How do you raise funds for your online marketplace startup? Top funding rounds & sources

With the changing consumer preferences toward online shopping and ordering, the popularity of digital marketplace platforms continues to rise. The demand for marketplace apps has surged across a number of industries, including e-commerce, food service, healthcare, e-learning, ride-sharing, art, fashion, real estate, freelance, and human resource management.

Regardless of the sector, in which you aim to launch an online marketplace startup, you will need resources to put your idea into life. However, even if the initial budget allows for creating a technology startup, there are still risks of failure. In 2021, 20% of small businesses went down within the first year, 50% fell through during five years, and 65% — within 10 years. According to CB Insights, 38% collapsed because of running out of cash.

Therefore, it is essential to learn the ins and outs of raising funds to prevent financial bottlenecks. In this article, you will find out how to attract investment and increase the chances of building a successful marketplace startup. On top of that, you will gain insights into the current landscape of investing in marketplaces. Let’s begin.

Online marketplace startup investment in 2021

Dealroom reports that online marketplace platforms fundraised $139 billion in 2021, hitting the all-time record. At the moment, there are 520 marketplace unicorns, with 145 of them launched last year. Combined, the value of online marketplace startups has increased by $1.9 trillion.

Non-fungible token (NFT) marketplaces showcased the fastest growth in 2021. Providing digital content authors with brand new opportunities to attract the audience, earn a profit, and confirm product authenticity, NFT marketplace apps have gained huge popularity recently.

In fact, NFT marketplace startups managed to attract over $1.5 billion in 2021, which was 50x more than the previous year. The sales volume generated through NFTs marketplaces climbed to $11.6 billion in Q4 2021, raising by 8.9x from Q2. On top of that, the NFT trading volume amounted to $23 billion in 2021, up from just $95 million in 2020.

While NFT marketplace startups were the first, grocery and food delivery marketplaces became second and third, respectively. According to Statista, global investment in online food delivery and logistics marketplace platforms accounted for $7.1 billion in the Q3 of 2021, reaching a three-year peak. Fashion marketplace startups have also demonstrated excellent results, with 22 unicorns created in 2021.

The key 6 marketplace startup funding stages

To raise capital, you have to showcase a product idea and demonstrate value while passing through several marketplace startup investment stages. Each phase is completed to attract enough money to extend a marketplace startup and obtain the necessary results.

Taking from 3 months to a year, funding rounds differ in business size and finance amount while the basic requirements are generally the same. As your technology startup grows, fundraising sources and company valuation change. Let’s have a look at the core marketplace startup investment stages.

1. Pre-seed

This phase comes so early that sometimes it is not even included in the list of marketplace funding rounds. Pre-seed funding generally refers to the period when marketplace startup owners are getting underway. As practice shows, pre-seed funders are usually company founders themselves, or their family, friends, or relatives.

2. Seed

After identifying user pain points, a marketplace platform owner looks for financial support. The investment sum can be relatively low, since the primary objectives are to proceed with market research, competitor analysis, and online marketplace development.

In order to raise capital, you should have at least a business plan, app prototype, and a team of diverse experts, involving the CEO, CTO, CFO, and CMO. In addition to that, you will need to hire software designers, developers, and quality assurance engineers.

There are many potential investors in a seed funding situation: friends, family, incubators, accelerators, angel investors, and venture capital (VC) firms. During this round, technology startups can attract from $10,000 to even $2 million.

3. Series A

When your online marketplace startup has high potential in terms of a user base, key performance indicators, and revenue, you can try to raise capital through Series A. At this marketplace investment stage, startups generally strive to attract a larger audience and scale business operations.

If you are thinking about how to get funding in Series A, you should first identify a marketplace monetization model and prepare a business development strategy for generating long-term profit. You also have to maintain a sustainable growth year for the entire period.

In addition to that, you will need a minimum viable product (MVP) or at least a prototype and professional team. To build a marketplace MVP, you should have a budget of $40,000–$200,000 if you outsource the project to an IT partner charging $20–$50 per hour.

In Series A, technology startups can attract $2–$15 million. Last year, the average Series A funding amount was $10 million. VC firms are the key investors during this stage. Examples of globally recognized venture capitalists are Intel Capital, Sequoia Capital, and Google Ventures.

4. Series B

Series B is quite similar to Series A in the context of key players and processes. The main difference between the two startup funding roused is the involvement of new VC firms that focus on providing later-stage investment.

After building a marketplace app, you can use Series B to raise finance for taking your business to the next level, meet the growing demand, and increase revenue. Helping achieve success and scale, Series B funding can enable you to find capital for recruiting the best specialists, marketplace promotion, and raising salaries.

In 2021, the average pre-money valuation of Series B tech startups amounted to $40 million.

5. Series C

Technology startups that raise funds via Series C round have already achieved great financial results and aim to find additional investment to extend a digital marketplace platform, hire new employees, and enter new markets. If your online marketplace startup has reached this stage, this means that you have proved your business idea and showcased impressive success.

