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As a marketplace figures out how to bring buyers and sellers together and builds liquidity, the virtuous cycle starts kicking in. The growth of sellers and buyers quickly accelerates. The ultimate goal is that a successful startup grows into a big company. But as you begin to scale, there are new considerations and strategies to keep the forward progress going. <strong>Foster trust and safety</strong> A certain level of trust is required for any type of transaction to take place. During the early days of your marketplace, you may have a small and passionate community. As such trust and safety are not significant concerns. However, as a marketplace grows and gains popularity, it will inevitably attract some bad actors. <em>Your job as a marketplace is to fight these bad actors proactively, so both buyers and sellers have confidence in the platform.</em> Transparency is one of the most effective ways to establish trust and credibility. This can be done with a rating system, user reviews, or testimonials. Some platforms act on this data to weed out the bad users (either buyers or sellers). For example, you’ll never see an Uber driver with a rating lower than three stars. Uber filters these drivers out, so customers don’t have to sift through driver reviews before getting a ride. Providing some level of guarantee – be it for service quality, delivery time, or payment – is critical for instilling trust on both sides. If your marketing claims you’ll be at your customer’s doorstep in 15 minutes, you need to make sure you can deliver on that promise. If a buyer never receives their item, you’ll need to be ready with a money-back guarantee. <strong>Support your power sellers</strong> In addition to solving any trust issues, the next step to scaling a marketplace is to support your power sellers – those sellers who earn a living off your marketplace. This approach may seem counter-intuitive for some startups that are typically used to pleasing end users (the buyers). But to be successful at scale, a marketplace needs good supply. For example, eBay offers an official <a href="http://pages.ebay.ca/help/sell/sell-powersellers.html">PowerSeller program</a> where qualified sellers get priority customer, unpaid item protection, a “Top-rated Seller” designation, and support and other promotional offers. Threadflip’s leadership team has regular <a href="http://firstround.com/review/How-Modern-Marketplaces-Like-Uber-Airbnb-Build-Trust-to-Hit-Liquidity/">one-on-one calls</a> with top sellers to find out what they like about the experience and what Threadflip could be doing differently. <strong>Develop an ecosystem</strong> Think about add-on products, services, and experiences that give sellers a deeper connection with your marketplace. These are incredibly effective ways to differentiate the selling experience on your marketplace from other sites, as well as lock in providers/sellers to your site. The first approach is to develop and/or offer these add-on products and services yourself. For example, <a href="https://get.uber.com/cl/financing/">Uber</a> connects its drivers with exclusive leasing and financing offers. And qualified drivers (those who completed 200 rides the previous month) can now get gas discounts with the <a href="http://www.forbes.com/sites/ellenhuet/2015/06/09/uber-driver-gas-credit-card-fuel-mastercard/">Uber Fuel Card</a> (issued by MasterCard). The second approach is to support those third-party services that spring up around your site. Marketplaces have a tremendous opportunity to scale into a platform – with an entire ecosystem of value-added services and startups. Shopify, a SaaS provider of ecommerce stores for SMBs, has done an excellent job of understanding and formalizing the role that third-party developers play in enhancing Shopify’s overall value to sellers. In the Shopify Apps Store, sellers can find third-party apps for selling, marketing, inventory management, customer support, shipping, reporting/analytics, and more. <strong>Build a moat</strong> The last part about scaling your marketplace is to build a moat against the competition by having the right product mix (unique supply) to become a frequent destination for your customers. You can read more about this in the post <a href="https://www.versionone.vc/marketplace-dynamics-buyer-mindshare-key-building-moat/#ixzz3eeJNqstu">“Buyer mindshare is key to building a moat”</a>

It’s widely accepted that SaaS has permanently changed software sales. Enterprise software sales once meant a large “boots on the ground” field sales team who knew how to wine and dine the right individuals and stakeholders. With the emergence of SaaS, the sales process became more transactional and less about relationships. With software products at lower price points, companies need to make up revenue via volume. As a result, focus began to shift from field sales to inside sales. During the first six years,<a href="http://www.forbes.com/sites/kenkrogue/2013/02/26/what-is-inside-sales-the-definition-of-inside-sales/"> Salesforce literally built their company</a> around inside sales. Higher volume at lower price points also means that organizations have a lot more data to measure the sales process and that takes us to the next stage in enterprise software. <b>Sales 3.0: data-driven</b> We’re now entering the third phase in the evolution of sales. Sales 3.0 is more methodical and analytical, driven by continuous testing and tweaking. This can be at a micro level, such as determining which messaging is more effective on an email sequence, how many touch points are needed to go from zero to opportunity, and what combination of email, phone, text, twitter, etc. are the right one for your buyer persona (our portfolio company, <a href="http://www.outreach.io">Outreach.io</a> enables such tests). Testing can also be on a large scale such as which sales structure makes the most sense: SDR and account reps or just account reps? Is it better to have the same team deal with inbound leads and outbound calling or should specialized teams handle each function? This transition to a metrics-based approach is similar to what we saw in marketing a few years ago, as the practice shifted from largely unquantified “brand building” advertising to very analytical, ROI-driven online marketing. In this new data-centric reality, the ability to adapt quickly is key. The old mindset that clings to “how it’s always been done” won’t work. Instead, sales leaders need to stay open to changing the process and structure of the sales team, while also helping manage their people to adapt to an ever-changing environment.

Last October, we made our first investment out of <a href="https://www.versionone.vc/announcing-version-one-fund-ii/">Fund II</a> and are excited to announce this news today as the company launches publicly out of beta. <a href="http://volley.works">Volley</a> is a friendly place for helping others solve problems online. Volley members can post requests in response to the question, “What are you looking for?” You can sift through a list of requests quickly and either reply directly to a request, volley it on to someone you know who can help, or just skip it if you can’t think of anyone in your networks suited to help. We have posted technical questions on drones, podcasts, Facebook groups, transportation/logistics, etc.; as well as personal questions (like what surgical graft I should get after I tore my ACL).  Similarly, we’ve leveraged the Volley community to recruit help (i.e. videographers, illustrators) and to get leads on renting out parts of our Vancouver office. The idea is simple, and there is no doubt that many other startups have worked on facilitating connections, but here’s why we decided to lead Volley’s round. There is a huge opportunity in the social space as everyone’s networks are fragmented across different services and platforms.  For example, with friends on Facebook being mostly personal and private, acquaintances on LinkedIn being professional, and followers on Twitter being public, this makes connectivity inefficient.  Volley can thus be the dominant way to solicit help from and access the knowledge of relevant people who are “siloed” across a variety of networks. &nbsp; <b>Tapping into a “pay it forward” culture</b> What’s exciting about Volley is that they are capturing the essence of Silicon Valley’s “pay it forward” culture and replicating it on a grand scale.  Living and working in the SF Bay Area, I have been fortunate to be surrounded by people who are incredibly generous with their time and knowledge, always eager to make introductions and help each other out. Volley offers the chance to open this Silicon Valley dynamic to community after community after community. The first time we met Volley founders Mike Murchison and David Hariri (they later welcomed Brendan Lynch as a co-founder too), we were blown away by their thoughtfulness. This same thoughtfulness has translated into incredible traction and engagement among the young professionals on Volley, especially in the Toronto startup ecosystem.  For instance, <i>every</i> request receives an average of over 5 replies. Volley has organically spread to other cities and they are looking forward to growing their community with this public launch. &nbsp; <b>We are power users, not just investors</b> We have been active members during Volley’s beta, deriving much value from the platform. For example, I posted the request below: <a href="https://gregburnison.ca/code/version1v/images/VolleyScreenshot.png"><img class=" size-medium wp-image-2419 aligncenter" src="https://gregburnison.ca/code/version1v/images/VolleyScreenshot-500x270.png" alt="VolleyScreenshot" width="500" height="270" /></a> Within two days, I got 15 very thoughtful answers from friends, and friends of friends whom I’ve never met before, and compiled a list of over 50 tools (to be shared in an upcoming blog post).  Yes, I could have discovered many of these tools via Google.  In fact, this is how I started but I quickly found that the information was outdated and/or sponsored (i.e. inherently biased).  Instead, through the Volley community, I was able to learn who uses which tools and why, <i>today</i>. We’re certain many users have found great value from Volley too - and we would to hear those stories. Have a question or need some help?  Getting the urge to be helpful?  Come experience the power of Volley’s community. <b>To learn more, visit</b> <a href="http://volley.works"><b>http://volley.works</b></a><b> or follow on @volleyworks on</b> <a href="https://twitter.com/volleyworks"><b>Twitter</b></a><b>.</b>

