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A Guide to Marketplaces

An abridged / deck version of our marketplace handbook: http://versionone.vc/marketplace-handbook/

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May 2016
VC InsightsA Guide to Marketplaces
Chapter 1: Introduction to Marketplaces



Chapter 2: Seeding, Growing, and Scaling a Marketplace



Chapter 3: Finding the Right Business Model for your Marketplace



Chapter 4: New Marketplace Types



Chapter 5: Marketplace Metrics



Chapter 6: Marketplace Tools



Chapter 7: Working with Investors



Conclusion
What’s an online marketplace?
Product-Focused Service-Focused Product + Service
A type of e-commerce site that connects those who
provide a product/service (sellers) with those looking to
buy that product/service (buyers)
Creates efficiency in an otherwise inefficient market
1. Aggregates sellers and their inventory
2. Includes a transaction element
– A true marketplace manages the entire transaction - from listing
to payment processing - with the service and goods delivered
offline.
– Some initiate but do not process transactions, such as lead
generation sites where providers send quotes through the
platform (Thumbtack).
Two elements to every marketplace
B2C (business-to-consumer)
Existing businesses use platform
and/or individuals formalize their
activities into a business.
B2B (business-to-business)
Makes procurement and supply
chain more efficient for long-tail
SMB market.
Marketplaces defined by role of participants
P2P (peer-to-peer)
Private individuals sell
to others.
1. Gross Merchandise Value (GMV)
– Total dollar value of everything sold in a time period
– This is not the platform’s revenue.
2. Take Rate
– Percentage of GMV the marketplace takes in fees
Two metrics of a marketplace

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A Guide to Marketplaces

  • 1. May 2016 VC InsightsA Guide to Marketplaces
  • 2. Chapter 1: Introduction to Marketplaces
 
 Chapter 2: Seeding, Growing, and Scaling a Marketplace
 
 Chapter 3: Finding the Right Business Model for your Marketplace
 
 Chapter 4: New Marketplace Types
 
 Chapter 5: Marketplace Metrics
 
 Chapter 6: Marketplace Tools
 
 Chapter 7: Working with Investors
 
 Conclusion
  • 3. What’s an online marketplace? Product-Focused Service-Focused Product + Service A type of e-commerce site that connects those who provide a product/service (sellers) with those looking to buy that product/service (buyers) Creates efficiency in an otherwise inefficient market
  • 4. 1. Aggregates sellers and their inventory 2. Includes a transaction element – A true marketplace manages the entire transaction - from listing to payment processing - with the service and goods delivered offline. – Some initiate but do not process transactions, such as lead generation sites where providers send quotes through the platform (Thumbtack). Two elements to every marketplace
  • 5. B2C (business-to-consumer) Existing businesses use platform and/or individuals formalize their activities into a business. B2B (business-to-business) Makes procurement and supply chain more efficient for long-tail SMB market. Marketplaces defined by role of participants P2P (peer-to-peer) Private individuals sell to others.
  • 6. 1. Gross Merchandise Value (GMV) – Total dollar value of everything sold in a time period – This is not the platform’s revenue. 2. Take Rate – Percentage of GMV the marketplace takes in fees Two metrics of a marketplace
  • 7. Five factors to consider in a marketplace* * Source: All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces by Bill Gurley. All 5 factors (or 10 on Bill’s list) are not required to build a good marketplace, but the more you have, the higher the potential of your marketplace. 1. High fragmentation 2. Buyer/seller relationship 3. High purchase frequency 4. Total available market (TAM) 5. Being part of the payment flow
  • 8. High fragmentation Most value is created in a highly fragmented market. – Buyers need help connecting to sellers. Higher fragmentation = higher take rate – It reduces the negotiation power of participants. – By contrast, when there are few suppliers, they won’t want to share in the economics with a new marketplace, resulting in a lower take rate.
  • 9. The buyer/seller relationship When buyers are loyal to their supplier, the value of a marketplace is reduced. – As an example, once consumers find a doctor they trust, they will not shop for another for some time. – This is also true for commoditized products where products are sourced from the same supplier (e.g. diapers on the consumer side and raw materials for businesses).
  • 10. High purchase frequency Know the difference between how often a buyer uses a service versus the marketplace. “All things being equal, a higher frequency is obviously better… where the consumers can rely on the marketplace as a utility. Many failed marketplaces attack purchasing cycles that are way too infrequent, which makes it much more difficult to build brand awareness and word-of-mouth customer growth.” - Bill Gurley
  • 11. Total available market (TAM) Can your marketplace create new value? How big is the total available market and how much can you capture?
  • 12. Being part of the payment flow The potential take rate is much higher when money is exchanged on the marketplace instead of offline.
  • 13. How to win against the incumbent 1. Lower the take rate 2. Go vertical: new categories or geographies 3. Develop a 10x better product 4. Bring unique inventory to underserved markets
  • 14. Network effects When a new user is added to the network, it increases the value of the service to all other users – Network effects ≠ virality – Virality = rate of user adoption Marketplaces usually have low virality but high two-sided network effects, which creates defensibility.
  • 15. Chapter 1: Introduction to Marketplaces
 