In this round, operational and investment risks are significantly lower compared with the previous rounds. As a consequence, more investors put their money into your company, including private equity firms, large secondary market groups, hedge funds, and investment banks apart from those players mentioned above.

With the goal to raise capital through Series C, you should have an established user base, high revenue, and sustainable growth history.

6. Initial public offering

Prior to initial public offering (IPO), a company is considered private. Typically, such a company has grown with a small number of shareholders that can involve marketplace owners, their friends and family, as well as professional investors, like angel investors and VC firms.

Also known as stock launch, IPO is the process of issuing shares to the public for the first time. This way, an online marketplace startup is transformed from a privately held business into a public company. By selling shares to either institutional or individual investors, you can raise equity capital, monetize investments, and enable trading of existing or future holdings. Through an IPO, startups can attract millions of dollars.

IPO has two phases. The first is a pre-marketing stage, during which you can make a public statement to increase awareness and stimulate interest. The second part is the IPO, with underwriters engaged in every aspect of documentation, marketing, and due diligence. Here your task is to choose underwriters—at least one investment bank—to introduce terms, proposals, and valuations in the agreement.

It is worth noting that IPO procedures are regulated by various laws across different countries. In the US, for instance, IPOs are governed by the United States Securities and Exchange Commission under the Securities Act of 1933.

Since IPO allows you to raise finance from the entire investing public, this may become a significant step for your marketplace startup, with new opportunities to expand. What’s more, this model helps improve company prestige and public image whilst facilitating acquisition deals. As you have to provide quarterly and annual reports, you will manage to increase credibility and obtain more favorable credit borrowing terms in comparison with a privately held company.

However, this marketplace startup funding source has a few drawbacks. First and foremost, IPOs are usually expensive. The costs of maintaining a public company are ongoing and comprise accounting, legal, and marketing expenses.

Data transparency can be a disadvantage, too. You will have to disclose financial, tax, enterprise, and other sensitive information that could aid your rivals. Meanwhile, reporting generally requires time and effort. In addition, fluctuations in share price may be a distraction for management.

As a rule, technology startups use IPO after reaching a valuation of nearly $1 billion. However, you can qualify for an IPO if your online marketplace startup has already proven its profitability potential and your product stands out from the competitors.

A number of marketplace startups used IPO to raise capital, involving Airbnb, Scout24, and Delivery Hero. Based in Germany, Scout24 runs digital marketplace platforms for multiple industries, from finance to real estate. In 2015, Scout24 entered the stock market, issuing 38.64 million shares at the price of €30 per each. As a consequence, the startup managed to generate a revenue of €1.15 billion.

1. Raising finance from your network

Raising finance from your own network means that you showcase a marketplace startup idea to friends, family, relatives, colleagues, or former partners. As a rule, this is the fastest and easiest way to attract investment. In this case, you should explain a product concept, for example, by demonstrating a simple prototype or presentation.

While this approach generally requires no agreements, we recommend that you sign a contract for eliminating the chances to ruin relationships. The contract should contain points such as sum, repayment deadlines, and repayment procedure, as well as protect your intellectual property. When providing their financial support, people primarily invest in you, not in a software solution, which leads to increased responsibility.

By implementing this fundraising strategy, you will be able to quickly receive an initial budget and launch an online marketplace startup. Contribution amounts raised through this marketplace investment source basically range between $10,000–$150,000.

2. Crowdfunding

Crowdfunding is another effective way to raise finance for an online marketplace startup. In crowdfunding, a company uses platforms like GoFundMe , Indiegogo , Wefunder , and Kickstarter to attract investment through donations from individuals or communities. This model allows for selecting from thousands of projects to invest even as little as $10. Crowdfunding platforms, in turn, earn income by charging a percentage of the capital raised.

Through crowdfunding, it is possible to raise $1–$5 million. Thanks to crowdfunding, technology startups access a large network of people and businesses through respective websites and social media channels, thereby expanding a traditional pool of inventors such as friends, family, and venture capitalists.

Furthermore, this approach can help you increase awarenesses about an online marketplace startup and reach a wider audience. When using reward-based crowdfunding, you can provide investors with benefits for participation in marketplace testing and release, this way boosting their engagement and growing a community of potentially interested users.

It is worth noting that a lot of crowdfunding platforms operate according to an all-or-nothing model. So, if you do not accomplish an investment goal, people who have put up their money will get it back.

When choosing a crowdfunding platform, take into account that some websites have a narrow focus and may not bring you money. To draw the attention and raise capital, you need to come up with a business plan and prove the advantages of your offering.

Ghost Marketplace and Billion Vegans are examples of well-known startups that used crowdfunding to attract investment.

3. Accelerators and incubators

With the goal to receive aid in business growth, early-stage startups often search for accelerators and incubators, which are organizations that offer mentorship, recommendations, and resources to raise capital.

Lasting up to a few months, accelerator and incubator programs include a Demo Day when startup owners can present their product concept and draw the attention of the investor community. While accelerators and incubators can be involved in all phases of marketplace startup development, the majority of them tend to assist early-stage startups.

