Mosaic Ventures: Building and Scaling Marketplaces with Reid Hoffman

so our last guest almost kind of needs no introduction but it brings a a wealth of experience to marketplace and network effect driven businesses from its for the first days as you know one of the board members and senior executives at PayPal which then became part of eBay through to more recent investments in their B&B and I guess your latest is convoy what I want to do is give the folks in the audience the chance to ask you lots of questions too but maybe before before we dive into that just to just to kick off tell us about how you sort of first encountered marketplace and businesses online and white why you fell in love with so I was very early at PayPal my friend Peter and I were taking walks and I was describing him my experience having founded a company a little over a year old social net and the fact that my experience was basically every Friday there were things I wish I had known Monday and would have changed the week and so when he and his friend Max Levchin decided to co-found a company that was first called field link then called con Finity then called PayPal you know he he and Max decided they would put each one of their closest friends on the board so I was Peters and Scott Bannister was Max's and that went through a whole iteration started with encryption of mobile phones encryption on a cache and mobile phones takes too long cash on Palm Pilots a little isolated and you not in a use case Oh will do sync to email Oh will do email payments and that's how PayPal off in bottom is a more detailed story about that it is funny how many people I hear claim we you know someone so invented the idea of PayPal it was Max Levchin and a board meeting just to be clear and and so then one of the funny things to watching PayPal is an organization is what it launched it actually had no real knowledge about eBay right there was no discussion about eBay and the board meeting anything up to launch the first week was there's all these eBay people using it you think we should get them off the system and then Luke knows it was one of the junior co-founders had PayPal uh-huh said no these are our customers and it was a complete pivot de Bain started paying a lot of attention to marketplaces and you know marketplaces have some of the most natural network effects but are super difficult to create develop your critical mass difficult a flywheel working in a way that it can work essentially organically and you know one of the things that I I was responsible for as soon as we realized eBay was the key thing basically Peter tasked me with all things eBay and arranged everything from negotiating with them because they own the company called build point which was essentially their attempt to kill you their attempt because and they bought build point even before we launched right so was that it was like we were going into their home world and so negotiating with them to one of the plans we have had in the and the in the in the backdrop that only a few people knew about which is codenamed Dark Star after the Death Star which is if we had to launch a competitive marketplace because if eBay banned us entirely from the system that the best thing to do for our business would actually be launch marketplace and try to compete since we had a whole bunch of deviates customers both cars and others so you try to move them over in in what is essentially you know like Luke Skywalker going into the trench you go out one shot at this let's even work fortunately we didn't need to do that and and the whole dynamic of reputation systems buyer and seller growth and demand how you manage them what is quality product look like what is the integration of payments how much is it end and all of those things were things that we all learn collectively and you know you can go each of those subjects you can spend a half an hour on and I guess coming seeing eBay up close and it really was the first kind of successful quintessential Marketplace on the Internet why why has that company I know floundered is too strong a word because it's a sort of 2025 billion dollar outcome and there's a lot of alumni in the room but there are bigger market places out there that it failed to become you know including Amazon frankly so they have the liquidity they vertical by vertical were able to move from collectibles into all sorts of other things and and what went wrong there from from your vantage point well at least a couple of fundamental things and there may be even more so one is to some degree but back when PayPal was launching any being that purchase by eBay the general wisdom the values eBay was a much better model than Amazon and that eBay would dominate Amazon and you know the attributes were we don't have inventory we have a whole bunch of small seller developers building everything and all those things were true and I think part like I think the probably to macro strategic issues so one was they play they try to build to the weaknesses versus playing the strengths so they went okay what does Amazon have that we don't have you know like logistics control tracking new object inventory you know ducted it up so let's try to go build all that in eBay and yet the thing is is if you're buying on this is a bit like the last point if you're buying on I'd like the book to arrive a new a new book to arrive in a day or two it's very difficult to compete with Amazon on that right you're going to try to build up eBay as much as possible to do that but all in a day we have all the shipping arrangements we have logistics we have the warehouses we'll ship you the book in a day or two you know arrive in a day or two and it's done and so they never got any traction on any of that and roughly speaking they should have played to the strengths even if maybe they'd say look without the new products and everything else and not the the pristine and then experience maybe there'll be a limit to how much growth but you're just never going to build that in and so you should have said lots of small like almost like think about the sellers as developers developers of absence or like each of them DUP have them develop the most unique possible things and be the purveyor of those experiences would have been a better alternative than strategy the the second part of it and it's related is they didn't evolve the product right I mean the the the big jump