 Chapter 2: Seeding, Growing, and Scaling a Marketplace
 
 Chapter 3: Finding the Right Business Model for your Marketplace
 
 Chapter 4: New Marketplace Types
 
 Chapter 5: Marketplace Metrics
 
 Chapter 6: Marketplace Tools
 
 Chapter 7: Working with Investors
 
 Conclusion
  • 16. Building a marketplace There is a chicken and egg problem in the early days of a marketplace: getting both buyers and sellers onto the platform. First, you need to devise an effective strategy for increasing supply. Next, you need to get to that virtuous cycle of supply and demand.
  • 17. Stage 1: Seeding your supply 1. Identify unique supply, e.g. those who don’t sell online 2. Convince existing sellers to list on your platform 3. Bring customers to a provider 4. Pay for inventory to artificially create supply at the outset, but know it’s not scalable 5. Aggregate inventory that is listed elsewhere, but know you will run the risk of becoming a cross-platform utility rather than your own marketplace
  • 18. Stage 2: Growing a Marketplace High Number of Quality Suppliers Attracts More Customers Brings More Suppliers Helps to Draw Even More Customers The cycle continues as a self-sustaining growth engine until supply & demand reach critical mass to be “winner takes all.” Holy Grail: The Virtuous Cycle of Supply & Demand
  • 19. How to create a virtuous cycle (1/2) 1. Identify and double down on things that work in your marketplace – What works on both supply and demand sides? (i.e. within certain geographies, audience segments, price points, etc.) – Initially, you may have to manually recruit members and do things that don’t scale (e.g. Airbnb rented a $5,000 camera and took professional pictures of New York listings).
  • 20. How to create a virtuous cycle (2/2) 2. Be patient: marketplaces take time – Can take 3+ years to establish buyer and seller communities • e.g. Indiegogo was founded in 2007 but broke out in 2011. – Look for 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 • Positive user feedback
  • 21. Stage 3: Scaling your marketplace (1/5) 1. Foster trust and safety – Establish trust and credibility with transparency • Use a rating system, user reviews, or testimonials – Consider some level of guarantee like service quality, delivery time, or payment – Follow up personally whenever the terms of a transaction are broken
  • 22. Stage 3: Scaling your marketplace (2/5) 2. Support power sellers – those who earn a living off your marketplace – e.g. ThreadFlip gives its sellers boxes and mannequins to help them display used clothes, and holds regular one-on-one calls for feedback. – e.g. eBay’s offers power sellers priority customer support, unpaid item protection, and “top-rated Seller” designation.
  • 23. Stage 3: Scaling your marketplace (3/5) 3. Develop an ecosystem that supports third-party apps and services – e.g. Other startups offering guest screening and catering for Airbnb hosts
  • 24. Stage 3: Scaling your marketplace (4/5) 4. Prevent leakage – Always a risk that buyers and sellers will settle the transaction offline, which prevents your marketplace from capturing revenue – Have a great UX for your users to communicate – Consider adding a rating system that suppliers value and buyers need in order to trust quality
  • 25. Stage 3: Scaling your marketplace (5/5) 5. Build a moat – Uniqueness of your supply will likely fade over time • Suppliers will seek out opportunities on other marketplaces • Competitors will grab market share that you discovered – Protect your supply • Lower listing fees for unique inventory • Tie sellers to your site through reviews • Find innovative models like Uber’s leasing model – Protect buyer mindshare • Find the right product mix to become a frequent destination for your customers
  • 26. Chapter 1: Introduction to Marketplaces
 