Inversely to incubators, accelerators usually do not provide startups with office space but have a physical location to hold various events, for instance, with invited guest speakers.

Although marketplace startup fundraising through accelerators and incubators is an appealing option, it may be challenging to get into the program. For example, leading accelerators, such as Techstars and Y Combinator, generally accept less than 2% of candidates.

As a rule, they take startups that have created an MVP and already showcased excellent business results. Incubators, in turn, can work with startups that have come from their own network of advisors or select companies through the application process.

A typical investment from accelerators and incubators is $20,000–$150,000 in exchange for 5–15% of marketplace startup equity.

Popular accelerators:

• US — Y Combinator, Techstars, 500 Startups, Alchemist Accelerator, StartUp Health, Plug and Play, Cogo Labs, Google Launchpad Accelerator.
• Europe — Startupbootcamp, Zero Gravity, Accel Springer Plug and Play Accelerator, World Startup Factory, and Startup Wise Guys.

Well-known incubators:

• US — Idealab, Z80 Labs, AngelPad, Tech Ranch, Excelerate Labs.
• Europe — CodeBase, Seedcamp, Startup Lab, Entrepreneur First, Sting, High Tech XL, Bethnal Green Ventures.

The key advantages of marketplace fundraising through this model are community support and mentorship regarding development, marketing, public relations, and legal issues. Therefore, incubators and accelerators are not just funding sources for startups.

By participating in respective programs, it is possible to create a network of potential investors, establish partnerships, and promote an online marketplace startup. However, you are likely to encounter intense competition. Furthermore, this approach requires a lot of time and effort whilst there are no success guarantees.

Udemy and Airbnb are among the leading marketplace startups that have taken advantage of this investment method.

4. Angel investors

Also known as angel funders, business angels, or informal/private/seed investors, angel investors are individuals who give financial support to startups or early-stage companies, basically in return for ownership equity. Unlike venture capital firms, angel investors generally invest their own money.

The majority of angel investors have excess funds to support risky startups in search of a higher profit compared with traditional investment opportunities. Angel investors tend to provide finance at the early stages of a startup operation. This method offers more favorable terms, since angel investors mainly focus on helping entrepreneurs get off the ground rather than on potential income they may earn.

Contribution amounts from angel investing can vary from $5,000 to $150,000. It is worth noting that some private investor groups can establish a syndicate and provide funding up to $1 million for selected online marketplace startups.

Angel investors usually aim to receive between 20%–25% of the revenue you will generate through a digital marketplace platform. However, the price depends on the initial contract. Although it may seem to be too costly, less expensive funding sources (for example, banks) are not typically available for early-stage marketplace startups.

Nevertheless, private investors often do not charge repayment in case of an online marketplace startup failure, which is a significant advantage. Therefore, this option has fewer risks than using business loans. What’s more, angel investors are ready to share their knowledge in growing a company to help you achieve success.

When looking for investment opportunities, take into account that informal investors receive a stake in your marketplace startup, leading to a lower level of independence in decision-making.

As business angels primarily invest in the entrepreneur and team, this method is all about trust and relationships. To find an angel investor, you can turn to a network of friends, family, and partners. You can also visit various events, for example, conventions, meetups, and fundraisers.

Another way is to use online platforms (Angel Capital Association, Angel Investment Network, Gust, etc.) that connect startups with the right people. With the view to draw attention, create a clear and memorable pitch that explains product value. In addition, you need to outline a business plan describing a path towards ROI.

Popular marketplaces, like Airbnb and Vivino, raised finance from angel investors. Here at Arateg, we developed a lot of marketplaces, helping startups attract investment from this funding source. Those marketplaces include a Polygon-powered NFT marketplace, an e-commerce marketplace, an online lodging marketplace, a fitness marketplace, and a cosmetics marketplace.

5. Venture capital

Venture capital is another popular method of tech startup financing that you should consider. VC firms or funds invest in startups and emerging companies that have showcased great results (annual revenue, scale of operations, team extension) or have high growth potential. In return, VC capitalists receive an ownership stake or equity.

Aiming to offset the risks, VC firms get control over marketplace startup decisions. Series A is the first VC funding round. After providing finance, VC funds charge an annual management fee, which typically accounts for nearly 2% of assets under management (AUM). However, some VC funds do not require paying a fee except as a percentage of returns received.

Contributions made by VC firms may vary from $300,000 to $3 million.

Along with crowdfunding and angel investing, VC is a great investment source for online marketplace startups with a limited operating history that currently are not able to issue a debt offering or obtain a bank loan. VC firms tend to offer strategic advice to marketplace startup owners regarding business models, monetization, and advertising.

If you are wondering how to raise finance through VC, it is important to begin by creating a business plan and product pitch. Then, you should introduce a clear strategy of how you are going to attract users and generate profit. To find a VC fund, you can use online platforms such as Crunchbase. Additionally, it is possible to directly connect with venture capitalists via their own blogs (for instance, avc.com, feld.com), email, LinkedIn, or Twitter.

World-famous marketplace startups such as Flipkart, Airbnb, eBay, and Uber have used venture capital to raise funds.