The virtuous cycle is the holy grail for online marketplaces. In this positive feedback loop, a high number of quality suppliers attract more customers; then more customers attract more suppliers to join. This cycle continues as a self-sustaining growth engine until both supply and demand reach critical mass to be “winner takes all.” But how does a marketplace create the momentum for a virtuous cycle in the first place? <h3><em>Identify and double down on the hot spots</em></h3> One of the most important things you can do is identify and double down on the things that work in your marketplace. As your marketplace starts scaling, there will be many matches and transactions between buyers and sellers. But not all matches are created equal. Identify where things are really clicking (on both the supply and demand side) - this could be in certain geographies, audience segments, price points, and user behavior. Then you’ll want to double down on these hot spots, often following Paul Graham’s advice to <a href="http://paulgraham.com/ds.html">do things that don’t scale</a>. Don’t worry that the absolute numbers hardly seem worth the effort. At this point you’re just trying to get the virtuous cycle going. If the market exists, you can recruit your suppliers and customers manually, then switch over to less manual (more scalable) methods. <p style="padding-left: 30px;">"At some point, there was a very noticeable change in how Stripe felt. It tipped from being this boulder we had to push to being a train car that in fact had its own momentum."?Patrick Collison, Stripe (source: <a href="http://paulgraham.com/ds.html">http://paulgraham.com/ds.html</a>)</p> Airbnb is a classic example. Founders Brian Chesky, Nathan Blecharczyk and Joe Gebbia frequently traveled to NYC to acquire their early users. Then when they realized that <a href="https://growthhackers.com/companies/airbnb/">high quality listing photos</a> were key to attracting customers (and differentiating the experience from Craigslist), they rented a $5,000 camera and went door to door, taking professional pictures of as many New York listings as possible. This approach led to two to three times as many bookings on New York listings. <p style="padding-left: 30px;">"When New York took off, we flew back every weekend. We went door to door with cameras taking pictures of all these apartments to put them online. I lived in their living rooms. And home by home, block by block, communities started growing. And people would visit New York and bring the idea back with them to their city.” – Brian Chesky, for <a href="http://www.theatlantic.com/business/archive/2013/08/airbnb-ceo-brian-chesky-on-building-a-company-and-starting-a-sharing-revolution/278635/">The Atlantic</a></p> <h3><em>Be Patient: marketplaces take time</em></h3> With a typical SaaS or e-commerce start-up, you probably should reassess your market or model if you don’t see signs of traction after six to nine months. However, this timetable is way too accelerated for marketplaces. Considering you need to establish both buyer and seller communities, you will need more time to prove out your business. As I <a href="http://www.forbes.com/sites/ciocentral/2013/02/07/5-tips-for-building-a-two-sided-online-marketplace/">wrote in Forbes</a>, it can take three years for a marketplace to get going. Looking at some Version One portfolio companies… <ul> <li>It took <a href="http://www.wattpad.com/">Wattpad</a>, a community for readers and writers, three years to get to <a href="http://ow.ly/gRWsY">300,000 uploads</a>; then it only took another three years to reach 10 million.</li> <li>Crowdfunding platform <a href="http://www.indiegogo.com/">Indiegogo</a> was founded in 2007, but its break-out year didn’t come until four years later.</li> </ul> This means that founders need to believe in their idea even when no one else does. But that doesn’t mean turning a blind eye to the market. You’ve got to continually look for small 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, and positive user feedback. Just as importantly, investors need to stay patient: no two-sided marketplace is built overnight.

<a class="zem_slink" title="Clayton M. Christensen" href="http://www.claytonchristensen.com" rel="homepage">Clayton Christensen</a> has written the book on disruption. He’s one of Silicon Valley’s most popular business school professors and we often subscribe to his theory on<a href="https://www.versionone.vc/the-easiest-path-to-growth-and-profit-is-up-why-startups-should-focus-on-the-long-tail/"> disruption from below</a>. With his theory “Disruptive Innovation,”<a href="http://www.claytonchristensen.com/key-concepts/"> Christensen states</a> that “a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” In essence, cheaper products start with less profitable customers, but eventually take over and devour an entire industry. While the theory is powerful and fits numerous cases, including Christensen’s own example of hard disk drives, we’ve seen counter-examples that suggest his theory is not as universal as we once thought. On the product side, Apple has proven that innovation can come from above. There’s a great analysis in “<a href="https://stratechery.com/2013/clayton-christensen-got-wrong/">What Clayton Christensen got wrong</a>.” It’s well worth reading in entirety, but one of the key points is that Christensen’s examples are based on buying decisions made by businesses, not consumers. Business buyers are extremely rational, with decisions coming down to balancing lists of features vs. prices. “The business buyer, famously, does not care about the user experience. They are not the user, and so items that change how a product <i>feels</i> or that eliminate small annoyances simply don’t make it into their rational decision making process.” That’s where Apple comes in. For the past 15 years, they’ve been focused on differentiation based on design and user experience. While these things can’t necessarily be quantified on a price-performance breakdown, they are undeniably felt by consumers and shape the buying decision. <b>Disruption and on-demand services</b> The past few years have brought about the rise of the on-demand economy. With nothing more than a few taps on your smartphone, you can summon an Uber or have your weekly groceries delivered to your doorstep. These on-demand services are disrupting entire industries, with the medallion-based taxi industry being the most visible and contentious example right now. Yet none of these new services offer anything cheaper- in most cases it’s quite the opposite. Huge groups of today’s consumers expect to get what they want, when and where they want it. And they’re showing that they’re more than willing to pay a premium for convenience and instant gratification. For example, GeekWire did a great<a href="http://www.geekwire.com/2014/grocery-delivery-wars-amazon-fresh-instacart-safeway-stacked-tests/"> pricing comparison</a> of grocery delivery services, highlighting the premium that <a class="zem_slink" title="Instacart" href="http://www.instacart.com/" rel="homepage">Instacart</a> customers pay. Both Uber and Instacart are disrupting from above, moving from premium to mainstream. Uber started with its premium Uber Black service (town car) before launching into its mainstream UberX product (taxi). And Instacart is pivoting away from setting a surcharge on each delivered item, instead looking to partner with grocers directly in order to bring down the premium fees. The bottom line is that disruption can come from both above and below. The key is to define your own strategy for going after the incumbents in your market.