that finally they got around to that Donahoe did what was smart with say okay look it's a mobile universe let's simply move it over to mobile that's important but like what is the product experience for Mars what does the platform look like and it's still basically very very similar to today to when we sold PayPal eBay and ultimately to really make headway to new markets other kinds of things you actually ultimately have to make jumps in the product and those are the two areas I think they have done some optimum suboptimal and and if we fast forward I guess a decade to to a B&B which you were one of the very first to sport and invest in what was it about that model that drew parallels or pattern recognition with what you seen up close with eBay well there's a long stack but roughly speaking what I look for you this in this range one could be huge market obviously eBay for space 2 is great counters 3 is that one of the real valuable hacks in early marketplaces that and you see them is and it has any energy to is very valuable is when sellers can be buyers and buyers sellers you get this this flywheel going very early and a lot of the folks were interested in in the kind of the oh all stadium on Simon's couch short spare room and so forth and so on words I will also like I'll rent it up and I will also do it and it becomes a flywheel so you can get to liquidity your your earlier thing there are maybe some metrics for defining liquidity you don't have to go back to the old judge although it's funny line and you know and those kinds of measuring you can see and then an a quick survey of how people were you know I heard the GEMA for me you know you look at market definition people weren't really focusing on that particular flywheel of bringing up essentially a variety of with a complete marketplace for all this kind of inventory but a key sections of new inventory that would create a lot of liquidity and this kind of buyers and sellers being their own it isn't just like a catalog shopping but actually kind of an active community and you know the kinds of things that I saw on the founders that I thought was really useful this was from later this wasn't from the first meeting that Brian Nate and Joe have the privilege of probably being the entrepreneurs that I have most quickly interrupted and told them that I would make them an offer it was about two minutes into their pitch I had reference chef them beforehand and and you know lucky me and so you know because I since I known that I had seen that I was already relieved but like for example the kind of things that I've learned from on this case Joe and Brian was they have this concept at 7 star design which is essentially you're not just designing them the the web experience the mobile experience the what is my shopping experience look like what is my communication experience look like but the experience of the stay and so for example they did some really thorough design things and one of the things they realize it was a very common pattern and maybe you guys all it's marketplace people all know this and sorry if I'm repeating something you know but this was instructive to me when I learned it was that customers come into the rental and the very first thing they do is look out the window and if the windows dirty that conclude the whole place is dirty so what they did is they as part of the instruction and you think about developers as you know the hosts as developers is giving them in you know kind of tips and instructions and part of the thing is is oh by the way you get much higher ratings you get much higher average selling prices if you wash the windows we had someone here and he said you don't even need a window so that's no no I know he's useful in this case yeah yeah man perhaps and then um you know there's there's a whole stack of different things from the from the Airbnb experiences but it was kind of the question of you know we're going after this flywheel how do you make the flywheel work and part of what I do when I'm talking entrepreneurs is I push them on their beliefs because what you want is a combination of persistence and flexibility persistence from the viewpoint up I thought it through I have a vision I have a reason for what I'm doing but flexibility in that if you're at least asking smart questions like okay let me think about that and let me integrate that into my plan and that is the usual successful learning curve that you need to have in order to do it in all three of them aren't pesto and I guess one of the things we've covered today and in some detail and we've covered it from one of your supply of demand of different KPIs to measure and how best to scale is it's just how sort of hard and sometimes nuanced marketplace businesses can be to build and to get that flywheel working so based on on your vantage point you know why is it the case that they are so rare so the key challenges is that essentially both sides but specially buyers no one's looking for marketplace that's an abstraction no one goes I'm looking for a marketplace and acts as a customer that's not that's not what they're doing and so they have a need that is then very difficult to track and this is of course one of the reasons why what is your strategy visiter Google right whether that you do paid acquisition and is that cocaine all arrested and how does that work and there's a lot of different strategies there but getting that going is super difficult and frequently you know you're you know classic challenges you get the supply you have no buyers maybe the supply goes away can you get the supply in a persistent way then you have enough buyer like all marketplaces are this constant kind of ratchet between demand and supply and they're all basically demand driven right at the end of the day but if you get a whole bunch of demand you don't have the right supply then you just purchased or acquired a how much demand and the demand is oh I went and look there that's not very good right and so it's savable but that two sides of the thing done not just oh we have two different audiences we're trying to bring together but we're trying to bring them gather coterminous the time at the time of interest in transaction in something that's somewhat non-standard because that's one of the reasons almost all marketplaces work on trust systems because it's like oh like for example you know like all good venture bets of