 Chapter 2: Seeding, Growing, and Scaling a Marketplace
 
 Chapter 3: Finding the Right Business Model for your Marketplace
 
 Chapter 4: New Marketplace Types
 
 Chapter 5: Marketplace Metrics
 
 Chapter 6: Marketplace Tools
 
 Chapter 7: Working with Investors
 
 Conclusion
  • 27. Finding the right business model Fees introduce friction to buyers and sellers transacting. Whoever is charged will try to go off-platform. The right business model depends on your marketplace: – If buyers make purchases with little back and forth, then seller transaction fees are the way to go. – If the marketplace acts purely like the classifieds, listing fees make more sense. Most marketplaces will take fees from sellers since demand is the limiting factor for growth.
  • 28. Listing fees Charge suppliers to list on your site – Since sellers pay to list an item, they invest time into each listing and only list items with a high chance of selling which helps create a better experience for buyers. – All vendors are hit equally, no matter how many sales they make on the site. This may discourage some from listing and make it difficult to gain new suppliers.
  • 29. Transaction fees Take a cut from each transaction – Fairest for suppliers as they only pay a fee when they sell something – Less friction for a seller to join when there are no upfront fees – If you only charge when a sale is made, you lower the supplier’s risk of losing money
  • 30. Subscription fees Charge buyers for access to the marketplace – Value proposition needs to be strong to entice buyers to pay a subscription. – Unlike a SaaS tool, which can be continually useful, the lifespan of a marketplace’s utility can be limited. – e.g. Angie’s List charges buyers a membership fee in order to search the directory and view ratings; Care.com has a freemium model with enhanced services for both buyers/sellers.
  • 31. Enhanced seller services No listing fees but charge for optional services – Low entry cost brings more suppliers, but revenue may be modest so “freemium” works best for companies that serve a huge market, such as Etsy.
  • 32. Lead-based model 1. Charge suppliers to contact customers when services delivered offline (e.g. Thumbtack). – Works with new connections but ineffective with a high frequency of purchases from same vendor. 2. Stay close to the transaction by productizing service and simplifying user experience – e.g. Elance offers hourly/project tracking and billing solutions that encourage the provider (freelancer) and customer to stay on the platform.
  • 33. Chapter 1: Introduction to Marketplaces
 