The earliest days in a marketplace are a tricky time. As I’ve discussed before, there’s a <a href="http://www.forbes.com/sites/ciocentral/2013/02/07/5-tips-for-building-a-two-sided-online-marketplace/">chicken and egg problem</a> when it comes to supply and demand: customers need supply, and suppliers need customers. But it’s nearly impossible to ramp up supply and demand in lock step. We’ve found that in most cases it’s best to focus on building up the supply first. That’s because there’s more incentive for a seller to invest their time in the early days. There’s zero motivation for customers to stick around without any inventory. So how to you go about seeding supply? Here are four common strategies: <p style="text-align: left; padding-left: 30px;"><strong>1. Identify unique inventory</strong></p> One of the best ways to convince sellers/providers to join your marketplace is if they don’t already have an online platform to sell. For example, <a class="zem_slink" title="Etsy" href="http://www.etsy.com/" rel="homepage">Etsy</a> went after the producers of hand-made goods. These designers and crafters often found their unique goods buried within <a class="zem_slink" title="eBay" href="http://ebay.com" rel="homepage">eBay</a>’s massive inventory and typically resorted to selling their items locally at craft shows, farmers’ markets, etc. Etsy came along and brought these local experiences online. The advantage of focusing on unique inventory is that it won’t take much effort to persuade providers to join once they’re made aware of your site. In addition, these types of sellers will typically bring along some of their own buyers – helping you ramp up your customer base at the same time. <p style="padding-left: 30px;"><strong>2. Convince existing inventory to list on your platform</strong></p> If your ideal suppliers already have an online outlet, you’ll need to be creative and exert more energy to convince them to join your young marketplace. <a class="zem_slink" title="Airbnb" href="http://www.airbnb.com/" rel="homepage">Airbnb</a> is a classic example: Airbnb’s target customers and suppliers were using <a class="zem_slink" title="Craigslist" href="http://www.craigslist.org/" rel="homepage">Craigslist</a> to rent out and find lodging outside of the standard hotel experience. Airbnb offered a more personal and trustworthy experience than the free-for-all on Craigslist, but Craigslist had one thing Airbnb didn’t: a massive user base and inventory. As detailed in this <a href="https://growthhackers.com/companies/airbnb/">Growth Hackers case study</a>, Airbnb found some interesting ways to leverage the existing supply on Craigslist, including emailing Craigslist listers and encouraging them to check out Airbnb. While this approach may be close to spam, it most likely enabled Airbnb to cheaply reach tens of thousands of their targeted suppliers each day. <p style="padding-left: 30px;"><strong>3. Pay for inventory</strong></p> During the early days at my startup JustBooks, our first growth hack was buying books to list so we didn’t have an empty site. Similarly, when Uber launched in Seattle, they paid town car drivers to idle. This generated the supply and once the customers and money started rolling in, they switched those drivers over to commission. Buying inventory artificially creates supply, improving the way the marketplace works at the outset. It’s an easy way to get inventory in the early stage, but it’s not scalable as it gets expensive to both buy and manage inventory yourself. <p style="padding-left: 30px;"><strong>4. Aggregate readily accessible inventory</strong></p> A last strategy is to aggregate inventory that’s already listed out there, for example through affiliate programs. This approach will provide the initial scale that you’re looking for, but there are several key drawbacks. First, while you may have a lot of inventory, none of it will be unique: why should buyers come to your site versus all the other sites you’re pulling inventory from? The second problem is that when you aggregate existing inventory, you run the risk of becoming a cross-platform utility rather than your own marketplace with lots of highly engaged users. <a href="http://avc.com/2012/09/cross-network-utility-and-networks/">Fred Wilson</a> discusses this issue with networks, but his words are equally relevant to marketplaces: <blockquote>If the initial utility of an app is to connect to a bunch of networks, collect information, present it, and then let the user engage with one or more of those networks, what incentive is there for the user to engage directly with other users of the app and help build a network inside of it?</blockquote> No matter which approach you use, it’s easier to build a strong community if there’s a large overlap between buyers and sellers. For example, think about the number of Airbnb hosts who stay with other hosts during their own travels. Likewise, sellers on Etsy also make purchases since they appreciate handcrafted goods. Peer-to-peer marketplaces are more likely to have sellers that double as customers and vice versa. The bottom line is if you are building a marketplace, you need to devise an effective strategy for ramping up supply. The next stage is getting to that virtuous cycle of supply and demand.

With more and more messaging platforms emerging, members within groups and communities are more likely to communicate across multiple platforms (SMS/iMessage, Whatsapp, WeChat, Facebook messenger, etc.), and therefore, in a less consistent and disparate manner.  As a result, we feel there is a great opportunity for startups to provide a better, more targeted experience for these groups and their communication needs.  Along these lines, we’re excited to announce our investment in <a href="http://www.shiftmessenger.com/">Shift Messenger</a>, a messaging app designed for hourly workers – it particularly gives these workers an easy way to communicate and ask co-workers for help covering a shift. <strong>Why are we excited about Shift Messenger? Four reasons:</strong> <ol> <li>It’s designed for an underserved vertical. While there are plenty of collaboration and communication tools built for office workers – such as Slack, HipChat, and Yammer – few tools cater to the 600 million global/30 million U.S. hourly workers in retail, restaurants, and healthcare. As a result, these workers typically rely on ad hoc solutions like phone, texting, and Facebook groups to swap shifts.</li> <li>There’s a frictionless setup.  No one has dedicated work emails within the hourly worker community, making it hard to communicate worker-to-worker or employer-to-employee unless people share their personal phone numbers or connect via Facebook. That’s why we were particularly excited to see that users don’t need to connect their phone number or Facebook account to sign up with Shift Messenger. No signup is necessary for Shift. New members of a community just need to be approved by an existing member.</li> <li>They take a bottom-up approach.  Shift Messenger is very much a member-driven community. No integration, or approval, is required with managers or enterprises. A worker can create a community around his/her workplace and invite others to it. Ultimately, once there’s a critical mass of employees using the app in a particular location, management will want to take advantage of the platform to communicate with their employees – a common trend with the consumerization of the enterprise.</li> <li>It’s ripe for strong viral effects.  A large percentage of hourly workers either work for multiple companies at the same time, or jump between companies at a higher rate than office workers. This means there’s a strong opportunity for cross-pollination: if you have been using Shift Messenger at one job, you’ll be likely to introduce it at your next job rather than go back to using an inferior solution.</li> </ol> Shift Messenger was founded by Austin Vedder (CEO) and Matt Tognetti (CTO), former <a href="http://www.redbeacon.com/">Redbeacon</a> employees who saw the scheduling problems facing retail workers after Redbeacon was acquired by Home Depot. They are also alumni of the most recent Y Combinator batch (YC W15). We’re excited to be a part of their journey as they build a suite of communication tools that will transform the way that non-office work environments and their teams operate. To learn more, visit http://www.shiftmessenger.com/ and follow @ShiftMessenger on <a href="https://twitter.com/shiftmessenger">Twitter</a>.

