The virtuous cycle is the holy grail for online marketplaces. In this positive feedback loop, a high number of quality suppliers attract more customers; then more customers attract more suppliers to join. This cycle continues as a self-sustaining growth engine until both supply and demand reach critical mass to be “winner takes all.”

But how does a marketplace create the momentum for a virtuous cycle in the first place?

Identify and double down on the hot spots

One of the most important things you can do is identify and double down on the things that work in your marketplace. As your marketplace starts scaling, there will be many matches and transactions between buyers and sellers. But not all matches are created equal. Identify where things are really clicking (on both the supply and demand side) – this could be in certain geographies, audience segments, price points, and user behavior.

Then you’ll want to double down on these hot spots, often following Paul Graham’s advice to do things that don’t scale. Don’t worry that the absolute numbers hardly seem worth the effort. At this point you’re just trying to get the virtuous cycle going. If the market exists, you can recruit your suppliers and customers manually, then switch over to less manual (more scalable) methods.

“At some point, there was a very noticeable change in how Stripe felt. It tipped from being this boulder we had to push to being a train car that in fact had its own momentum.”?Patrick Collison, Stripe (source: http://paulgraham.com/ds.html)

Airbnb is a classic example. Founders Brian Chesky, Nathan Blecharczyk and Joe Gebbia frequently traveled to NYC to acquire their early users. Then when they realized that high quality listing photos were key to attracting customers (and differentiating the experience from Craigslist), they rented a $5,000 camera and went door to door, taking professional pictures of as many New York listings as possible. This approach led to two to three times as many bookings on New York listings.

“When New York took off, we flew back every weekend. We went door to door with cameras taking pictures of all these apartments to put them online. I lived in their living rooms. And home by home, block by block, communities started growing. And people would visit New York and bring the idea back with them to their city.” – Brian Chesky, for The Atlantic

Be Patient: marketplaces take time

With a typical SaaS or e-commerce start-up, you probably should reassess your market or model if you don’t see signs of traction after six to nine months. However, this timetable is way too accelerated for marketplaces. Considering you need to establish both buyer and seller communities, you will need more time to prove out your business. As I wrote in Forbes, it can take three years for a marketplace to get going.

Looking at some Version One portfolio companies…

• It took Wattpad, a community for readers and writers, three years to get to 300,000 uploads; then it only took another three years to reach 10 million.
• Crowdfunding platform Indiegogo was founded in 2007, but its break-out year didn’t come until four years later.

This means that founders need to believe in their idea even when no one else does. But that doesn’t mean turning a blind eye to the market. You’ve got to continually look for small signals that you’re on the right track – such as increased word of mouth from early adopters, increased repeat usage from buyers, increased listings from sellers, and positive user feedback.

Just as importantly, investors need to stay patient: no two-sided marketplace is built overnight.