it that most high-quality venture capitalists have learned that mixed votes in the partnership are actually the things that that generate the highest returns so anything be was a contentious one everybody was a contentious one one of my partners who throws himself under the bus but I won't mention them by name basically looked across the table at me and said look everyone has to have a fales you can have this one and he's a good friend of mine so it's fun and and the reason was is Cusack oh my god you think people at scale are gonna go stay at someone's house like what's gonna happen is gonna be like a salts and theft and getting it up which there has been but it's they've weathered it yes and so and so those kinds of trust issues are prevalent because like who am i transacting with you know excetera and so you have to solve all of these problems you have to get the critical mass and then you have to get the flywheel going and and it's tricky and how does this device change that is that a game changer an accelerator for certain kinds of market places do you think I think it is I think it's one of the reasons why you know like what you guys are doing today we also do a marketplace conference berry market we think marketplaces are really interesting one of our partners it's friends with you know you three Simon who basically only isn't here today because friends is because he's actually bringing another deal to the partnership today maybe in a couple hours precisely on timing and and so we think it's hugely valuable and part of it of course is because there's all kinds of things mobile phone that ends in it makes the density of the connectivity of the online world to now much more so people can bring in new kinds of verticals in to work they can be demand right now like I have interested in it and I'm going to look at it it can increment trust right the pictures of people the ability to connect right so you know part of what happens is say you for example you're transacting and high-value goods the fact people call and talk to someone about it that's a trusting fermenter right so all of those things are enabled by these devices which is one of the reasons you know exactly you know like you guys we're like oh this is an interesting area we pay a lot of attention to so I want to be so generous to the audience so what questions are there from the floor and it could cover anything from some of the things we've talked about sort of more general questions about reach experience at LinkedIn or as an ally Facebook investor or you know his more recent initiatives well so look this this is probably old hat all of you guys but you know basically what are they obvious very simple questions that people ask like is this a real person are they so verified identities but by the way even low-cost their verifications can be like the picture of the person in support guarantees right so part of how Airbnb went on a turn the whole company alert when they had their first major event was the thrashing thrashing about basically a criminal had stolen a credit card used it to stay at a Airbnb place and just completely like vandalize the place it wasn't even just stealing things it would just you know so it was like the whole company went to it we're on a trust and safety margin everyone's working on trust and safety and so you know the kinds of things that they generated is okay well what kinds of guarantees can we give to hosts and the travelers because they go okay well there's a company that has a bunch of money that's standing behind the guarantee and I'm guaranteed this way and those kind of guarantees increment trust now that doesn't guarantee trust because people go well I know you're giving you the guarantee but is it still okay right all of those kinds of things are kind of the standard sets of techniques but they're important to do and then when you look at a specific market place you think about okay from my marketplace from for my buyers from my sellers what are for example what does verification look like there what does reputation system look like that what is a guarantee look like that I'll tell you actually a funny PayPal story on this which is an example what not to do that I had to unroll so we were fighting this trust and safety battle between a PayPal and Bill Point on eBay and so the then head of product David sacks rolled out the buyer protection guarantee which was a $5,000 guarantee on a good but having given no thought to the shape of this guarantee it was basically if you didn't get the good you you were you were paid back the money so what happened is these fraudsters essentially collaborated second agency throat as an agency problem and so but because the way the thing was written you actually had to pay them out so we were paying out money at a rate that was catastrophic and Peter called me and said I'm shutting it down tomorrow I said well give me two days right to figure this out like we have enough money for two days of losses right said yes and so what we did as a patch is we shifted it to the eBay double guarantee which is eBay had a way of doing insurance and we said if you use PayPal you get to X the eBay guarantee so we basically piggyback off their system right they had to make the decision so they were like the first deductible in you were the yes exactly that the reinsurance and so the marketing was not that bad because it's like okay we're shifting the buyer protection guarantee to the eBay double guarantee that doesn't sound bad right as the way doing it but that at least gave us the lateral out of oh my god we're about to crush the company on this badly designed guarantee to something that action pepper brush okay man people are so important as you know and you I think you've seen probably the most successful founders of more than anyone so your pattern recognition of people is incomparable and some question is how much can you really see it in that first meeting versus just home or feel like well three designers that did everybody would you really have called it if they didn't have those vexes success great question actually in fact you know look I'm obviously mister Network I on various levels I wouldn't have made that offer I hadn't referenced written before they came in so I'd done a reference check and my own view is that actually in fact the guy depict between an interview or a pitch or a reference check I take a