The Marketplace Checklist: How to Evaluate and Build Network Effect Machines
The Marketplace Checklist: How to Evaluate and Build Network Effect Machines
A tactical framework inspired by Mike Ghaffary to assess supply, demand, liquidity, and scale—used by Team Ignite to back the next generation of breakout platforms.
At Team Ignite, we’re fortunate to work with early-stage founders building the next wave of category-defining marketplaces. These companies don’t just connect buyers and sellers—they orchestrate trust, liquidity, and behavior at scale. But spotting the breakout opportunities early requires more than instinct. It requires a structured way to evaluate what really matters.
This checklist was originally developed by Mike Ghaffary, General Partner at Burst Capital and one of the sharpest minds in the marketplace world. He’s backed and built legendary platforms and joined us on episode #154 of the Ignite Podcast to break down the nuances of what makes a marketplace work.
Whether you're a founder refining your wedge, or an investor looking to level up your diligence, this framework outlines what great looks like—across both supply and demand dynamics, network effects, monetization, and more. We’ve included a range of answers from “best” to “poor” to help calibrate what strong execution really looks like in each category.
Marketplaces don’t just grow—they compound. And the winners are often decided early by the quality of their insights, execution, and flywheel strength. This is how we break them down.
1. Which side of the network values the other side more?
Best: One side is deeply reliant on the other, showing measurable willingness to pay, refer others, or churn if the other side shrinks.
Good: Clear value asymmetry with some qualitative or anecdotal evidence, like preference surveys or feature usage.
Okay: Perceived value is roughly equal or unclear which side drives growth.
Poor: Neither side appears particularly dependent on or enthusiastic about the other; weak engagement.
2. Is there an effective and proprietary method for distribution to each side of the marketplace, especially the more highly valued side?
Best: Scalable, cost-effective, and proprietary distribution strategy with strong ROI, e.g., SEO moat, API integrations, or exclusive partnerships.
Good: Clear GTM playbook working well today, though not unique or defensible long-term.
Okay: Reliant on generic, competitive channels (e.g., paid ads) with moderate success.
Poor: No clear strategy or inefficient CAC; over-reliance on manual outreach or unsustainable tactics.
3. How strong are cross-side network effects, is there a metric that can measure that, and how has it tracked over the last year?
Best: Strong cross-side NFX backed by data (e.g., each 10% increase in supply drives 12% demand); improving YoY.
Good: Evidence of network effects but hard to quantify or slightly declining growth elasticity.
Okay: Loose or inconsistent NFX with weak correlation between sides; flat trendlines.
Poor: No measurable network effects; sides grow independently or cannibalize each other.
4. Are there same-side network effects, and how strong are they?
Best: Meaningful same-side NFX (e.g., buyers benefit from buyer reviews/community); boosts retention.
Good: Same-side NFX exists in niche segments or specific use cases.
Okay: Weak or nascent same-side effects; mostly theoretical.
Poor: No sign of same-side value creation or worse, competition/dilution.
5. What are switching costs for each side?
Best: High switching costs (e.g., embedded workflows, escrowed funds, reputation systems).
Good: Moderate friction via integrations or identity/review systems.
Okay: Low switching costs, but product stickiness compensates.
Poor: Easy to multi-home or churn; no lock-in or loyalty mechanisms.
6. What are LTV and CAC for demand and supply side?
Best: High LTV/CAC ratio (>5x) on both sides, with fast CAC payback (<6 months).
Good: Solid LTV/CAC (>3x) and breakeven within 12 months.
Okay: LTV/CAC ~2x with long payback periods or one side underperforming.
Poor: Sub-1.5x ratios, poor retention, or unsustainable CAC.
7. What does liquidity look like, and how do you measure it?
Best: >80% of supply matched within 24–72 hours; tracked rigorously (e.g., match rates, fill time).
Good: Steady improvement in liquidity KPIs; some friction but improving.
Okay: Patchy liquidity; some categories/geos lag.
Poor: Low match rates, long fulfillment times, or no standard liquidity metric.
8. What is frequency of use (transactions per month) for demand and supply side?
Best: High-frequency use (weekly/daily); strong habitual engagement.
Good: Monthly or episodic use aligned with core use case.
Okay: Irregular or seasonal usage.
Poor: One-and-done users dominate; minimal repeat behavior.
9. What is average transaction size for demand and supply side?
Best: High transaction value with good margin and low churn risk.
Good: Mid-size transactions with scalable volume potential.
Okay: Low AOV but high frequency or upsell potential.
Poor: Tiny transactions with high churn and no path to monetization.
10. What is the marketplace take rate or monetization model, and what is the sustainable take rate over time and why?
Best: Take rate 10–30% with strong justification (e.g., full-stack service, payments, risk reduction).
Good: 5–15% take rate with potential to grow via premium services.
Okay: 3–5% take with pressure from competition or user pushback.
Poor: Marginal take rate (<3%) or unproven monetization model.
11. Does it get easier to acquire incremental supply and incremental demand as this marketplace grows?
Best: Strong flywheel; CAC drops and referrals increase with scale.
Good: Some economies of scale visible, with product-led growth.
Okay: Flat acquisition efficiency; scale hasn’t helped much yet.
Poor: CAC rises over time; diminishing returns with scale.
12. How fragmented is the supply side?
Best: Highly fragmented with millions of potential suppliers; low bargaining power.
Good: Moderately fragmented; some concentration risk but manageable.
Okay: Fragmentation limited to a few categories or geos.
Poor: Supply concentrated in few large players or gatekeepers; power imbalance risk.
13. Is there an initial focus on one or two geographies or categories, and how strong are the network effects there?
Best: Deep penetration and high NFX in a niche beachhead market; showing market dominance.
Good: Focused entry with some traction and early signs of NFX.
Okay: Broad market entry; light traction in several areas.
Poor: No clear beachhead strategy; scattered efforts.
14. What is the winning strategy for that initial market, and what is the plan to scale beyond that?
Best: Crystal-clear wedge strategy with proven GTM playbook and logical expansion path.
Good: Initial market defined with a plan to expand via adjacencies or verticals.
Okay: Strategy loosely defined; unclear how to replicate early success.
Poor: No clear path to expansion; growth assumptions are vague.
15. Is there a new product enhancement to the marketplace/transactional user experience?
Best: Breakthrough improvement to UX, fulfillment, or trust—sets a new bar in the category.
Good: Nice-to-have features that simplify parts of the experience (e.g., mobile app, scheduling).
Okay: Some basic improvements, but not transformative.
Poor: Same-old UX; clunky or indistinguishable from legacy competitors.
The best marketplaces aren’t static—they’re living, breathing systems where each interaction strengthens the entire network. The most compelling founders get this. They obsess over unlocking liquidity, eliminating friction, and driving value creation with every transaction.
This framework isn’t gospel—but it is a powerful lens. It’s meant to help founders pressure-test their model, and help investors cut through noise with clarity and consistency. We use it often at Team Ignite when evaluating early-stage opportunities—and when helping our portfolio companies build real traction before scaling.
We believe marketplaces, when built right, are one of the most durable and compounding business models in tech. The strongest ones don’t just grow—they get better, faster, and stickier with every new user.
Keep digging. Keep refining. The signal is always in the nuance.