I recently came across a <a href="http://vator.tv/news/2015-04-27-marco-zappacosta-on-thumbtacks-evolving-business-model#81iF1JXpuGBZpgFd.99">good story</a> about pivoting and how hard it can be to find the right monetization model for your marketplace. <a class="zem_slink" title="Thumbtack" href="http://www.thumbtack.com" rel="homepage">Thumbtack</a> is a platform that helps people find service professionals (photographers, painters, home contractors, movers, etc.). My friend (and Thumbtack CEO) <a class="zem_slink" title="Marco Zappacosta" href="http://twitter.com/mlz" rel="twitter">Marco Zappacosta</a> described how the company first tried transaction fees, then a subscription fee, before finally settling on a lead-based model. "I don’t know if it was because we were sort of dumb, or if we weren't sort of seeing things correctly, but it took us three tries to get it right," he said. <strong>Transaction fees vs. listing fees</strong> Let’s start with the transaction fee, where the marketplace takes a cut of each transaction generated through the platform. It’s the fairest monetization model for suppliers and vendors, as they only pay a fee if and when they sell something. By taking away the upfront costs of listing and the risk of not making a sale, this model encourages more suppliers to join the platform…thus increasing a marketplace’s supply. A transaction fee model also scales nicely: the more sales your platform generates, the more revenue you bring in. By contrast, listing fees can have the opposite effect. Charging suppliers to list on your site will discourage many from listing. You might find your marketplace soon hits a ceiling where you can't get any new suppliers to join. In addition, this model is less fair than monetizing by transaction fees as listing fees hit all vendors equally – no matter how many sales they end up making on the site. <strong>What to do when services are delivered offline</strong> A business model based on transaction fees seems like the simplest and most effective approach for any marketplace – and it’s the first model that Thumbtack tried. However, Thumbtack soon realized that a transaction fee model is hard to pull off when transactions are made online, but the service is delivered offline. For example, when a plumber goes to the customer’s house to fix a leaky faucet, it’s hard for Thumbtack to stay in the loop and know when the service was performed and for how much. That makes charging by transaction fees tricky. Marketplaces that deal with high-ticket products or services with a low degree of commoditization will find themselves with this same struggle. That’s why Thumbtack settled on the introduction or lead based model: the company makes money by charging suppliers to contact customers. A vendor on Thumbtack sees all the details for a particular job (what, when, where) and if they feel they are a good fit, they pay Thumbtack to be introduced to compete for the job. Another option for this situation is to make the base listing free and then charge for enhanced services like better placement. This encourages more suppliers to list, but revenue can be hard to come by since only a small percentage of suppliers will choose to pay for the better placement. Such a freemium approach works best for companies that serve a huge market: even if just a small percentage of suppliers pay for additional seller services, their base is so big that they can build a large business (e.g. Yelp). However, if you are tackling a niche market, you’ll never reach the scale necessary for a freemium model to work as the core source of revenue. Last but not least, a start-up can decide to attack the market with a full-stack approach and <a href="https://www.versionone.vc/the-emergence-of-managed-marketplaces-greater-opportunities-but-a-lot-more-risk/)">manage the marketplace</a> or even become the provider of the service (like Homejoy, Handy, Pro.com). By standardizing the offline service, you can get closer to the simplicity of an online transaction. However, the downside is you need to take on the added operational complexities and risk of managing, guaranteeing, and/or providing the service. So, generally speaking, my advice to marketplace start-ups is to try to move your business model as close to monetizing the transaction as possible in order to minimize the friction for onboarding supply. But if the underlying service or product doesn’t lend itself to this model, then you could try Thumbtack’s strategy and adopt the lead-generation model. <h6 class="zemanta-related-title" style="font-size: 1em;">Related articles</h6> <ul class="zemanta-article-ul zemanta-article-ul-image" style="margin: 0; padding: 0; overflow: hidden;"> <li class="zemanta-article-ul-li-image zemanta-article-ul-li" style="padding: 0; background: none; list-style: none; display: block; float: left; vertical-align: top; text-align: left; width: 84px; font-size: 11px; margin: 2px 10px 10px 2px;"><a style="display: block; overflow: hidden; text-decoration: none; line-height: 12pt; height: 83px; padding: 5px 2px 0 2px; background-image: none;" href="http://vator.tv/news/2015-04-27-marco-zappacosta-on-thumbtacks-evolving-business-model" target="_blank" rel="noopener noreferrer">Marco Zappacosta on Thumbtack's evolving business model</a></li> </ul>

The success of <a class="zem_slink" title="Uber (company)" href="http://www.uber.com/" rel="homepage">Uber</a> has inspired hundreds of startups to call themselves the “Uber of X, Y, or Z.” There are now apps to order groceries, have you car washed, get legal counsel, and much more. Uber is part of a broad category of on-demand mobile services. Thanks to smartphones and cloud computing, it’s easier than ever to connect people who need a job done with people looking to take on some extra work and monetize their spare time. This new marketplace model is responsible for shaking up numerous industries. Uber and <a class="zem_slink" title="Lyft" href="http://lyft.me" rel="homepage">Lyft</a> drivers are disrupting the taxi industry. <a href="http://www.homejoy.com">Homejoy</a> and <a href="http://www.handy.com">Handy</a> traditional cleaning companies. Entrepreneurs and investors are excited by the massive opportunity potential, while others worry that the Uberification of our economy will turn every good full-time job into a flex-time gig. However, amidst all the fear and exuberance, it’s important to realize that the on-demand service model that has lifted Uber to its $40B valuation won’t work for every industry. Several underlying factors made the taxi industry ripe for disruption by on-demand marketplaces. While these ingredients certainly aren’t unique to hiring a ride, they do not cut across all industries and verticals. Consequently, finding an untapped market and saying you’re going to build the “Uber for X” is hardly a surefire route to success. So what are the underlying drivers that enabled Uber to thrive in the car service industry? There are three key elements: it’s a commoditized service with a high purchase frequency that is truly time-sensitive. <strong>Underlying Commoditized Services</strong> When it comes to hiring a ride, most of us are happy as long as a driver brings us from Point A to Point B in a clean car without getting lost. This makes us pretty flexible in terms of who delivers the service. Yet the more complex the service, the harder it becomes for consumers to accept the idea that somebody at random will show up each time. We develop preferences for who cuts our hair, babysits our children, performs home repair, and gives out legal/medical advice. To overcome the trust-barrier, marketplaces can leverage user reviews and Facebook profiles. For example, through Facebook Connect, Airbnb has managed to make people feel safe and secure when opening up their home or staying in a stranger’s place. Other strategies are to certify the service provider pool, tie into existing review sites/peer testimonials, and offer money-back guarantees. Sites do exist for non-commoditized services today. But they operate more like a lead generation engine than an actual marketplace capable of facilitating the entire transaction with the couple-of-taps simplicity of Uber. Marketplaces for <a href="https://www.versionone.vc/future-online-marketplaces-complex-transactions/">complex transactions</a> will need to productize their services, with boxed offerings that pre-define the scope, pricing, duration, and deliverables of a service. By removing choice and customization from the process, it’s more realistic for customers to arrange a complex service on a mobile app. <strong>High purchase frequency</strong> The best marketplaces have high purchase frequency and regular usage. For city dwellers and frequent travelers, taxis are used on a daily, or at least weekly, basis. Few other services have such a high purchase frequency. On top of this, Uber also enjoys significant spill-over effects as travelers move from one location to another. With high frequency use cases, customers fall into the habit of using the same service as long as they’re satisfied. It’s easy then for a startup to become the “home screen app” for that particular use case. By contrast, it is much harder to retain customer mindshare with lower purchase frequencies. For example, if customers need a yard cleanup a few times a year, they’re more likely to begin the research process over again each time. <strong>True on-demand use case</strong> Many of the services that fall into the on-demand mobile services category aren’t actually “on-demand.” In most cases you don’t need a cleaning service or house painter to show up within minutes, or even the same day. But, taxis are a different story. A true on-demand marketplace requires sufficient liquidity on the supply side. Without enough available drivers in a car service marketplace, customers will be left waiting on the curb. This creates a large barrier to enter the market, since a new competitor needs to launch with hundreds of providers, not just a handful. By contrast when services can be 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. As such, we can expect just one or two major players for a true on-demand service, while less time-sensitive markets will be crowded with smaller companies. <strong>Final thoughts</strong> This is not to say that Uber will be the last multi-billion dollar Unicorn in the marketplace space. I have no doubt that some savvy companies will figure out how to move more complex transactions online, shaking up more industries in the process. However, entrepreneurs and investors need to be thoughtful when evaluating the underlying factors of a marketplace and vertical, as the “Uber of X” won’t necessarily work as well as the original.