reference check especially if I can get to several different people that I trust that have depth of knowledge because everything is like you there are people who can pitch really really well and execute not so well right and they seem really great and smart and all the rest and so the references is much better now both is even better than one or the other and so I'd already had called five people who'd worked with them beforehand because I it had happened that was easy to do I don't always do that for me going to happen it was easy to you so I did that dr. Burke too because that yes I actually hadn't had any references the way the Zuckerberg thing happened is Sean Parker had discovered them because he rented a room in a house that they were in Sean who I helped with Plaxo called me and said oh my god like the Facebook's great and yeah the basement Bostic know they're here because I tracked them already from their traffic like I would have their traffic look when they launched a new college at the point where they're pitching in six weeks they went to from zero people using a campus to 85% checking in six plus times a day right and you look at that kind of traffic curve and you're like I don't care if you can't speak it doesn't make a difference so look it wasn't a really reference Shepard you knew you were gonna take the bed anyway and then because I'd gotten as you know had gotten grief from having led the round in Friendster and you're like oh you're having your cake and eating a tutu new LinkedIn and prinster I actually had Peter lead the round and I followed because that way it was like look I'm not actually in fact you know going into these areas in conflict even though I didn't think at the time they're in conflict and even now I don't think they're so so what one was people and the other was metrics is the answer yes what people are Mexican have them people project marketing that's essentially the the you knew and integration you know please what would be your best advice to increase platform loyalty motivated negatively some marketplaces are open to leakage disintermediation yep is there a belief in these marketplaces or well.all marketplaces have something of gray market effect and from an early stage perspective if the raw demand of the value of your marketplace bringing buyers and sellers isn't so strong that you could ignore the gray market you don't have a strong enough marketplace yet so in early stages I don't worry about leakage from the viewpoint if they don't if there isn't a raw enough intrinsic desire now Airbnb for example even from what I investment it you know it was like oh I'm going to contact you know Simon about staying at his place and I'll say hey but maybe we can arrange it on side right not to pay the film there was like emails yes I'm numbers they have to put algorithms into yes not like but ultimately even though there was the there there was and is that bleed and now there's large enough that they're working on it some not just from a positive incentive but a negative incentive point of view there's enough people are like look I'm comfortable with the reputation system I have here people who are like look is variable to me and I'm honorable that that you could you could do nothing about the gray market inter B&B and still have a perfectly good trajectory on the business and all the rest now that being said you want to you want to modify it you want to use a combination of positive and negative incentives a positive incentives are things that lead to my better business higher reputation score leads to higher conversion takes a higher HP's I'm gonna get the reputation if I do it you know all those kinds of things that you lock in that that should be more intrinsic to the value that I'm getting from the system frequently by the way it tends to be more locked in on one side than the other like the reputation system is more valuable for tracking the buyers and yet the sellers are paying more of the fees you know freely but it's like still valuable in terms of loop and then obviously there's there's negative incentives where you know you can do things like saying look if we get a certain percentage or a number of complaints that you are soliciting off platform transactions we decrement you in search even I need to kick you off the platform and so forth so there's ways you can do both positive and negative obviously always a preference for the positive but also from early stage it's really not the big worry right that's the thing you work if that's the thing on early stage you're worrying about your world with the wrong thing yes speaking about Facebook tell me man what role you think they should go that's fine laughs so so let's say they as you know they've had a failed classified they had a he say he's a classifieds entrepreneur you know they hadn't seriously failed effort we Greylock also got up front and close that not just from David Z's investment and my own investment Facebook but we were in great David was investor noodle and oodles and Craig who's an awesome guy basically went and back ended it and they just couldn't drive the demand and the part of the challenge to like for example if Facebook came to me now and said well we're doing classifieds again I tell them they're being foolish if they asked me and the reason is because you have to own these networks look at where the gravity is like what's the gravity of what I'm doing right does it fit with photo sharing does it fit like games is actually something I think they should do which is reason I invested in Zynga right because basically the investment Inga came down to very simply Jacque doesn't understand games doesn't understand why people waste their time with it and doesn't like them so doesn't he's not going to do them and yet that's what the Facebook platform should be about right so therefore Zynga as an investment and and that can I gave you the opportunity the problem with classifieds is is like well do I is this what I remember and then you say well the social network does it add value actually in fact most the time when I want to sell something I want to sell something to someone I don't know I don't want the implicit guarantee the oh I told it assignment ah hey it's broken now I broke a month later ah really weird right and so like the whole social graph is actually a negative feature not a positive feature so I'm actually in the design now