Thinking about some of the world’s game-changing startups, you’ll quickly realize a lot of them are marketplaces — eBay, Uber, Airbnb, etc. The “platform economy” is the future, and marketplaces are its vital components. The competition among marketplaces is cutthroat, though — statistically, online platforms account for 40% of online retail.
As a marketplace developer or business owner, chances are that you are wondering how to make an impactful presence for your platform, and where to find funding to get a next-generation marketplace off the ground. In this post, we will take a look at the top methods for how to raise funds for a marketplace startup.
Investments for Online Marketplace Startups: Key Major Trends
In 2021, what are investors and Venture Capital (VC) firms looking for in a successful startup? We took a closer look at the industries with the most booming marketplace landscapes and zoomed in on trends that will define the future of marketplace development.
Here are the trends that will shape marketplace demand in the next 5-7 years:
|Industry||Key industry trends||Top online marketplaces|
- Organic food markets
- Online grocery shopping
- Meal kits
- Blue Apron
- Hello Fresh
- On-demand education that helps people acquire relevant skills
- Remote education and homeschooling
- Financial and trading consulting
- Insurance provider marketplaces
- Increased demand for in-city car travel (as a growing number of people try to avoid using public transport)
- Governments encourage micro-mobility (e-scooters, e-bikes) to reduce air congestion
2020 led to fundamental changes in the online marketplace market. In the pre-COVID world, the most popular platforms were those primarily selling electronics and books. Now, marketplaces have a powerful presence in almost all fields of life: they are prominent players in meal shopping, education, healthcare, and other industries.
As can be seen from the table above, regardless of the field, the key market demands for online marketplaces are speed, customer support, online shopping safety, and convenience.
Online Marketplace Startups Funding: Companies That Got Most Investors' Attention
According to Andreessen Horowitz, a leading VC firm, 2020 was a busy year for online marketplace startups. The company put together a list of marketplaces that stormed into the startup community and gathered impressive funding.
“We were surprised by the number of startups that had made it to the list, including many relatively unfamiliar names”
In this blog, we have selected the most rapidly-developing companies across all marketplaces that made it to the list, and took a closer look at these platforms to get an understanding around how a marketplace startup raises money.
- MilkRun — a grocery shopping company, that connects farmers and wellness-oriented shoppers, has made 12 times more in 2020 than it had in the two years prior. The marketplace is expanding its reach and is now partnering with over 150 farmers.
- Instacart — an online meal delivery marketplace closed an impressive deal in October 2020, raising $200 million.
- EzCater is the largest catering marketplace that, since its creation in 2007, raised over $170 million in funding.
Health and wellness
- Instacart — an online fitness marketplace that raised $300 million in investments, closing a deal with Softbank.
- Classpass — at the beginning of last year, the marketplace that connects fitness enthusiasts and gym instructors for online classes raised $285-million in investments.
- GOAT — a sneaker marketplace platform closed a Series E deal last year, raising $100 million for expansion.
Top 5 Ways to Raise Money for a Marketplace Startup
Statistics point to the fact that marketplaces are “the next big thing” and it’s no surprise that a growing number of investors can be found placing bets on B2B and B2C online platforms.
Despite the booming growth of marketplaces, it’s normal for business owners to feel overwhelmed when trying to secure funding. To get a sense of direction in online marketplace fundraising, take a look at these methods to raise funds for an online marketplace startup.
Bootstrapping is a fancy word for financing a startup on your own, without reaching out to investors. A lot of companies owe their success to bootstrapping — GitHub, BigCommerce, and many more
While bootstrapping brings undeniable benefits to the table, such as the freedom of decision-making, it also comes with a major drawback — there’s a limit to how much money business owners can spend on marketplace maintenance.
- Time savings
- Operational freedom
- Full ownership of the platform
- No need to share confidential data with investors
- No oversight
- High budget needs
- Limited scalability
There are times when business founders can generate public interest in the platform and have future users fund its development. The “Hall of Fame” for crowdfunded projects is impressive — Oculus VR, Allbirds, and other startups have become multi-million companies after raising funds on Kickstarter.
Online marketplace funders can consider leveraging the power of crowdfunding, as well.
- Gathering a user base for the future platform
- Full ownership of the product
- Quick way to raise funds
- Attracting donors requires a lot of effort
- Business owners need to come up with incentives for contributors
- High failure rate
Business incubators provide business owners with a growth-oriented environment for building and raising money for a marketplace startup business. In addition to connecting with investors and prospective users, company managers can learn by watching other startup owners get their projects off the ground.
