This post was originally published as a Twitter thread.

The best consumer marketplaces end up supply-constrained, because they tap into an incredible amount of demand. For instance, Airbnb, Lyft, and Uber have seemingly infinite demand since the product-market fit is so strong — and this demand puts pressure on supply.

Everyone talks about chicken-and-egg as if demand and supply were equivalent problems. But identifying a widespread user need and driving tremendous value for the demand side is what underpins successful consumer marketplaces.

Only once you solve a demand problem, and provide a 10x better solution than what existed before, do you have the luxury of being supply-constrained as a marketplace.

I often see early-stage marketplace founders during the idea-picking stage focusing too much on the needs of the supply side. “Suppliers in [industry] need better monetization, more data, lower fees, etc, which is why we’re creating a marketplace that helps them with this!”

But the most successful marketplaces didn’t start by solving supply problems. Homeowners likely weren’t thinking pre-Airbnb, “I have a spare room and need to monetize it,” or car owners pre-Lyft, “My car is unused all day; I want to get paid for driving it around.”

Instead, these marketplaces started with acute, widespread demand problems.

They honed in on user needs that already existed — for affordable places to stay and convenient transportation — and were poorly or insufficiently met, then leveraged underutilized supply to fulfill the latent, excess demand.

“Chicken-and-egg” becomes “supply, demand, supply, supply, supply.” Translation: Identify a user problem, then bootstrap enough supply to make the marketplace valuable to initial users. Once there’s product-market fit, focus on scaling the supply side to meet all the demand.

With marketplaces, it’s relatively easier to attract the supply side because they’re economically motivated and will usually meet demand where they are. Marketplaces can bootstrap supply by creating single-player tools, paying suppliers to join the network, or using other tried-and-true tactics.

However, it’s more difficult to aggregate demand, and tremendously more difficult to create new consumer demand where it didn’t exist before.

Humans have remarkably stable needs throughout time and across cultures — for entertainment, belonging, acceptance, friendship, communication, shelter, etc. — but the particular solutions change and improve over time. So in building a marketplace, start with what the demand needs!

Thanks to @andrewchapin and @andrewchen for interesting conversations that inspired this.

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