At Version One, we love marketplaces and platforms. Over 50% of our portfolio companies fall into this category including our recent investments in <a href="http://www.headout.com">Headout</a> (a mobile-first marketplace for last-minute travel experiences) and <a href="https://www.varagesale.com/">VarageSale</a> (a mobile-first community-driven Craigslist). We’re often asked what we look for in a marketplace. While there are many factors to consider (Bill Gurley’s <a href="http://abovethecrowd.com/2012/11/13/all-markets-are-not-created-equal-10-factors-to-consider-when-evaluating-digital-marketplaces/">list</a> is one of my favorites), the two most important to us are: 1) high fragmentation; and 2) regular frequency of use or purchase. Keep in mind that these aren’t the only factors that lead to success. For instance, other VCs feel that a marketplace with less frequency of purchase can be offset by a high AOV. However, for us, these two points create the foundation of our thesis and we’re more likely to dive into a startup’s data if we’re aligned at this higher level. &nbsp; <strong><em>What type of traction do you want to see in order for you to invest?</em></strong> It’s a commonly asked question and my answer is always “it depends.” Every startup is different and we conduct our due diligence on a case-by-case basis. Yet with that said, there is a general set of questions we use to evaluate the dynamics of a marketplace and assess a startup’s product-market fit. Using <a href="http://www.headout.com">Headout</a> as an example, here’s a sample of questions we may ask a potential marketplace startup. While some of the specific details may vary based on market, any founder can use this as a primer for building out their own metrics. <strong>On buyers (i.e. travellers/tourists):</strong> <ul> <li>How do you define engagement? What does your <a href="https://www.versionone.vc/engagement-pyramid/">engagement pyramid</a> or conversion funnel look like (i.e. % of users who download app, browse your app, purchase based on overall signups or relative to previous activity)?</li> <li>How do you identify your most engaged users? Have you been able to identify common traits of power users (i.e. perhaps a demographic breakdown)?</li> <li>What is the average time spent on the app on the whole, and on a per-activity basis?</li> <li>Do you have a weekly or monthly cohort analysis that you can share? What is your DAU and/or MAU?</li> <li>What is the average spend per user? Are users sensitive to price?</li> <li>How many users have purchased more than once? What is the time between first and second time of purchase?</li> <li>What is the average time between booking and experiencing the purchase?</li> </ul> <strong>On suppliers (i.e. vendors):</strong> <ul> <li>What percentage of vendors’ total inventory is made available on your marketplace?</li> <li>How often do suppliers list new inventory?</li> <li>What percentage of listings are purchased?</li> <li>How long is something posted before it is purchase?</li> <li>What is the average price point? What is the most popular price for purchases?</li> <li>What is the average discount offered by vendors (if any)?</li> <li>What are the common characteristics of the most successful vendors?</li> <li>For scale: what percentage of vendors do you need to sign up (in a particular area) for critical mass or starting liquidity?</li> </ul> <strong>In general:</strong> <ul> <li>To get a greater sense of product-market fit: what is the total number of downloads to date, number of users (suppliers and vendors), etc.?</li> <li>Are there any overlaps between suppliers and buyers? If so, what percent? (Note: this question won’t be applicable to every marketplace)</li> <li>What is your GMV? What is your take rate?</li> <li>What are your sources of traffic for users?</li> <li>What is your CAC by channel?</li> </ul> Note that wherever applicable, I ask for average values (i.e. spend, price, buyers, suppliers, time) <em>and</em> absolute numbers and distributions. As you can imagine, there are many more questions to ask but these serve as a good conversation starter between Version One and the entrepreneurs we meet, helping us develop a stronger thesis faster. Ultimately, we invest in smart founders – ones who are incredibly passionate, ambitious, and talented. But these founders are also data-driven, no matter how early the company is. We want to know that an entrepreneur has a good hold on all KPIs, i.e. the knobs and levers that he or she can turn and pull in order to engage users and scale the business. In fact, the founders we have been most impressed with have been able to present their data quickly and communicate insights clearly.

We’re thrilled to announce our newest investment:  <a href="https://www.headout.com">Headout</a>, an on-demand mobile concierge that helps travellers discover and book last-minute activities during vacations at great prices. Headout makes discovering new cities easy and spontaneous. As frequent travelers, we have been watching this space for a while, but most players took a web-first, mobile-second approach. Web-first doesn’t make sense as travel experiences are typically something you book spur of the moment when exploring a new city (or a day in advance at maximum). That’s why we were so excited when we were introduced to Headout. They have a beautiful app that lets you book travel experiences at unbeatable prices. Headout focuses on activities that are ready to be booked within the next 24 hours, curating the inventory of tour operators, activity providers, guides and other in-destination service providers. It’s these types of experiences that are typically hard for travellers to find, as they’re fragmented across vendors who don’t always have good tools to list their inventory online. We’re super bullish on marketplaces and mobile, and Headout is a perfect use case that marries the two. There’s also a great team at the helm with <a href="https://twitter.com/varunkhona">Varun Khona</a>, <a href="https://www.crunchbase.com/person/vikram-jit-singh">Vikram Singh</a>, and <a href="https://www.linkedin.com/in/sultania">Suren Sultania</a>. They were part of <a href="http://techcrunch.com/2015/02/04/niche-to-win/">500 Startups accelerator, Batch 11</a>.  We have been extremely impressed by their hustle, execution and ability to create a beautiful product. This team has been thinking about how to re-imagine and re-engineer the way travelers discover the world for a long time, and we’re thrilled to be a part of the journey. In this $1.8M seed round, we are investing alongside 500 Startups, Nexus Venture Partners, Arena Ventures, Maiden Lane Ventures, Funders Club, Haystack Fund, Ludlow Ventures, and many super angels. Headout is currently in New York City and Las Vegas, with plans to launch in San Francisco, Los Angeles, Chicago and Washington DC in the next few months. If you find yourself in these cities soon, make sure to download the app on <a href="http://bit.ly/tldshios">iOS</a> or <a href="http://bit.ly/tldshapp">Android</a> and try a new experience! To learn more, visit https://www.headout.com/ or follow on @Headout_App on <a href="https://twitter.com/Headout_App">Twitter</a>. &nbsp;

