A Guide to Marketplaces

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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 th...

What’s an online marketplace?
Product-Focused Service-Focused Product + Service
A type of e-commerce site that connects th...

1. Aggregates sellers and their inventory
2. Includes a transaction element
– A true marketplace manages the entire transa...

B2C (business-to-consumer)
Existing businesses use platform
and/or individuals formalize their
activities into a business....

1. Gross Merchandise Value (GMV)
– Total dollar value of everything sold in a time period
– This is not the platform’s rev...

Five factors to consider in a marketplace*
* Source: All Markets Are Not Created Equal: 10 Factors To Consider When Evalua...

High fragmentation
Most value is created in a highly fragmented market.
– Buyers need help connecting to sellers.
Higher f...

The buyer/seller relationship
When buyers are loyal to their supplier, the value of a
marketplace is reduced.
– As an exam...

High purchase frequency
Know the difference between how often a buyer uses a
service versus the marketplace.
“All things b...

Total available market (TAM)
Can your marketplace create new value?
How big is the total available market and how much can...

Being part of the payment flow
The potential take rate is much higher when money is
exchanged on the marketplace instead o...

How to win against the incumbent
1. Lower the take rate
2. Go vertical: new categories or geographies
3. Develop a 10x bet...

Network effects
When a new user is added to the network, it increases the
value of the service to all other users
– Networ...

Chapter 1: Introduction to Marketplaces 
 
Chapter 2: Seeding, Growing, and Scaling a Marketplace 
 
Chapter 3: Finding th...

Building a marketplace
There is a chicken and egg problem in the early days of a
marketplace: getting both buyers and sell...

Stage 1: Seeding your supply
1. Identify unique supply, e.g. those who don’t sell online
2. Convince existing sellers to l...

Stage 2: Growing a Marketplace
High Number of
Quality Suppliers
Attracts More Customers
Brings More Suppliers
Helps to Dra...

How to create a virtuous cycle (1/2)
1. Identify and double down on things that work in your
marketplace
– What works on b...

How to create a virtuous cycle (2/2)
2. Be patient: marketplaces take time
– Can take 3+ years to establish buyer and sell...

Stage 3: Scaling your marketplace (1/5)
1. Foster trust and safety
– Establish trust and credibility with transparency
• U...

Stage 3: Scaling your marketplace (2/5)
2. Support power sellers – those who earn a living off your
marketplace
– e.g. Thr...

Stage 3: Scaling your marketplace (3/5)
3. Develop an ecosystem that supports third-party apps
and services
– e.g. Other s...

Stage 3: Scaling your marketplace (4/5)
4. Prevent leakage
– Always a risk that buyers and sellers will settle the transac...

Stage 3: Scaling your marketplace (5/5)
5. Build a moat
– Uniqueness of your supply will likely fade over time
• Suppliers...

Chapter 1: Introduction to Marketplaces 
 
Chapter 2: Seeding, Growing, and Scaling a Marketplace 
 
Chapter 3: Finding th...

Finding the right business model
Fees introduce friction to buyers and sellers transacting.
Whoever is charged will try to...

Listing fees
Charge suppliers to list on your site
– Since sellers pay to list an item, they invest time into each listing...

Transaction fees
Take a cut from each transaction
– Fairest for suppliers as they only pay a fee when they sell
something
...

Subscription fees
Charge buyers for access to the marketplace
– Value proposition needs to be strong to entice buyers to p...

Enhanced seller services
No listing fees but charge for optional services
– Low entry cost brings more suppliers, but reve...

Lead-based model
1. Charge suppliers to contact customers when services
delivered offline (e.g. Thumbtack).
– Works with n...

Chapter 1: Introduction to Marketplaces 
 
Chapter 2: Seeding, Growing, and Scaling a Marketplace 
 
Chapter 3: Finding th...

At their core, every marketplace is similar: there’s a seller
and a buyer and it acts as an intermediary to bring these
tw...

For odd jobs For laundryTo buy and deliver groceries
Smartphones can summon anything: this is the “on-demand” economy.
It ...

Uber Other
Underlying
Commoditized
Services
People tend not to care who drives
them from A to B.
People do care who cuts t...

Managed marketplaces
Pros Cons
Can be a game-changer when
dealing with high-value ticket items
Cuts into gross margin and ...

Hosts local meet-ups
and added community/
team functionality
Holds driver meet-ups
and community rallies,
which have becom...

SaaS-enabled marketplaces
Sellers are attracted to a useful free tool, then encouraged
to participate in the marketplace.
...

Decentralized marketplaces
Fee-free and user-driven marketplaces with flattened
hierarchies and decentralized control: any...

Chapter 1: Introduction to Marketplaces 
 
Chapter 2: Seeding, Growing, and Scaling a Marketplace 
 
Chapter 3: Finding th...

Marketplace Metrics
The dashboard is
separated into 3 parts:
1. Overall marketplace
metrics
2. Seller/supplier
metrics
3. ...

Overall Marketplace Metrics (1/2)
Gross merchandise value (GMV)
= Total sales dollar value for good or services purchased ...

Overall Marketplace Metrics (2/2)
Revenue
= Income that the company receives (e.g., transaction fees, listing
fees, premiu...

Seller/Supplier Metrics
* recommended at a minimum
General KPIs Engagement KPIs*
Number of suppliers
Supplier growth rate
...

Buyer Metrics
General KPIs Engagement KPIs*
Number of buyers
Buyer growth rate
Average dollar amount purchased
per buyer
A...

Chapter 1: Introduction to Marketplaces 
 
Chapter 2: Seeding, Growing, and Scaling a Marketplace 
 
Chapter 3: Finding th...

Marketplace Tools
Don’t reinvent the wheel! Leverage existing tools.

Chapter 1: Introduction to Marketplaces 
 
Chapter 2: Seeding, Growing, and Scaling a Marketplace 
 
Chapter 3: Finding th...

What investors look for
We encourage you to read Bill Gurley’s outline of 10 factors to
consider when evaluating marketpla...

What traction we want to see
Every startup is different and we conduct our due diligence
on a case-by-case basis.
– There ...

Valuation multiples for marketplaces
The main multiple we like to use for marketplace
businesses is GMV.
– Rule of thumb: ...

Example: Etsy
GMV multiple was as high as 1.7 immediately after IPO.
2015 Total Revenue ~$270M
2015 Total GMV ~$2.4B
Take ...

What about early-stage marketplaces?
Early metrics don’t count into valuation. We’re evaluating
the team, idea, and vision...

What you should focus on
Early-stage founders should focus on:
1. Growing GMV
2. Proving out take rate
Occasionally, we se...

Chapter 1: Introduction to Marketplaces 
 
Chapter 2: Seeding, Growing, and Scaling a Marketplace 
 
Chapter 3: Finding th...

Looking ahead
Marketplaces are tough to build, but once they reach liquidity, they can
be even tougher to kill.
Buying and...

Thanks for reading!
Angela Kingyens
@atkingyens
angela@versionone.vc
@bwertz
boris@versionone.vc
Boris Wertz

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