on entrepreneurship but this is general pattern like I'm skeptical of the general classifieds in Facebook now it could be an entrepreneur you someone else goes no no actually I got the right thing that makes the social graph positive or the fact that even though all the traffic goes to you know funny pictures and other kinds of things that people remember and go into it and will use it and the right clever idea oh yeah I was right general principle that's very hard with that idea Trump's it so it's not it's not a never never never but it's highly unlikely and another example of it is Facebook tried to launch a version of general search - it couldn't work and they said well we get social graph we got all this information about it well when I come to Facebook I'm not thinking search I'm thinking fun pictures from my friends right so you tie in to where the actual gravity loops are now you said oh I have an idea for fun pictures and friends and that leads to a new classifieds there well that might be something we're thinking about if it works so anyway so thank you sauce so which enables Sasson a discussed this afternoon to rocne a mirage and talked about his marketplace network idea and we had someone earlier who sort of said I don't think SAS and marketplaces easily fit together you've got to start off by wanting to be a marketplace and if you bolt on a workflow and free SAS product great but it's rare that something starts to SAS and then upgrades its business model to marketplace over time so I think that's the the genesis of the question and just to put it in context this chap is is that the early stages of business not too far away from convoy in this part of the world so that's the context of this question um yes so I think marketplaces are super valuable but also super hard so I think if you're doing a marketplace that's what you're doing and you focus on the key things the marketplace the liquidity of it the buyers and sellers in the band the dashboards that specifically teach you about what to do there because use a lot like working on the band for a while then working on supply for a while you're working liquidity you're looking on transactional conversion you're doing all these kinds of things and if you happen to have some SAS ready to hand that helps you with that great and then time but it all comes back from that market place liquidity if you say I'm going to do a whole bunch of SAS that's going to enable it unless it directly enables those specific problems it's a diversion of focus and literally 99% of market places and in smoking craters right so it's like do not divert from that focus and only work back to SAS and workflow and other kinds of things in as much as they help you very specifically within marketplace right into the minimum to which they do that now you may add into them over time like once you really begin to get your theory of critical mass and liquidity and transactional volume and assets building going then you might go oh the real way to amplify this is the changes part of the workflow for the buyer the seller to integrate into something that's a b2b concern like you know what like how a shipper might be you know concern is something and that may be a viable way of doing it but but I wouldn't marketplaces are so hard that literally I would make all of your priorities stand exactly from the market place and literally only do this ass stuff if that's the next step that I'm trying to solve in the market not turning launching a Marketplace on papa oh yeah so I've had a theory that that actually networks can large launch marketplaces it actually hasn't happened yet I mean profiler will seeing how it works and so in both thus far by the way the I can't say anything about the results public companies and us but we're happy with them and the theory is is as you're solving this by seldom and if you actually have channels by which you can naturally promote to them and actually do the natural connections and solve the how do you get enough supply can you give them the supply to wait for the buy-side demand can you generate the buy-side demand in the right way that's one of the central questions on networks for essentially can you launch the marketplaces which is essentially 80% of what we're really doing beyond the minimum to just start the cycle going then my my theory is that you can they actually back you can launch marketplaces now we couldn't launch a car marketplace right we don't have the network for that but you know it's a marketplace for accountants and lawyers and graphic designers and other kinds of folks that that we actually have a very wide set to do and so it's a venture bet so I can't I can't guarantee success but I think it's possible and was interesting my partner Simon Rothman who built eBay autos who's our guy who focuses entirely on marketplaces he and I had about a three months conversation where he was kind of going okay you're not snow mark the mayor earlier answer you have to focus entirely on marketplace a network for marketplace won't work today and now I think he's intrigued and think that it might work but those and the reason do it is kind of obviously like we're trying to be about the economic potential the major economic potential for every member a link in some people you know don't do the oh I'm looking for a job right or I need a little bit of work on the side even if I have a job in a certain way well how we provide that so this is this is our experiment with it so Thank You Reid for coming you're going to stay for drinks and thank you everyone I know it's a very significant contribution of time for all of you to devote yeah the best part of a day in many cases to travel to London for this we're very grateful as mosaic and Mike and Toby myself that you made that investment there's many of you in the room that we're already in business with in one way shape or form and the reason the rest of you are here is that we'd like at some point to be in business with me too so let me add early part of the reason I'm here is because if I have my first choice partner in Europe for early-stage deals it's these guys thank you so that's very fine yes I don't think I'll top

Channel: Mosaic Ventures

Views: 20,731

Rating: 4.8991594 out of 5

Keywords: Technology, Startups, Marketplaces, Venture Capital, Investment

Id: t7Ys2IHJSrA

Length: 35min 8sec (2108 seconds)

Published: Mon Nov 07 2016