy is something most startups start thinking about after they’ve started building the product. For marketplace founders it’s imperative you think about the GTM strategy before you start building the product. It will inform what you build.

Incorrect GTM strategies are the number one reason I see great teams fail when launching marketplace products.

If you’re a marketplace founder reading this, this post will help you find ways of growing more quickly and efficiently.

Zero Player Mode, if deployed correctly, is the most capital efficient way for marketplaces to grow. It’s relevant for both bootstrapped & venture-backed marketplaces. If you’re a founder you’re may be thinking ‘why should I care about capital efficiency?’

Higher capital efficiency = less capital required = less dilution for founders.

However in order to switch-on Zero Player Mode, first you need to enable Single Player Mode.

What is Single Player Mode?

As a marketplace when you first start out, you have to overcome the infamous chicken-and-egg problem or as Andrew Chen describes it in his recent book the ‘Cold Start Problem’. You have the challenge of attracting both buyers and sellers to the platform at time when you have no activity, which creates complexity. Complexity = cost.

Chris Dixon was one of the the first to coin the term ‘Single Player Mode’. Sangeet Paul Choudary calls it ‘Standalone Mode’.

'The idea is to initially attract users with a single-player tool and then, over time, get them to participate in a network. The tool helps get to initial critical mass. The network creates the long term value for users, and defensibility for the company'

Chris Dixon

It means that you create a tool which adds value to one side of the marketplace without the value proposition of connecting them to the other side of the marketplace.

Usually this product is a tool which solves a problem for the supply side.

While traditionally Single Player Mode has been defined from the user’s perspective (the customer who is using the product in standalone mode) I define it from the founder’s perspective (selling to one side of the marketplace, rather than two or more).

Let’s look at a famous example: OpenTable.

You know OpenTable today as a platform which sends hundreds of millions of diners every month to restaurants. They have a value proposition to restaurants which is two-fold:

1. Fill seats and drive revenue for the restaurant

2. Software tool for restaurants to manage their reservations

When they first started-out they could not deliver the first value proposition of driving revenue (at least without spending tens of millions of dollars they didn’t have on marketing). So they focussed on the second value proposition; they replaced the traditional pen and paper reservation book with a piece of software that saved restaurants time. They focussed their sales and marketing efforts on one side of the marketplace (restaurants) and didn’t add complexity and cost by simultaneously trying to attract diners.

Once OpenTable had a critical mass of restaurants and enough supply to create a valuable user experience to diners, they turned on the other side of the marketplace without having to spend any money on marketing. How? The restaurants were so enamoured with their electronic reservation system, they allowed OpenTable to install a widget on their website (the restaurant’s website) accepting reservations.

OpenTable then simply collected the contact information from every diner and very quickly had a network of hundreds of millions of diners which they paid close to no money to acquire.

The genius of the best Single Player Mode GTM strategies is that one side of the marketplace will sign-up the other side for you. For free.

There are some examples of Single Player Mode being enabled on the demand side in marketplaces, the most notable of which is Amazon. Amazon initially built a traditional online retail business and only enabled their marketplace once they had significant traction on the demand side of their site.

Alex Macdonald @alexfmac

'Marketplaces seeded with a Single Player Mode have 10x the capital efficiency of marketplaces promising to Fill Empty Seats for suppliers' Figure out how to launch with a Single Player Mode strategy. If you do, you won't struggle to raise money. And you won't need to either.

Single Player Mode is the best GTM strategy (if feasible) for marketplaces as it reduces complexity and increases capital efficiency.

Eli Chait analysed the 100 largest marketplaces in the world and found that Single Player Mode was the most popular GTM strategy (used by 34% of the top 100).

Marketplaces that used Single Player Mode include Amazon, Wish, Flipkart, Sofi, Zillow, Ticketmaster and Etsy (see full list here).

More importantly he found that Single Player Mode-enabled marketplaces have 10x the capital efficiency of marketplaces who use a ‘Fill Empty Seats’ go to market strategy.

While it is possible to build large and successful marketplaces with the ‘fill empty seats’ strategy (Uber and Airbnb are two very notable examples), the most capital efficient growth model is Single Player Mode.

Eli Chait: How the 100 largest marketplaces solved the chicken and egg problem

In summary: enable Single Player Mode by building a tool which is valuable for one side of the marketplace, make it so valuable that they help you sign-up the other side of the marketplace. Then you will be ready to enable Zero Player Mode.

What is Zero Player Mode?

Zero Player Mode is when you are able to switch off your marketing and sales efforts on the one side of the marketplace you’re focussed on (in Single Player Mode) and it continues growing through a sustainable growth loop.

Why would you enable Zero Player Mode? For most companies (both bootstrapped & venture backed) it enables them to:

1. Focus resources on product

2. Demonstrate attractive and improving unit economics

3. Extend their runway

However it isn’t right for every company and for those it is right for, it’s not right for every stage of the journey.

Only enable Zero Player Mode if:

1. Liquidity - you have reached a sufficient critical mass on one side of your marketplace (normally the supply side) and have clear product-market fit with that side. (If the supply side a goal might be 50-100 companies signed up with churn <5%)

2. Single Player Mode is successfully operating and your supply side is signing-up your demand (or vice versa)

3. Competition - you are operating in a niche without too much direct competition. (Zero Player Mode would not work in traditional food delivery marketplaces for example)

4. Cash - you are not swimming, Scrooge McDuck style, in a deep pool of venture capital with a pressure to put that money to work - the risk of a slowdown in growth far outweighs the reward of greater capital efficiency.

If you meet the criteria above, you’re ready to enable Zero Player Mode. So how do you do it?