One of the more interesting developments over the past few years is the emergence of managed marketplaces. The term means different things to different people, but I consider it a marketplace that not only connects buyers and sellers, but takes on additional parts of the value chain to deliver a better overall experience. For example, <a href="https://www.beepi.com">Beepi</a>, a peer-to-peer marketplace for buying and selling cars, inspects every car listed on the platform – giving people a more trustworthy, stress-free way to buy a car. The platform also adds value to its sellers by guaranteeing a sale: Beepi buys the car if you don’t sell it within 30 days. <a href="https://driveshift.com/sf/about">DriveShift</a> adds concierge services to its marketplace for buying/selling cars. For example, they’ll bring a car to your doorstep if you’re interested in a test drive and will stop by for an instant appraisal if you’re thinking about selling. The managed approach isn’t limited to auto marketplaces. <a class="zem_slink" title="Threadflip" href="http://www.threadflip.com" rel="homepage">Threadflip</a> and Real Real handle the logistics/cataloging for its sellers in women’s clothes and luxury products respectively. These types of marketplaces can be game-changers in their categories, particularly when dealing with high-value ticket items. By adding managed services, marketplaces can create new demand by helping buyers overcome the trust issues associated with most peer-to-peer marketplaces. There’s a big difference in trust levels when buying a car via Beepi or <a class="zem_slink" title="Craigslist" href="http://www.craigslist.org/" rel="homepage">Craigslist</a>. In addition, by adding concierge/logistics support, these marketplaces unlock brand new supply. Most sellers of luxury items aren’t inclined to go through the time and trouble associated with cataloging and listing their clothes on a marketplace. But a managed marketplace can take care of all the hassle. Yet alongside these advantages, there are a few downsides to building a managed marketplace: <ol> <li>Taking on additional tasks cuts into your gross margin and adds operational complexity. You might need to scale farther in order to make the model work profitably.</li> <li>There’s considerable risk involved should you guarantee the sale and take on sellers’ inventory. If economic conditions worsen rapidly – such as the “overnight recession” in 2008 – you’ll end up sitting on inventory that’s impossible to move.</li> <li>Lastly, most of the processes needed for a managed marketplace are vertical-specific. This offers little synergy to expand into a new vertical.</li> </ol> The core question is: how much value can you unlock by managing parts of the marketplace value without raising the risk profile exponentially? Managed marketplaces are an exciting evolution, but the jury is still out in how well they’ll be able to manage the inventory risk in a downturn.

Last week, my post on “<a href="https://www.versionone.vc/marketplace-dynamics-buyer-mindshare-key-building-moat/#ixzz3XBVShu3Y">Marketplace dynamics: buyer mindshare is key to building a moat</a>” generated good discussion about the best strategies to disrupt existing marketplaces and get past the incumbent’s moat. It’s certainly an important topic to any founder or entrepreneur looking to break into an existing market. The discussion was sparked by Jonas’ question: “If the first marketplace that reaches liquidity earns a moat (justifying large A rounds for marketplaces), what paths might new entrants take to disrupt existing marketplaces?” <a href="https://twitter.com/JonasBrandon">Jonas</a> offered two key paths: First, you can push on the incumbent’s economic model. For example, <a class="zem_slink" title="Craigslist" href="http://www.craigslist.org/" rel="homepage">Craigslist</a> came in with free listing fees compared with paid listings at traditional classifieds section of newspapers. <a class="zem_slink" title="Clayton M. Christensen" href="http://www.claytonchristensen.com" rel="homepage">Clayton Christensen</a>’s <em>Innovator Dilemma</em> explains how most incumbents find it hard to follow down the market…they brush off an upstart as being too small or too low end to matter. By the time the incumbent finally gets around to addressing the new innovator, the upstart has already found traction. His second point is that an upstart can unbundle a generalized marketplace and focus on creating the best product for a specific vertical. For example, <a class="zem_slink" title="StubHub" href="http://www.stubhub.com" rel="homepage">StubHub</a> vs. Craigslist and HotelTonight vs. Expedia. It is a strategy that has worked <a href="http://techcrunch.com/2015/04/10/as-vertical-marketplaces-rise-craigslist-faces-its-demise/">spectacularly well</a> for many verticals and <a href="http://thegongshow.tumblr.com/post/345941486/the-spawn-of-craigslist-like-most-vcs-that-focus">Andrew Parker’s market map</a> has become the blueprint for tracking the different companies that have chosen that route. (On a side note: that strategy is not just limited to marketplaces. Focusing on niche verticals or specific functional areas may be one of the <a href="http://techcrunch.com/2013/03/23/narrow-focus-is-helping-verticals-win-enterprise-software-but-it-challenges-remain/">most successful strategies for enterprise SaaS companies</a>.) In addition to disrupting the incumbent’s economic model and building to a specific market niche, there are a few other paths that a new startup can take to cross the incumbent’s moat. You can build a product that’s ten times better than the incumbent. I’d argue that this is the key to <a href="https://www.varagesale.com">VarageSale</a>’s success (a portfolio company that has done a great job <a title="Introducing one of Version One’s earlier investments: VarageSale" href="https://www.versionone.vc/introducing-one-version-ones-earlier-investments-varagesale/">building mobile-first, social, &amp; safe local marketplaces</a>) vs. Craigslist. Or Uber's success against the taxi industry. Of course, these opportunities are rare and hard to execute on and the incumbent's existing network effects might be too strong to just win on a better product. Last but not least, a marketplace start-up can focus on the supply side, and identify opportunities to bring unique inventory to underserved markets. This strategy certainly helped Airbnb against <a class="zem_slink" title="HomeAway" href="http://www.HomeAway.com" rel="homepage">HomeAway</a>, as well as <a class="zem_slink" title="Etsy" href="http://twitter.com/Etsy" rel="twitter">Etsy</a> vs. <a class="zem_slink" title="eBay" href="http://ebay.com" rel="homepage">eBay.</a> So let’s keep the conversation going. How else can new marketplace entrants disrupt an existing market?

