Gurley tests marketplace strength by asking if value to one side grows exponentially as the other side scales.
“When I push entrepreneurs to think about this and it gets to your increasing marginal utility, but I just say, as you penetrate a supplier base, one side of a marketplace, whatever, is the value proposition to the other side going up? And ideally, it would be going up exponentially, which is super hard.”
Gurley shares his unpublished formula for evaluating network effects using value versus market penetration.
“If it's a two sided network, you could build one for the value to the supplier, one for the value to the consumer. On the x axis is your penetration into the market.”
Gurley coined the term liquidity quality and prioritizes it over geographic breadth when evaluating marketplaces.
“And I've come up with this phrase I use internally that I made up. So I one day I'll have to write a definition of it, but I call it liquidity quality.”
Gurley introduces his concept of liquidity quality as more important than geographic breadth for marketplaces.
“So I one day I'll have to write a definition of it, but I call it liquidity quality. And I tell entrepreneurs I care way more about that than I do how broad you are.”