Zero Player Mode is enabled by creating a sustainable referral program so that your supply side is signing up other suppliers as well as the demand side of the marketplace (or vice versa). While direct financial incentives can help drive this, it works best where there is an innate, organic reason why the supply side would want to bring on other suppliers. At first thought this may sound strange, why would a supplier want to bring on other suppliers would could compete?

To answer that question let’s take a look at one type of marketplace that has nailed Zero Player Mode in the past: creator economy platforms.

OnlyFans, Substack, Patreon, Twitch and other creator economy marketplaces have all to some extent successfully enabled Zero Player Mode at certain stages of their journey.

OnlyFans started in 2016 as a platform for creators (initially adult performers) to sell subscriptions for their content. It quickly grew to 8 million registered users within its first 3 years. The pandemic accelerated its growth to a reported $2b in gross sales, $400m in net revenue, $60m+ in net profit and more than 1 million registered creators in 2020. This meteoric growth was fuelled in the first few years by a Zero Player mode Strategy.

Creator Platform Revenue Data from Second Measure

When OnlyFans reached sufficient supply side liquidity, they enabled a creator referral program with huge potential earning power for existing creators, enabling them to earn up to $50k per creator referred (5% of the referred creator’s earnings). It’s still live to this day on their site.

The crazy part: OnlyFans saw significant referrals from creators to other creators before they enabled the referral program. Why?!

As a creator I’ve likely already advertised my OnlyFans account across my other distribution channels (social media, email lists), so if I want to grow my paid audience, the best way would be to bring other creators onto OnlyFans who will bring their audiences to the platform, enabling me to increase my addressable market.

There is an innate incentive for the supply side (creators) to refer other suppliers to the marketplace, as they will gain a larger paid audience as the marketplace grows, regardless of any other referral incentives introduced by the marketplace. This creates an organic flywheel which will keep spinning without investing in marketing or sales: Zero Player Mode.

From the outside it’s tough to say whether OnlyFans, Patreon and other creator economy marketplaces ever truly enabled Zero Player Mode by turning off their paid sales and marketing. I suspect most continued their paid acquisition programs to accelerate the flywheel.

There is one marketplace however where there is some evidence that Zero Player Mode was truly enabled: Gumroad.

Sahil Lavingia founded Gumroad in 2011 and quickly raised $8m in venture capital to start growing it. As he details in his introspective blog ‘Reflecting on My Failure to Build a Billion Dollar Company’; he failed to grow it quickly enough to raise further venture capital, so had to lay-off 75% of the team, cancel his office lease and grow it profitably. As he notes beneath the chart below, can you tell when he stopped having a sales team to drive creator growth? Well it was actually in October 2015, and the marketplace continued growing strongly after that, with Zero Player Mode enabled.

We had a sales team for a few years, then we didn’t. Can you tell when we made the switch? I can’t.

Sahil Lavingia - Founder & CEO of Gumroad

I reviewed more than 100 marketplace seed stage decks this year. It’s extremely rare to find founders who have thought about their go-to-market strategy in detail, and even rarer to find founders who have a Single Player Mode strategy outlined (despite it being the most popular growth strategy for the largest marketplaces in the world).

I have seen 4 companies this year who have the potential to enable Zero Player Mode (and 3 of them are not creator economy marketplaces):

1. Sellar - B2B drinks trade marketplace in the UK. They already have Single Player Mode enabled and grew revenue 436% this year (while spending the first half of the year bootstrapped & ramen profitable) - I invested.

2. Shopscribe - marketplace unlocking recurring revenue for local shops. Single Player Mode already enabled (shops are signing up the demand side) and potential Zero Player Mode characteristics - I invested.

3. Avvinue - an all-in-one marketplace for finding suppliers to help you move house / country. Single Player Mode is already enabled, and given the supply side is multi-vertical (movers, insurance companies, banks, estate agents etc) their is no disincentive for suppliers to bring on board both their clients and also other supply-side partners they have in other categories.

4. Offscript - a 3-sided (creators, fans, brands) creator economy marketplace enabling creators to sell products directly from brands on their own instagram-integrated e-commerce solution. I only started speaking to the founder Pontus last week, but it is already exhibiting Zero Player Mode characteristics (creators are signing up their fans, other creators and brands).

In summary - if you’re a marketplace founder here’s the ideal go-to-market strategy in terms of capital efficiency:

1. Create a software tool which solves a problem for one side of the marketplace (likely the supply side), which will be your primary value proposition (rather than driving demand for them).

2. Enable Single Player Mode and ensure the tool enables that side of the marketplace to sign-up the other side for you.

3. When you reach sufficient liquidity (50-100 customers with <5% churn), create a lucrative referral program for them to sign up other suppliers for you. Ideally there will also be an innate incentive for them to do so (bringing more customers on to the platform for example).

If you’re a marketplace founder and would like some advice on your GTM strategy or help activating Single or Zero Player Mode, message me on Twitter.

If you enjoyed this post, subscribe below to get further updates.

I’d like to thank James Lamming, Evan Goldin, Ben Kennedy and Ali Dinani who took the time to give me detailed feedback on the post. They all run interesting marketplace businesses, you should check them out.

📚Further reading on marketplaces can be found in my Marketplace Library, with more than 200 books, blog posts, podcasts, videos and research papers on marketplaces.

Specific highlights related to this post:

Lenny Rachitsky - Magic Growth Loops

Eric Feng - Digital Native Vertical Creators

Eli Chait - How the 100 largest marketplaces solve the chicken-and-egg problem

Chris Dixon - Designing products for single and multiplayer modes