Here’s a question that we have been getting a lot lately: Do you still invest in marketplaces?
The answer is YES! We love their network effects and continue to invest in them.
In a tweetstorm last week, our friend Andrew Chen listed the 20 best links he’s seen on marketplaces and included us on the list (#11 – we are so honoured!). This reminded me that it has been awhile since we’ve touched upon this topic on our blog. In fact, it has been over 4 months since we published the second edition of “Our guide to marketplaces”. In that handbook, our goal was to aggregate all the amazing content out there. We purposely kept the tone factual rather than prescriptive. We didn’t want the e-book to be biased or explicitly state our marketplace thesis because we wanted it to be a helpful resource and not an investor checklist.
With that said, here are some opportunities we see for the next generation of large, venture-scale marketplace businesses:
With Amazon capturing nearly 50% of US e-commerce market, it may seem that there isn’t much room for a new marketplace focused on products. However, over the past few years, we’ve seen new marketplaces succeed by differentiating through a new shopping experience (i.e. mobile) and/or new or differentiated supply. For example, Wish has given shoppers direct access to Chinese sellers; LetGo and OfferUp have connected local buyers and sellers with a visually appealing mobile-first experience; and our portfolio company Headout has taken the supply of offline attractions, activities and events online as well as mobile for travellers to book on-demand. In addition, there are opportunities to build a marketplace around communities that are passionate about a specific product category, i.e. GOAT for sneakers.
Uber and Lyft have created one of the largest marketplace categories. They’ve empowered a brand new group of participants – growing the number of sellers (drivers) and transactions (rides), and also transforming the way we view shared transportation (i.e. increased popularity of bikes and scooters).
The question is: what are the characteristics of other services marketplaces that can scale to this level? Not every service category is right for becoming the “Uber for X.” At Version One, we are more inclined to invest in businesses where the services are as commoditized as products so there isn’t supplier preference nor disintermediation. We need to see that buyers actually use the marketplace more than once and not just for a lead.
Alibaba is a household name for anyone doing business in or purchasing from China, and the company has grown into an international e-commerce empire. What are the key characteristics that enabled it to flourish? We think it’s simplicity and discovery.
We’ve been pitched the promise that “we’re going to replace the broker” by B2B marketplace builders many times. The broker, after all, represents an inefficiency that one can possibly eliminate with technology. And by doing so, the platform can deliver on the value proposition of charging a lower rake than the traditional “middleman” who does most work manually.
However, B2B transactions are generally complex, requiring many steps and communication between buyer and seller to complete. And while the GMV per transaction is likely large with B2B deals, it can be harder for the marketplace to justify its take. If technology makes the transaction “too easy” to complete, then buyers and sellers might wonder why they are giving a percentage of their transaction away. On the other hand, streamlining the transaction is important for higher margins.
At Version One, we’re looking for B2B marketplaces that 1) promote discovery (buyers feel compelled to find new vendors despite the traditionally complex transaction) and where 2) the transaction is simplified and completed online (likely because it’s for a commoditized product).
If you are building a marketplace – and are thinking about how to overcome the challenges in your category – we’d love the opportunity to get to know you and learn more.