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Deep Dive into Marketplaces:

- Vertical marketplaces
- B2B marketplaces
- Unit economics
- Case studies
- Understanding liquidity
- Mistakes founders make

High-level overview 👇
First, why are marketplaces great businesses?

- Network effects bring high barriers to entry

- No inventory means cheaper to operate (e.g. Airbnb vs. hotels)

- No inventory means easier to scale (e.g. Rover vs. dog hotels)

- No inventory means easier to pivot
Marketplaces vs E-commerce:

Marketplaces over time

- CAC lowers
- Retention increases
- AOV increases
- Hard to get initial liquidity but gets easier b/c network effects

E-commerce is the opposite of the above. It has to rely on economies of scale or adjacent markets to scale
Marketplace Eras:

Listing Era provided lead gen. (e.g. Craigslist, Grubhub, Yelp)

Transactional marketplaces facilitated transactions on platform. (e.g. Thumbtack, Fiverr)

Managed Marketplaces integrated w/ supply or owned supply outright (e.g. Honor, Clutter)
Managed Marketplaces:

Bear take: Capital intensive, lower margins, less scalable, handicap network effects b/c you commoditize supply

Bull take: It's a more controlled & thus higher quality experience, can do lower margins if TAM is in trillions (e.g. healthcare
Vertical marketplaces:

Enable a 10x better experience.

For example, you could buy tickets on Craigslist & eBay.

But Stubhub integrated w/ ticket providers so you could also verify identity and get seating charts.

Slice does this for pizza ordering.
Vertical marketplaces

"1- Look at large horizontal marketplaces, identify the verticals w/ low NPS, & use product to leapfrog the liquidity of the incumbent’s supply base

2- Nail a small, overlooked and under-appreciated niche, then land & expand from there"

- @sarahtavel
Vertical vs Horizontal Marketplaces:

If you play this out 10 years, can you imagine people have 20 apps for different service categories on their phone? Probably not.

So vertical marketplaces either likely have to expand and become horizontal, or get acquired.
Double commit marketplaces: Marketplaces that pick supply for you (e.g. Uber).

If you do enough work, it looks like the marketplace is the provider rather than the individual suppliers (e.g. Amazon).

For this to work you need to highly curate supply and match effectively.
B2B Marketplaces:

Why Now?

- After 10+ yrs of consumer marketplaces, we're finally getting to b2b.

- Today's business owners are more tech-savvy.

- B2B requires domain experience to see the opportunity, unlike consumer

- Selling to SMEs where they are fragmented.
Factors of a Healthy Marketplace:

- Fragmented supply
- Not prone to monogamy (e.g babysitters)
- User experience has to be 10x better than status quo
- Low friction for supplier to sign up
- High frequency & high AOV
- In the payments flow
- Good reason to stay on platform
Labor Marketplaces:

- If you're successful, you lose a customer (they get a job). Thus more of a marketing play

- Vertical marketplaces unbundling LinkedIn can work if they offer value beyond job (e.g RigUp creates a network of profiles for the industry, including reviews etc)
Human capital marketplaces:

Biggest underutilized asset of all time is people's time:

P2P Marketplaces:

Lots of data that can be leveraged for people matching (e.g what I'm reading, purchasing, etc)
Building marketplaces:

- Identify "red hot center" - the group that feels the pain most acutely b/c they'll jump through hoops to use the product initially.

- Main way to create magic for demand is to have the right supply. If you have exclusive lock over supply, that's a moat.
How to solve Chicken & Egg problem:

Constrain marketplace to a geo or category you can own

Nail one side of the marketplace (usually supply)

Biggest way to grow supply is sales ppl.

Biggest way to grow demand is word of mouth--or when supply brings demand (e.g. Eventbrite)
Liquidity is what matters:

Craigslist even w/ horrible experience did $1B last yr b/c of liquidity.

Liquidity is basically how well that you can satisfy user demand. How well supply and demand value props match. Conversion rate is one proxy for that.
Redefine the atomic unit of supply and therefore dramatically expand the addressable supply.

HomeAway stayed limited to vacation home rentals until Airbnb redefined and expanded the atomic unit of supply which enabled them to own it instead of share it.

medium.com/@sarahtavel/th…
Leverage an underutilized fixed asset

Enables supplier acquisition to scale a lot easier

Hipcamp leverages underutilized land

Cloudkitchens leverage underutilized kitchens

AirBnB leverages underutilized properties

Uber leverages underutilized cars

kwokchain.com/2020/01/23/und…
Unit economics:

- Recoup fully loaded cost CAC on a net contribution margin basis in the first 6 months of the business

- 3x your CAC in 18 months

- Don't know LTV in beginning b/c you have negative churn
Mistakes founders make:

- Overvalue GMV growth, undervalue net revenue & unit economics. Not charging

- Overvalue growth at expense of liquidity & creating more value for incremental next user

- Relying on paid acq.

- Scale too quickly instead of "nail it before you scale it"
On whether to expand verticals:

The Q to ask is "Does this lead to stronger PM-fit, or am I expanding just b/c I'm supposed to?"

AirBnB smartly didn't expand immediately to AirBnB for dogs, boats, etc.

Rover waited too long to expand.

Most cos expand too fast though.
Business model:

Charge whichever side is more inelastic (less likely to switch)

One trick: Offer a free, high quality B2B SaaS tool to your suppliers to attract them to your marketplace. e.g. Fresha
Mean valuations for marketplace businesses:

Seed (pre-launch): 1 on 5-6M post
Seed (150k/mo. GMV, 15% take rate) : 3 on 8M post
Series A (650k/mo. GMV): 7 on 25M post
Series B (2.5M/mo. GMV): 20 on 70M post

h/t @thejerrylu quoting @fabricegrinda
Case study: Why did Uber for X fail?

- Uber was 10x better experience, but also cheaper. Also high frequency (& high variable frequency-i.e can't plan for it)

- Uber for X companies may have been 10x better, but weren't cheaper, and also low frequency (e.g moving, dry cleaning)
Case study: Why didn't Homejoy work?

- Not enough frequency
- Not enough AOV
- Went off platform to develop monogamous relationship w/ cleaner b/c once you found one you liked, you wanted to keep them.
/FIN

This thread is compiled from conversations with & writings by @sarahtavel @nabeel @fabricegrinda @danhockenmaier @lennysan @onecaseman @kevinakwok @swaaanson @johnkobs & others.

Interested in hearing feedback & follow-up points.
Correct post link here: medium.com/@sarahtavel/wh…
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