Most people don’t even realize the problem until it’s too late.
The first startup I ever built was the type of company that people in the entrepreneurial community usually describe as the “hardest type of startup.” It was a two-sided marketplace.
Two-sided marketplaces are considered the hardest types of startups because founders need to solve the “chicken or the egg” problem — as-in that old philosophical puzzle: Which came first, the chicken or the egg?
In the case of a two-sided marketplace, it needs some type of supplier and some type of buyer. However, without suppliers, the marketplace won’t attract any buyers. And, without buyers, the marketplace won’t attract any suppliers. The result is an empty marketplace and a founder struggling to get initial traction.
My first startup turned me into one of those struggling founders desperately trying to get traction for a two-sided marketplace. Ultimately, the company failed miserably, and I swore I was never going to build a company like it again.
The good news is I didn’t. The bad news is my next startup was almost as difficult. It was the second-hardest type of startup, and it failed just as miserably.
What’s the second-hardest type of startup?
While lots of people in the startup community like discussing the hardest type of startup, they rarely talk about the second-hardest type, which is almost as difficult to build, but nobody warns entrepreneurs about it. Because of this, I suspect more founders fail every year struggling to build the second-hardest type of startup than the hardest type of startup.
To be fair, I don’t have any hard evidence to support my claim. However, I have plenty of experiential evidence based on all the startups I personally see. From what I can tell, for every one entrepreneur I encounter building a two-sided marketplace, I’ll speak with at least 10 entrepreneurs attempting to build this other difficult type of startup.
To help explain the second hardest type of startup and why it’s so difficult, I’ll describe a startup I encountered during a recent conversation with its two co-founders. They had built a financial literacy app for parents to give their high-school-aged children.
On its surface, the problem seems reasonable enough. Children aren’t great with money. Parents need to teach them to be more financially responsible. What could go wrong?
The answer: Lots can go wrong.
The reason: The buyer isn’t the same as the user.
Let’s call this “the buyer-user mismatch” problem.
In the case of the financial literacy app I’ve described above, the expected buyer is the parent. But the parent doesn’t use the app. The end-user is the child. On its surface that might not seem like a big deal; however, in practice, it creates an enormous challenge for founders related to customer (and user) acquisition and onboarding.
The challenge of having buyer-user mismatch
When a product’s buyer isn’t the same as a product’s end user, the company developing that product encounters a huge operational burden. To understand that burden, first take a moment to consider how traditional companies operate where the buyer is the same as the end user.
When selling a product directly to its end user, entrepreneurs need to educate that end user about what the product does, why it’s valuable, and how to use it. Each of those things requires enormous amounts of time, effort, and resources.
Now imagine selling a product like the financial literacy app I’ve described above where the person buying it is different from the person using it. In that scenario, the entrepreneur still needs to build all the things I’ve described above in order to make the initial sale. In addition, after making the sale, the entrepreneur needs to deliver an entirely different set of resources in order to teach, educate, and/or train the end-users.
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In other words, a startup with a buyer-user mismatch basically has to market, sell, and train two different companies at the exact same time, meaning founders have to do twice the work with the same amount of limited resources.
The challenges associated with the second hardest type of startup are difficult for reasons that are completely different from the chicken-or-the-egg problem. The chicken-or-the-egg problem is hard to overcome because it requires a wildly creative (and somewhat lucky) solution.
In contrast, the buyer-user mismatch problem isn’t an issue that gets solved through creativity and/or luck. Instead, buyer-user mismatch problems have to be solved through brute force. Simply put, when a product’s buyer isn’t the same as a product’s end-user, founders are stuck with an enormous amount of additional work. If they can’t do all the extra work, their companies fail.