 Chapter 2: Seeding, Growing, and Scaling a Marketplace
 
 Chapter 3: Finding the Right Business Model for your Marketplace
 
 Chapter 4: New Marketplace Types
 
 Chapter 5: Marketplace Metrics
 
 Chapter 6: Marketplace Tools
 
 Chapter 7: Working with Investors
 
 Conclusion
  • 34. At their core, every marketplace is similar: there’s a seller and a buyer and it acts as an intermediary to bring these two sides together. As the industry matures, new marketplace models emerge. New marketplace types Buyers SellersMarketplace
  • 35. For odd jobs For laundryTo buy and deliver groceries Smartphones can summon anything: this is the “on-demand” economy. It is a continuation of the sharing economy, exemplified by Uber and Airbnb, where people turn underused assets (home, car, time, etc.) into a source of revenue. Today’s on-demand marketplaces match jobs with contractors. On-demand marketplaces
  • 36. Uber Other Underlying Commoditized Services People tend not to care who drives them from A to B. People do care who cuts their hair, babysits their children, etc. High Purchase Frequency Regular usage leads to customers using the same service - urbanites may use Uber multiple times a day. Lower purchase frequencies make it difficult to retain mindshare. True On- Demand Use Case Sufficient liquidity on the supply side is required and creates a barrier to entry since a new competitor will need to launch with hundreds of providers. When services are delivered with more flexible timing, it’s easier for competitors to enter a vertical or new location, and there’s less of a winner-takes-all dynamic. Why there won’t be an Uber for every vertical
  • 37. Managed marketplaces Pros Cons Can be a game-changer when dealing with high-value ticket items Cuts into gross margin and adds operational complexity. May need to reach massive scale in order to reach profitability Can create new supply and demand by helping buyers overcome trust issues Risk involved if you guarantee the sale and take on sellers’ inventory. What if you end up sitting on inventory that’s can’t move? Processes/operations are vertical-specific. This offers little synergy to move into a new vertical. Those that take on additional parts of the value chain to deliver a better overall experience. – e.g. Beepi (P2P marketplace for used cars) will buy your car if you don’t sell within 30 days
  • 38. Hosts local meet-ups and added community/ team functionality Holds driver meet-ups and community rallies, which have become Lyft traditions Community-driven marketplaces Brand and sellers form communities with others who have similar interests. Created online forums, which triggered micro- groups to form
  • 39. SaaS-enabled marketplaces Sellers are attracted to a useful free tool, then encouraged to participate in the marketplace. – Chris Dixon described this approach as “come for the tool, stay for the network.” (e.g. OpenTable, Zenefits) – Some sellers may wish to use your tool but fear joining your marketplace because of competition. – Requires ongoing use of the marketplace, may not work in cases where consumers prefer a “monogamous relationship”.
  • 40. Decentralized marketplaces Fee-free and user-driven marketplaces with flattened hierarchies and decentralized control: anyone sells, anyone buys. – Everything from trust, rules, identify, to payment, operates at the peer level. – OpenBazaar allows users to conduct P2P transactions with the help of notaries, Bitcoin, multi-signature transactions, and a reputation system. – Decentralized marketplaces need to figure out how to monetize and create defensibility without inherent network effects.
  • 41. Chapter 1: Introduction to Marketplaces
 
 Chapter 2: Seeding, Growing, and Scaling a Marketplace
 
 Chapter 3: Finding the Right Business Model for your Marketplace
 
 Chapter 4: New Marketplace Types
 
 Chapter 5: Marketplace Metrics
 
 Chapter 6: Marketplace Tools
 
 Chapter 7: Working with Investors
 
 Conclusion
  • 42. Marketplace Metrics The dashboard is separated into 3 parts: 1. Overall marketplace metrics 2. Seller/supplier metrics 3. Buyer metrics We created a marketplace KPI spreadsheet.
  • 43. Overall Marketplace Metrics (1/2) Gross merchandise value (GMV) = Total sales dollar value for good or services purchased through marketplace over a certain time. – Track GMV growth rate on a monthly and yearly basis – Understand its makeup by customer acquisition channels, paid versus organic, etc. Average order value (AOV) = GMV / Total number of transactions
  • 44. Overall Marketplace Metrics (2/2) Revenue = Income that the company receives (e.g., transaction fees, listing fees, premium seller/supplier services, etc.). Take rate = Revenue / GMV
  • 45. Seller/Supplier Metrics * recommended at a minimum General KPIs Engagement KPIs* Number of suppliers Supplier growth rate Number of listings Listings growth rate Average listing price Sell-through rate Customer acquisition cost (CAC) Cohort analysis: % of suppliers still active 1 month and/or 1 year after signing up GMV retention: average % of Month 1 GMV generated by suppliers in Month 12 Concentration: % of revenue generated by the top 20% suppliers Net promoter score (NPS)
  • 46. Buyer Metrics General KPIs Engagement KPIs* Number of buyers Buyer growth rate Average dollar amount purchased per buyer Average number of orders per buyer Average order growth per buyer Customer acquisition cost (CAC) Repeat buyer contribution: % of buyers who have purchased more than once % of GMV generated from buyers in previous months GMV retention: average % of Month 1 GMV generated by buyers in Month 12 Concentration: % of revenue generated by the top 20% buyers Cross pollination: % of buyers who spend in another category Net promoter score (NPS) * recommended at a minimum
  • 47. Chapter 1: Introduction to Marketplaces
 
