There are many things that make building and scaling marketplace businesses hard: for example, there’s the quintessential chicken-and-egg problem of building and balancing supply and demand, and there’s the need to build two or more products in parallel to serve the needs of the different participants in your marketplace.
There is also the question of how you scale your marketplace once you’ve got product-market fit established and some unit economics that seem to work.
Electrons vs Atoms
Most marketplaces have to deal with the tangible, real world: unlike pure software/SaaS companies, marketplaces have to deal with whole atoms, rather than just electrons.
Those atoms might make up people, or cars, or meals, or apartments but they are physical resources that have to be managed. This is why marketplaces tend to need significant operational headcount.
However, most marketplace companies aspire to be, and actively position themselves as, technology platform companies. This of course requires an ongoing investment in product/engineering.
Given finite resources, how do you choose between scaling a market place through operation headcount versus product/engineering investment? How do you strike the right balance?
I did some quick research to look at what other marketplace businesses are doing.
I took a basket of marketplace companies at varying funding stages and looked at their employee counts on LinkedIn by role.
Firstly, let’s set the scene by looking at the absolute number of engineers that various marketplaces have and compare that to their funding stage:
Perhaps no surprises here: as marketplaces develop, they hire more engineers. I am struck, though, by the widely varying number of engineers that the earlier stages marketplaces seem to have.
Now let’s look at the ratio between operational headcount and engineering headcount in these same companies:
This is also what you might expect. Although the data is noisy*, it seems that as marketplaces grow, they become less dependent on operational headcount. Presumably, their investments in product/engineering payoff in terms of automations and efficiencies.
Of course there’s also survivorship bias here – these are only the marketplaces that are still around. Perhaps the ones that didn’t make it had wildly different ratios.
What would be great is to get historical data on these ratios and see how that correlates with outcomes. Unfortunately, I don’t have that data (if you do, let me know!).
My bet would be that a higher ratio of operational to engineering headcount is hard for marketplaces to wean themselves off – i.e. it’s hard to change the ratio over time. If you organization gets accustomed to scaling and solving problems by hiring ops people rather than hiring engineers to automate, that just gets amplified over time.
* my methodology here was simply to search on LinkedIn for people with “engineer” and people with “operations” in their job title. This is obviously error prone for a number of reasons. For example, some “engineering” roles have “operations” in their job titles, and not all headcount are necessarily on LinkedIn, especially if a company outsources or off-shores some functions. However, given a sufficiently large sample set, one would hope that these effects blend out.
Brute Force Growth vs Long-term Value
Like any business, marketplaces have to continue to show top-line revenue growth in order to maintain the faith of investors and employees and be able to continue to raise money. The first, second, and third rules of business are “don’t run out of money“.
However, while it’s possible to “brute force” growth of many marketplaces through reliance on operational headcount in the short to medium-term, I believe this strategy has large associated dangers in the longer term.
In a perfect world, you could scale both operational and product/engineering headcount as needed but, in reality, you will be forced to choose between spending each $1 on one or the other. Here’s my quick take on the pros and cons:
In summary, the biggest danger with scaling by adding operational headcount is that it works…in the short-term. It’s also cheaper. But, the danger is that you win the battle but not the war.
Agree or disagree, please leave a comment.