Most marketplaces start off by providing a unique supply of products/services. Demand follows supply, and so the flywheel of supply and demand begins. However, as a marketplace gains popularity, its supply inevitably becomes less and less unique. I know this firsthand. At <a class="zem_slink" title="AbeBooks" href="http://www.abebooks.com" rel="homepage">AbeBooks</a>, our booksellers initially listed only with us, but then started to list with <a class="zem_slink" title="Amazon" href="http://amazon.com/" rel="homepage">Amazon</a> after it launched its marketplace. Uber and <a class="zem_slink" title="Lyft" href="http://lyft.me" rel="homepage">Lyft</a> drivers typically begin with one service, but often end up driving for both. And marketplace uniqueness can become diluted even when suppliers don’t intentionally leave. For example, <a class="zem_slink" title="Etsy" href="http://www.etsy.com/" rel="homepage">Etsy</a> struggles with design copying, including complaints of major <a href="http://www.washingtonpost.com/business/twitter-erupts-over-accusations-that-urban-outfitters-copied-designers-necklace-line/2011/05/27/AG0GJxCH_story.html">retailers mass-producing</a> products that look extremely similar to its handcrafted artisan designs. If you’re building a marketplace, it’s safe to assume that the uniqueness of your supply will fade over time, as your suppliers seek out opportunities on other marketplaces and competitors look to grab a piece of the pie that you discovered. In order to minimize the impact of these competitive dynamics, a marketplace can adopt to strategies: protect the supply and protect buyer mindshare. When it comes to supply, you can’t keep supply unique when sellers list on other sites. Give your sellers little reason to seek out other marketplaces. For example, you can <a href="https://www.versionone.vc/freemium-model-future-marketplaces/">lower listing/transaction fees</a> for unique inventory, tie sellers to your site through reviews (which cannot be transferred to other marketplaces), or find some other innovative model like Uber’s <a href="https://get.uber.com/cl/financing/">leasing model</a>. Yet while these strategies can slow down the drain of your unique supply to other marketplaces, they won’t stop it altogether. It’s much more effective, and important, to win buyer mindshare. For example, Etsy has done an incredible job with its repeat usage. As revealed in its <a href="http://www.sec.gov/Archives/edgar/data/1370637/000119312515077045/d806992ds1.htm">recent S1 filing</a>, 78 percent of its gross merchandise sales in 2014 came from repeat customers. Uber and Lyft have done a great job becoming the de-facto local transportation options locking valuable real estate on many people's mobile phones. In the age of mobile where long-tail discovery (whether paid or organic) is less important, becoming such a home screen app is critical. This trend is even stronger in those countries that have <a href="http://www.zdnet.com/article/why-indias-flipkart-abandoned-its-mobile-website/">skipped the desktop</a> altogether and gone straight to mobile. If buyer mindshare is the key to building a moat against the competition, you need to have the right product mix to become a frequent destination for your customers and build a brand that captures the mindshare of your target audience. And becoming a home screen app is the ultimate prize in a mobile-first world.

Online marketplaces have made it easier than ever for people to buy and sell things. But the human element has been missing with the anonymity of <a class="zem_slink" title="Craigslist" href="http://www.craigslist.org/" rel="homepage">Craigslist</a> and <a class="zem_slink" title="eBay" href="http://ebay.com" rel="homepage">eBay</a>. That’s why I’m happy to announce an investment we did two years ago when we participated in the seed round of <a href="https://www.varagesale.com">VarageSale</a>. At the time, they chose not to announce the funding, following a more general trend of going stealth. For a long time, I had been looking to find a better Craigslist: one that was social, trustworthy, and mobile first. Many have tried to build this kind of marketplace, but ran into the chicken and egg problem in growing both the seller and buyer communities. When I first met Carl Mercier (who founded VarageSale with his wife Tami in December 2012), I instantly knew that they had found a way to solve this problem in a very scalable way. Since then, VarageSale has created hundreds of hyper-active local communities. They have scaled quickly to more than 50 employees. This traction has allowed them to raise three subsequent funding rounds from <a href="http://floodgate.com/">Floodgate</a>, <a class="zem_slink" title="Sequoia Capital" href="http://www.sequoiacap.com/" rel="homepage">Sequoia</a> and Lightspeed. In VarageSale, users are identified by their real names (you need to log in via your Facebook account), offering a friendlier and safer environment. VarageSale has become something of a social network built, connecting people with shared interests in local communities. Like <a href="http://www.bellonheels.com/suburbias-hottest-trend-varage-sale-one-mans-trash-is-another-mans-treasure/">in this story</a>, there is a sense of camaraderie as the local <a class="zem_slink" title="Walgreens" href="http://walgreens.com" rel="homepage">Walgreens</a> parking lot turns into a meeting place for VarageSale moms buying and selling on Friday night. VarageSale is a local, social network built around commerce and we couldn’t be more excited to be involved with this company that <a href="https://twitter.com/cmercier">Carl</a> and Tami are building.

The Freemium Model, where a vendor offers both a free and paid version of the product, has become the de facto business model for many SaaS companies. Freemium makes general usage free, while monetizing the heaviest users through premium features. This model has proven to work well for consumer apps like <a class="zem_slink" title="Spotify" href="http://www.spotify.com/" rel="homepage">Spotify</a> as well as enterprise services like <a class="zem_slink" title="HootSuite" href="http://hootsuite.com" rel="homepage">Hootsuite</a>. Through <a class="zem_slink" title="Etsy" href="http://www.etsy.com/" rel="homepage">Etsy</a>’s recent S1 filing, we get a glimpse into a new frontier for Freemium…and that’s marketplaces. Traditionally, most marketplaces charge a mix of transaction and listing fees, with the total fee per sale often being the same for all sellers. Yet, if we analyze Etsy’s S1 (and there’s a great analysis <a href="http://techcrunch.com/2015/03/29/unpacking-etsys-s1/">here</a>), we see that the company’s premium seller services are growing much faster than base transaction fees. Etsy’s seller services revenue nearly doubled in the last two years. These are the services that cater toward the marketplace’s power sellers: promoted listings, direct checkout, shipping labels, etc. The average Etsy seller isn’t interested in such services as they’re too small to be concerned with fulfillment efficiency and/or they’re not thinking about investing in marketing yet. <a href="https://www.versionone.vc/freemium-model-future-marketplaces/screen-shot-2015-03-31-at-2-22-58-pm/" rel="attachment wp-att-2379"><img class="aligncenter size-full wp-image-2379" src="https://gregburnison.ca/code/version1v/images/Screen-Shot-2015-03-31-at-2.22.58-PM.png" alt="Image Source: etsy S1 filing" width="612" height="310" /></a> <em>Image Source: Etsy’s S1 Filing</em> The result is that Etsy takes a higher rate from their power users. And this approach works very well for the company and community. By relying less on monetizing the smaller sellers, the platform ensures that these small sellers can afford to stay on the platform and contribute their crafty and unique inventory that Etsy buyers want. Etsy then takes a higher rate from the big sellers that can most afford it due to their scale. As a result, Etsy doesn’t have to choose between the number of small sellers/unique inventory and monetization level. This strategy keeps competitors at bay (because there’s no reason for the small sellers to leave) while growing the company’s take rate and revenues. Will we see a time when Etsy will drop their basic listing and transaction fees altogether? This could very well happen in completely decentralized marketplaces. Sellers pay for added productivity and discovery services, but basic listings and transactions are free. In short, it may only be a matter of time before Freemium comes to marketplaces.

