How To Properly Vet Vendors for a Two-Sided Marketplace Startup
By: Joe Procopio
Tags: Technology, Product Management, Business, Entrepreneurship, Startup

How To Properly Vet Vendors for a Two-Sided Marketplace Startup

The biggest vetting mistakes can be avoided

image by teravector

Don’t let vendor incompetence sink your marketplace.

I’ve written a ton about digital marketplaces this year. And as a longtime creator of such marketplaces, I’m not surprised at where most founders are making their mistakes.

It’s not crap technology, it’s not poor UX design, and it’s not lack of customer demand. In fact, 2020 saw to it that those three barriers were, if not removed, certainly lowered to a common denominator.

No tech experience? No problem, just go no code. On top of that, a quarantine-accelerated acceptance of digital models, as well as the forced boost in the demand for those models, created unending waves of new and ready-to-engage markets.

In 2020, the entire world learned, networked, collaborated, and even exercised and socialized online in a way that would have seemed shocking in 2019.

Nope. Without question, the majority of mistakes are being made on the vendor fulfillment side.

Game changers and posers

In a lot of ways, marketplace startups in 2020 remind me of digital currency and blockchain startups in 2016. For every truly game-changing application of the underlying technology, there were several poorly-designed, hastily-constructed, and minimally-vetted projects underwritten by people who assumed there were better controls in place.

There is enormous opportunity in digital marketplaces, never more than right now. But just as the roller-coaster ride of Bitcoin shows us that success or failure of a new technology is pinned to the customer acceptance of the infrastructure, digital marketplaces will live and die on trust.

And trust in a marketplace is only as valid as the trust in its vendors.

The case for vendor vetting as the most important marketplace problem to solve

Last week, I wrote a post on vendor availability and the need for building a vendor bench slowly. I got a ton of positive feedback from that post, mostly from folks who have been down that road and fallen into the trap.

My point in that post was that fulfillment strategy varies wildly from market segment to market segment, and even from vendor to vendor. If a marketplace platform isn’t equipped to handle and reduce the differences, the complexity and inconsistency of transacting will eventually turn off the marketplace’s customers.

Now, that’s the most damning cause of marketplace failure, but the vendor quality problem is the hardest to solve, especially consistently. It’s also the one a marketplace must solve before it becomes a problem.

Why? A marketplace isn’t just digital real estate where goods and services can be transacted. By its very existence, a digital marketplace tacitly vouches for every product or service it offers. This is true even for two-sided or third-party marketplaces.

So of course, the top reason why vetting is critical is to ensure against vendor fraud and misrepresentation — but that reason also happens to be the easiest reason to ignore. There are a few bad actors in any sector, not a ton. Consider, however, that there are plenty of incompetent actors out there, and wanna-be actors, and experts of fields in which there isn’t any credentialing or governance.

The marketplace needs to serve as that governance, not only for its own ethical reasons and reputation, but also because the true value in a marketplace startup is in its customer experience. One bad vendor can do a ton of damage, and usually, that damage can’t be undone.

First determine exactly what the vendor relationship is

Before I get into vendor relationship, I’ll talk a bit about vendor classification, because those are completely different topics requiring completely different vetting strategies.

At Spiffy, the mobile auto-maintenance-on-demand startup where I recently served as Chief Product Officer, we offer a combination of first-party services (our own W2 employees providing our own services to our customers), third-party services (we offer another company’s services to our customers through a corporate partnership), and a two-sided marketplace (we recruit vendors to operate as service providers to our customers).

There is obviously a very standardized contracted relationship with W2 employees and corporate partners. However, most marketplaces rely on that third classification — vendors operating as individual contractors — and that’s where a relationship needs to be strictly defined.

Note that no matter what service or provider combination I listed above with Spiffy, in each case, they are serving OUR customers, and every marketplace should identify its customer base as their own customers, not the vendor’s customers.

That’s the first relationship distinction. Marketplace vendors are the startup’s corporate partners, but without all the name brand recognition.

Marketplace vendors aren’t employees, so the startup has neither the liability nor control they’d have with an employee. But here’s the mistake a lot of marketplace startups make. Marketplace vendors aren’t just users or customers of the marketplace platform, even if they are classified as such.

The exchange of money through the startup’s platform means that, regardless of all the caveat emptor the startup may communicate to its customers, the customers will come at the startup for resolution. In other words, if your Uber driver sucks, you’re going straight to Uber.

Just imagine this is in all caps: Personally vet every vendor

I’ve also spent a ton of career time using technology to automate manual processes, from washing cars to writing sports articles, So I can also emphatically state that almost no automation gets around the 80/20 rule.

That rule states that when automating any task, 20% of the time should be spent verifying the accuracy of the automation, if not actually completing the task.

And since there are virtually zero success stories in the total automation of vetting a two-sided marketplace provider, a marketplace startup should be prepared to spend a lot of time talking to vendors, whether that’s via email, phone, or Zoom.

Not every vendor needs a formal interview in front of a panel of experts. I’m just saying that the more time that a marketplace startup can spend interacting with the vendor, the more opportunity they’ll have to find red flags, warning signs, exaggerated qualifications, and things that should have been known when things go wrong.

Verify credentials, insurance, bonding, employment, and clients

Not every marketplace requires formal documents from its vendors, but if they do, they should always be verified. Negligence rarely happens by being fooled by a phony document (although it can), it mostly comes about by not bothering to verify the document in the first place, or even requesting it.

When a marketplace startup is offering services from expert service providers, especially the kind that are going to sell themselves through their employment and client list in the provider’s bio or description, the startup needs to be in control of what goes into that bio or description.

Again, this is not always mandatory, but experience has taught me that vendors will lie when they think they’re not going to get caught.

Ask for digital evidence before human vetting

There’s nothing inherently wrong with using digital sources as a vetting mechanism, as long as the vetting doesn’t stop there. Digital evidence can help the startup execute the human interaction in a much more efficient manner.

Almost everyone who is good at what they do has a website to show off how good they are at what they do. Failing that, LinkedIn or something like it can be good digital evidence, but only if there’s detail. Most social media is pretty easily faked.

Again, and this is the biggest vetting mistake I see, digital evidence should not be the only source of vetting. It’s a good gating mechanism. If the vendor fails this part, no human follow-up needed.

Ratings and feedback as a vetting pulse check

Finally, once the vendor is on the platform, the platform should give the customer every opportunity to rate the vendor. That rating opportunity should revolve around specific actions, not just the customer’s vague appreciation of the vendor.

Ratings without reasoning are vanity metrics. Ratings with reason not only help the marketplace startup create a better offering, but also help the vendor improve their performance within the confines of the marketplace.

And like all the vetting methods I’ve talked about, those ratings need to be reviewed and verified using no more than 80/20 automation. Because any vetting mechanism that isn’t verified by a human just can’t be considered the truth. If the information can’t be verified, then that’s on the vendor. If it can be verified, but isn’t, that’s solely on the marketplace startup.

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