 Chapter 2: Seeding, Growing, and Scaling a Marketplace
 
 Chapter 3: Finding the Right Business Model for your Marketplace
 
 Chapter 4: New Marketplace Types
 
 Chapter 5: Marketplace Metrics
 
 Chapter 6: Marketplace Tools
 
 Chapter 7: Working with Investors
 
 Conclusion
  • 48. Marketplace Tools Don’t reinvent the wheel! Leverage existing tools.
  • 49. Chapter 1: Introduction to Marketplaces
 
 Chapter 2: Seeding, Growing, and Scaling a Marketplace
 
 Chapter 3: Finding the Right Business Model for your Marketplace
 
 Chapter 4: New Marketplace Types
 
 Chapter 5: Marketplace Metrics
 
 Chapter 6: Marketplace Tools
 
 Chapter 7: Working with Investors
 
 Conclusion
  • 50. What investors look for We encourage you to read Bill Gurley’s outline of 10 factors to consider when evaluating marketplaces. Our 5 most important criteria are: 1. High fragmentation 2. Regular frequency of use/purchase 3. Discovery/new buyer-seller relationships (vs. monogamy) 4. Total Available Market 5. Transactional (being part of the payment flow) These aren’t the only ones that lead to success: some VCs feel that a marketplace with low purchase frequency can be offset by high AOV.
  • 51. What traction we want to see Every startup is different and we conduct our due diligence on a case-by-case basis. – There is a general set of questions we use to evaluate a marketplace and assess a startup’s product-market fit. – Please refer to the guide for an example using Headout, a Version One portfolio company.
  • 52. Valuation multiples for marketplaces The main multiple we like to use for marketplace businesses is GMV. – Rule of thumb: marketplaces at scale are valued at roughly 1x annualized GMV or typically about 6-8x annual revenue – Assumptions for valuation: – Scale > $1B GMV – YoY growth >= 30% – Take rate = 10-15% There’s a currently a disconnect between the valuations for public and private consumer marketplaces.
  • 53. Example: Etsy GMV multiple was as high as 1.7 immediately after IPO. 2015 Total Revenue ~$270M 2015 Total GMV ~$2.4B Take Rate 11% YoY Growth ending Q1 2016 40% Market Cap (as of 5/11/2016) ~$963M Revenue Multiple 6.8 GMV Multiple 0.76
  • 54. What about early-stage marketplaces? Early metrics don’t count into valuation. We’re evaluating the team, idea, and vision. As the marketplace starts to scale fast, the multiples are often very high because growth is high as well. Ultimately, however, your marketplace will be valued at 1x GMV.
  • 55. What you should focus on Early-stage founders should focus on: 1. Growing GMV 2. Proving out take rate Occasionally, we see impressive GMV but no proof that companies can get a significant take. – A marketplace that generates leads might have a low take rate of 2-3%. In this case, GMV must be 5x bigger than a comparable marketplace with 10-15% take rate. The bottom line? Don’t wait too long to prove out monetization
  • 56. Chapter 1: Introduction to Marketplaces
 
 Chapter 2: Seeding, Growing, and Scaling a Marketplace
 
 Chapter 3: Finding the Right Business Model for your Marketplace
 
 Chapter 4: New Marketplace Types
 
 Chapter 5: Marketplace Metrics
 
 Chapter 6: Marketplace Tools
 
 Chapter 7: Working with Investors
 
 Conclusion
  • 57. Looking ahead Marketplaces are tough to build, but once they reach liquidity, they can be even tougher to kill. Buying and selling is an integral part of daily life, and there’s still great opportunity for innovation in new verticals, models, and monetization strategies. More than a third of Version One’s portfolio is marketplace companies. We continue to learn from successes and how to overcome challenges. We’re excited to be active investors in this space and are looking forward to the journey ahead.
  • 58. Thanks for reading! Angela Kingyens @atkingyens angela@versionone.vc @bwertz boris@versionone.vc Boris Wertz