When it comes to market opportunities, you can either build a better product in an existing market, or create a brand new market altogether. In the first case where the product category and market are mostly defined, the playbook is relatively straightforward. Potential customers already know they have a need and are actively looking for a solution. The challenge is to build a better solution, have more effective marketing, and beat out any rivals in the space. Creating a new market requires a different kind of strategy. On the upside, there’s a big underserved market right at your feet, but it’s undeveloped territory. People do not even know that they need a solution/product. In addition, marketing is a challenge since there’s no common terminology yet – meaning little search traffic and Word of Mouth. An example for a big new market on the enterprise side is mobile software for non-desk workers as there are nearly <a href="http://www.slideshare.net/EmergenceCapital/emergence-mobile-enterprise-forum-2014-kevin-spain-keynote">2.5 billion workers worldwide</a> who are currently underserved by technology in their job. We made a few investments in this space over the past couple of years (e.g. <a title="New investment: Jobber, SalesForce-like software for handymen, gardeners" href="https://www.versionone.vc/new-investment-jobber-salesforce-like-software-for-handymen-gardeners/">Jobber</a> and <a href="http://frontdeskhq.com">Frontdesk</a>) and continue to be excited about the opportunity. So how can your startup create market demand when customers aren’t yet looking to fill a specific need? There are usually three steps: <span style="text-decoration: underline;">1. Brand it</span> You need to coin a catchy term for your market/value proposition that resonates with your target audience. You need to make it as easy as possible for customers to start talking about the market. <span style="text-decoration: underline;">2. Educate</span> Use white papers, case studies, conference appearances, and thought leadership to communicate the challenges and opportunities in your space. <span style="text-decoration: underline;">3. Create demand</span> Since target customers won’t necessarily be searching for a solution, you will need to leverage outbound sales efforts to create demand. Some enterprise companies, particularly in the SMB space, have nailed this discipline.

Apple’s first event of 2015 is <a href="http://www.cnet.com/news/apple-watch-event-join-us-march-9-live-blog/">scheduled for March 9</a> and if all the hype and rumors are correct, we will be hearing more details about the Apple Watch, which should hit the shelves in April. Apple’s smart watch is one of Apple’s most hyped products since the first iPad. Pebble’s huge success with their <a href="https://www.kickstarter.com/projects/597507018/pebble-time-awesome-smartwatch-no-compromises?gclid=CI7fudTFisQCFVKFfgodDC0ASQ">latest smart watch</a> offers a glimpse of consumer interest in this space. However, wearables in general haven’t crossed over to the mainstream yet and fewer and fewer people (particularly younger generations) are even wearing watches at all. Apple is partly to blame for this trend – after all when you have a smartphone in your pocket, why do you need another device to tell you the time? The real question is will there be a mass market for smart watches beyond early adopters or Apple fans? And will the Apple Watch provide the necessary momentum? To date, notifications have been the main use case for smart watches. It’s more convenient and polite in certain situations to glance at your watch to check out a text or see who is calling. The bulk of smart watch apps have centered around getting to the right information (notifications, next meeting, etc.) more quickly. However, for the smart watch to truly emerge as a huge category, it needs to differentiate from the mobile phone. Right now, the smart watch feels more like an extension of what a phone does, but on a smaller screen. The real opportunity for smart watches might be more of a personalized tracking device, since it’s directly on our skin 24/7. In this light, exciting use cases include: health, fitness, emotions/self-expression, and dating. The category is still in its infancy, but for the smart watch to break out into the mainstream it needs to find its own unique use cases separate from the smartphone.

In conjunction with their <a href="http://youtu.be/7rCkB8Dg_Zs">exciting public launch</a> today, we’re happy to announce our newest investment in <a href="http://perceptivlabs.com/">Perceptiv Labs</a>, a startup that’s using computer vision to make drones more intelligent and fully autonomous. Imaging, delivery and manufacturing are increasingly becoming automated with the use of robots and drones. The current global non-military drone market is already at $2.5B, and is expected to hit $10B by 2024 (according to Forbes) with applications in agriculture, film production, package delivery, farming, security/search and rescue, and infrastructure inspection. The problem, however, is that drones currently cannot fly on their own (they need constant piloting). They are hard to control and crash easily. That’s where Perceptiv Labs comes in. Their computer vision platform enables fully autonomous motion in a dynamic environment. In other words, they can provide the “brain” for every commercial drone. Their product can integrate with any existing drone, giving it the ability to:  search, detect, and track objects; localize outdoors/indoors without GPS; and avoid collisions with obstacles. Just check out the awesome demo video below to get a better idea! The company is currently focused on the film industry, with a number of pilot projects already underway with top studios. They have also launched a pre-order campaign for their entry-level filmmakers toolkit, the <a href="http://www.flytheshift.com/">Perceptiv SHIFT</a>. In addition to this cool technology, there’s an impressive team at the helm of Perceptiv Labs. While <a href="https://twitter.com/neilxm">Neil Mathew</a>, P.J. Mukherjee, and Yan Ma are all first-time entrepreneurs, they have been working on computer vision since studying mechatronics and robotics at the <a class="zem_slink" title="University of Waterloo" href="http://maps.google.com/maps?ll=43.4705555556,-80.5472222222&amp;spn=0.01,0.01&amp;q=43.4705555556,-80.5472222222 (University%20of%20Waterloo)&amp;t=h" rel="geolocation">University of Waterloo</a>. The team is currently a part of the <a href="http://www.creativedestructionlab.com/">Creative Destruction Lab</a> in Toronto and the winter batch of <a class="zem_slink" title="Y Combinator" href="http://www.ycombinator.com" rel="homepage">Y Combinator</a>. We are thrilled to be helping this team build out their platform and are so excited for the possibilities. To learn more, visit <a href="http://perceptivlabs.com/">http://perceptivlabs.com/</a> and follow <a href="https://twitter.com/perceptivlabs">@perceptivlabs</a> on Twitter. [embed]http://youtu.be/7rCkB8Dg_Zs[/embed]

In recent years we have seen a big focus on establishing customer success teams across the SaaS B2B industry. The goal is about both (initial) conversion and (subsequent) retention. Make sure your customer understands and is as successful as possible in using your product, and your conversion rate will go up and your churn will go down. There’s no doubt that customer success plays a vital role, but there’s also a huge number of customers they will never reach, no matter how strong your customer success team and how carefully you craft each onboarding email. That’s because these users never get far enough into the product. They check out right away. One of my portfolio companies recently discovered through a variety of a/b tests that user engagement within the first 10 minutes is crucial for their product as there’s an exponential drop-off in engagement after that time. Given the amount of products, services, and technology competing for our attention, I imagine this is a similar trend across the SaaS space. If the benefits aren’t immediately obvious, it’s easy to move on to something else. Another take-away from those A/B tests was that there is a huge difference in conversions depending on the initial page shown during the onboarding process: people who were shown a page that was most relevant to solving their problems viewed more pages early on in their account life, completed more goals, and ultimately converted to a paid account at a higher rate. The big question for you is <em>how can you hook a customer in the first 10 minutes? </em>If you want to increase goal completion, customer success emails and sales outreach might be too late and reactive. Users need to get hooked early, or they’re gone.