Are Startup Marketplaces Picked Over?
Marketplaces have been great businesses for 5,000 years, I don’t see that changing anytime soon
As a marketplace founder, I frequently get this question and at times it can seem like marketplaces are picked over, but in reality marketplace opportunities just evolve with changes in technology, consumer expectations, and economic factors. According to Battery Ventures, 50% of the top 16 recent/projected IPOs are marketplaces. It would be hard to imagine living your life without Uber, Lyft, Airbnb, and DoorDash to name a few. Here is why marketplaces continue to make such great investments and what to look for in the next era of marketplaces.
Marketplaces solve an age-old problem
Marketplaces are one of the oldest forms of human interaction with the first documented marketplace emerging around 3,000 BCE. And for good reason, marketplaces solve an important problem for two groups of people:
- Customers need to buy things
- Businesses need to sell things
Without a marketplace, they must wander from person to person and village to village and now website to website, to find the businesses that is selling what they need. This is time-consuming and expensive. Once they do find a business, it is most likely a sub-optimal business as the customer will have only been exposed to a limited number of businesses and will probably be charged a higher price since that business has less immediate competition.
Without a marketplace, they must devise cost-effective ways to find customers. This is challenging because potential customers are spread out and many other businesses are vying for their attention.
A marketplace solves both groups' problems. Customers no longer have to wander to find the right business, settle on a sub-optimal business, or be subject to higher prices. Businesses have a greater volume of traffic as customers know where to go and they don’t have to waste marketing resources on untargeted marketing tactics. Although the businesses have increased competition, there also comes added benefits because they are forced to make better goods and services and also learn from other businesses in a way a stand-alone operator doesn't, which ultimately makes the marketplace more attractive to customers and sales increase. A rising tide does indeed lift all ships.
Marketplaces are great businesses to own
Marketplaces have the opposite characteristics of most businesses. Most businesses are highly capital intensive, hard to scale, and have low defensibility. Marketplaces have the opposite attributes, they have:
- Low capital intensity because the marketplace owner, isn’t actually providing the good or service, but simply creating and managing the space for them to connect.
- Scale rapidly because of their low capital intensity.
- High defensibility due to their inherent network-effects, which tend to create monopolies, and monopolies have moats, and moats have margins. Understanding a marketplace’s network-effects is at the heart of understanding its defensibility and thus, profitably. NFX found that 70% of value in tech is driven by network-effects after conducting a study of 336 companies between 1994 and 2017 that went on to become valued at over $1 billion.
For these reasons, marketplaces have been great businesses to own and before the internet department stores like Sears and Walmart were fixtures of the American economy. Department stores are classic marketplace businesses that aggregate thousands of products in one place for customers to purchase. Below is the first Sears catalog, the value prop “Cheapest Supply House on Earth”, is the essence of the value that marketplaces provide to consumers.
Add in technology
The fact that marketplaces solve an age-old problem and make for highly profitable businesses have made marketplaces attractive businesses for a long time. However, the physical aggregation of goods is time-consuming and expensive. Many more niche marketplaces and especially services marketplaces lay dormant because they didn’t yet have all three active ingredients needed to reach critical mass: enabling technology, economic impetus, and cultural buy-in. The last 20–30 years changed all of that as the internet and smartphones created the enabling technology to unlock new marketplaces.
The Internet drives Wave 1
The internet changed everything and created a massive shift in enabling technology. One of the most popular websites has always been the marketplace for everything, Craigslist. Companies have since chipped away at many of these verticals with startups like eBay, Airbnb, Indeed, and Zillow.
Platforms, like Amazon, Google, Facebook, and Netflix, also closely resemble marketplaces in that they have a low cost of capital and create value by more efficiently connecting supply and demand. Although has they’ve grown they’ve become more complex and certain business units have more marketplace attributes than others.
Smartphones drive Wave 2
Again, enabling technology was at the core of the next generation of marketplaces. Inexpensive smartphones allowed communication, detailed orders, mobile payments, and location to be shared in real-time.
Uber, Lyft, DoorDash, Instacart, and companies like them benefited from mobile technology the most, and existing marketplaces like Airbnb got a boost from customer’s increased mobile engagement. In Battery Ventures assessment, 50% of the top 16 recent/projected IPOs are marketplaces and most of them were driven by smartphones.
Cultural Buy-In drives Wave 3
While enabling technologies drove the first two waves. The next era will be driven by cultural buy-in as a result of the last two eras. Below is a chart somewhat adapted from Andrew Chen’s marketplace eras.
Because many of the ‘Uber for X’ era startups destroyed our perception of what was possible — in a good way. Push a button, get a ride in 5 minutes that is cheap and clean. Push a button and get your favorite restaurant at your door in 30 minutes.
Consumers are increasingly wondering why other purchasing experiences are time-consuming, lack selection, lack pricing transparency and are low quality (with no accountability).
Consumers are asking, shouldn’t finding a pre-school, buying a house, or booking an event space be as easy as getting an Uber or booking an Airbnb. The next wave of marketplaces like Opendoor and Wonderschool are tackling these more complex and higher dollar transactions.
What to look for in the next era of marketplaces
- The software products will be more comprehensive than in the past and often have a marketplace, a network, and a SaaS tool all in one to create what NFX refers to as a ‘Market Network’.
- The marketplaces will exert a greater degree of control on the supply side to improve the customer experience and reduce disintermediation risk, often blurring the lines of what a traditional marketplace is and create what a16z calls a Managed Marketplaces.
- The marketplaces will tackle increasingly complex and higher dollar transactions that may take place over the course of weeks or months.
- Marketplaces will become increasingly verticalized and no longer be just part of the solution, but provide complete end-to-end solutions for the entire customer experience.
I’m extremely bullish on the future of marketplaces. The last several decades saw significant marketplace innovation and we would have a difficult time getting through our day without many of the marketplaces that have been created. But the best years for marketplaces are yet to come, as marketplaces tackle increasingly complex transactions that create a step function improvement for customers, suppliers, and marketplace owners.
- Marketplace video by Jeff Jordon, General Partner at a16z, ex-OpenTable CEO
- The Guide to Marketplaces ebook by Version One
- Marketplace article by Dave Lu, Founder of Pared (marketplace for labor at restaurants)
- State of Marketplaces video, Roger Lee of Battery Ventures
Tools for building marketplaces
- Sharetribe provides no and low code solutions to launch a marketplace. Free 30-day trial and it starts at about $80/month after
- How to get a marketplace started video by Avni Patel, Founder of Poppy
Other marketplace resources
- Market-Network concept by NFX
- Network-Effects bible by NFX
- Network-Effects manual by NFX
- Managed Marketplace concept by a16z
- SaaS Enabled Marketplace concept by Point Nine
- How to measure net CAC for two-sided marketplaces from Lightspeed
- Marketplace Conference
- Marketplace pricing article by Bill Gurley of Benchmark
- Marketplace evaluation tool by Bill Gurley of Benchmark
- Marketplace library of resources by Sharetribe
- Marketplace metrics and KPI dashboard by Version One
- How to build supply article by Lenny Rachitsky (fmr Airbnb).