- Learning-induced environment
- Exposure to users and investors
- Mentoring programs
- Rigorous selection
- Partially giving up ownership of the company
- Long waiting periods between program cycles
4. VC funding
VC funding is a mature way to get funds for a marketplace startup. After pitching the project to venture capital firms, business owners can get private equity and, in return, they pay investors back through delayed profit and shares.
VC online marketplace startups funding makes it possible to generate multi-million dollar investments; however, closing the deal with a firm takes a lot of time and effort
- VC firms usually provide startups with multi-million dollar investments
- Wide range of VC firms
- No application fees
- Partly giving up ownership over the company
- Preparation takes a lot of time and effort
- Need to compete with other startup owners
5. Angel investment
Angel investors are people who have amassed a following in the niche and are financially independent. For the sake of exposure or new monetization opportunities, these individuals invest in potentially promising startups.
As the name suggests, “angel” investors typically have more reasonable terms and lower interest rates than venture capitalists.
- Support and oversight from the investor
- Reasonable deal terms
- Introductions to key players in the industry
- Limited funding capacity
- Investors are hard to find
Review of Top Platforms to Find Funding for Online Marketplace Startups
Regardless of the answer you may end up with when you ask the question on how to raise capital for a marketplace startup, keep in mind that you are in it for the long run. Not vetting investors properly puts you at risk of data leaks or ownership hijacking schemes.
To make sure you embark on an online marketplace development journey armed with the right tools and connections, here is a top list of fundraising platforms and companies.
- Indiegogo is one of the leading crowdfunding platforms. Its highest-grossing projects have raised multi-million targets — over $51 million for Pamu Slide, $36.2 million for Ninebot Max, and more. The platform is easy to work with — it allows business owners to choose between 'all-or-nothing' or 'take-what-you-get' funding. Also, you can keep receiving investments after the campaign is closed with Indiegogo InDemand.
- Patreon is a widely used platform to support online creators. Although it’s mainly geared towards influencers, business owners can use the platform’s infrastructure to fund online marketplaces. The benefits of the platform include flexibility of rewards, an internationally accessible payment gateway, and reasonable (5%) processing fees.
Angel investment platforms
- Republic is a platform that connects private investors and startup owners. In 2020, over $150 million was raised through the Republic. On the one hand, it introduces startup owners to a wide pool of investors. On the other hand, the platform has high processing fees and does not allow business owners to collect investments for online marketplace startups until they reach the funding goal.
- WeFunder is another platform that aims at making the investment process simple and mainstream. Similar to Republic, it helps startup owners get to know thousands of investors worldwide; however, few of them are ready to back companies with millions of dollars — the investment minimum on WeFunder is $100.
- Y Combinator This is the most renowned accelerator program among startup owners, and has successfully funded over 940 companies. Enrolling in this incubator will introduce startup owners to key players in the marketplace industry. On the other hand, business managers need to brace themselves for hardcore competition — over 10,000 companies apply to every hosted batch.
- 500 Startups is a global incubator, running in over 75 countries and boasting an impressive track record — with over ten years in business, the company has funded over 2,400 startups including the famous online education marketplace, Udemy, and the Canva design tool.
Read also about how to develop an EdTech startup.
- Union Square Ventures has an eye for promising marketplaces — the company was among the key investors for Etsy, MeetUp, and other renowned names in the marketplace industry. The firm invests selectively, though — since 2003, it has founded only a few hundred startups, most of which went on to become impactful players in their respective fields.
- Sequoia VC Taking credit for investing in Google, Apple, and Youtube, Sequoia VC helped bring up the world’s most legendary companies. It is open towards providing funding for an online marketplace startup team of developers, with platforms like Instacart, Moovit, and Airbnb in its portfolio.
Running an online marketplace startup is challenging — business owners need to offer the technology, and acquire both suppliers and customers. At the end of the day, however, there’s a lot of room for scalability and revenue generation.
To make sure budget constraints don’t hold you back from making the most out of your platform, put some time into researching fundraising strategies and identifying top platforms that can fuel your startup’s growth. Rather than trying to successfully leverage every tactic on the list, focus on two or three high-priority fundraising methods and make the most out of them.
To develop a reliable online marketplace platform and get expert assistance on managing the startup, reach out to WTT Solutions. Our experts help business owners build and maintain small-scale and large-scale marketplaces. We design both B2C and B2B-facing platforms across all industries.
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