"What You Don't Know About Your Marketplace Type" - James Currier, NFX Guild

I'm the managing partner at nfx which is a seed stage venture capital firm we got an office in San Francisco Tel Aviv and Palo Alto I've invested in over 60 marketplaces over the last 15 years built several myself and today what we're gonna go through is the 12 things that you need to look for to make sure you've got the best market place you can have and I think as time has evolved about marketplaces what these things are have changed so let me walk through the 12 with you let's get right to it so the first of the 12 we've got a funny blockage here I've been told about reach over like that was that working for him before okay okay there we go I don't know who's got metal on their body but something's happening okay so look guys this is our basic Market Place idea right you've got your supply side you've got your demand side of some kind and there's money moving between these guys all right this is a network effect this is the core of what makes your business work some people in the past have said this is a nice to have this is not a nice to have this is the only thing to have okay and to get this thing going you know you get let's say you get a supply person on there like a lyft driver right and nobody is using the lyft app other than a lyft driver a second lyft driver comes along second lyft driver comes along and it doesn't really help the other person right so in order for there to actually be a market place you've got to get some demand to come now there's some action now this person is gone why did this person come along this person came along because the other two drivers were there so even though the drivers compete with each other for revenue they helped create the marketplace by having there be enough so that someone even shows up at all all right so that's how you start to build these marketplaces and that's where the network effect kicks in when the next person comes okay and the more people on both sides then things start to really cook this is the network effect once you get this going it's hard for others to potentially get it going and why would people go elsewhere okay so this is the core of what you need to see building now there are many ways to actually enhance this and I know we understand this basic fundamental principle but there's ways to enhance this by showing the other drivers that other drivers are there by showing these people what activity is happening between the others to give a people a sense that the network effect is adding value to them you can design the product to enhance this activity to enhance these retaining network effects that you want to build in your marketplace okay so you need to constantly think about how that's done the second thing you should be looking for in your marketplace is to have the right playbooks for your market type okay so what's your marketplace type and most people don't think about this for some reason but let me walk through it can you move it forward there we go okay ignore this I'm not sure where that's there next let's see let's go to this place okay so one thing you want to think about is are you geographically constrained or not right are you do you graphically constrained or not and then what type of network effect are you trying to build what type of business do you have so for instance uber is a and lyft are a two sided marketplace this is what we typically think of is what we just discussed uber and Craigslist are both geographically constrained monster a little bit less so okay because people can move from city to city to take jobs about 20% of people move every seven years so it's it's geographically seen but not as do you golf games constraint oh this is so stupid so eBay not at all geographically constrained people just sent to each other all over the place right so when you look at these two sided marketplaces you can see that they're actually very different in the mechanics of what's going to make the marketplace work all right all right so then there's also these one-sided marketplaces for instance match.com now I put it right on the line because it's kind of a two sided marketplace because men and women are actually quite different right we all know that you try to get the women there then the men will come okay they're quite different but it's still a one-sided marketplace everyone's there for the same thing they're both a buyer and a seller so we call that a one-sided marketplace it's also the case that Etsy and Poshmark who are not geographically constrained have dynamics that look like a one-sided marketplace where a huge percentage a majority of the people who are selling on Etsy and on Poshmark are actually buying on it so those are actually the same people okay so this is what we think of as a one sided marketplace to the extent that you can create a marketplace that feels one sided or behaves one sided it's a good thing because every new person you bring on you get both a buyer and a seller all right you then have that King you got the three sided marketplaces now this is not for the faint of heart it's hard enough to do the two sided marketplaces but a company like a fit mob or an honour you know so a fit mob they thought they had a two sided marketplace between the teachers of the fitness classes and the people taking the fitness classes but they got into it and realized oh it's actually a three starter market list because those people need a place to meet so you so the third part of that market place was the venues all right not good hard to manage honor the same thing not only do you have the nurse who has to take care of the old person in their home but you also need the children of the old people who are generally involved in their care so it's a three sided mark like complicated to manage all right and so both companies have had to figure out ways to shrink it down to a two sided marketplace in order to grow and be successful I'll just tell you to click how's that that'll be great and then we've got these incited marketplaces click so honey book is a an insider marketplace around the events businesses that's where they've started and now they're expanding from that but you have n sides meeting you had the event planner you have the photographer you have the florist you have the caterer this is a network of professionals who are all buying and selling services with and from each other in the service of one piece of the demand side click how this is the same situation with the contractor the architect the interior designer these people are all on that platform click and then angellist as well you've got the investors you've got the founders you've got the employee you know the the customers these these are now non-geographic constrained whereas these are more geographically distinct click and then you've got to further your thinking you've got a one sided network like next door geographically constrained or you've got the big boys which are the non geographically constrained one sided networks ok so as you think about your marketplace type figure out which sector you're in because there's different playbooks for different businesses all right the third thing click third click asymmetries look for asymmetries in your marketplaces ok click some people say that so first you have to have them in your marketplace alright look at your marketplace see what asymmetries there might be you have to find them identify them measure them and then you have to figure out how to actually use them alright so for instance this is a situation where you obviously have a lot of supply and smaller demand realize that that's the that's the type of marketplace you have because click you know companies like Lending Club and upwork so upwork has plenty of supply of Engineers around the world to help but they're constantly trying to work on getting more demand right Lending Club same thing plenty of people willing to loan money to people who want loans hard time getting people to take the loans alright Catalan which is a consulting marketplace out in New York these guys have a lot of supply of consultants they work really hard on getting the buyers all right click this is the opposite you might have a market place click like uber where they spend most of their time working on the demand side that's to me the supply side constantly working to try to get more drivers because there's plenty of people who want the rides opentable took them seven years of building up the supply side before they opened up the marketplace to the the man that they had outdoors you the same thing with the RV rentals marketplace they've focused much more on the supply side because the demand is so overwhelming so different big market places can be either and now what you'll see in the literature often is that you got to focus on supply that's not true you can focus on either side it depends on what type of marketplace you have click if you have a situation like this where you can't see an asymmetry on demand or supply often what you need to then find is the asymmetry in terms of what types of supply there are ok not all supply is the same so think about the differences the asymmetry is in the types of supply you have identified the white-hot center on your supply side look for the same types of asymmetry on your demand side and then try to connect those two and that's where you're gonna find asymmetry this way not this way ok next slide clear good so the fourth thing is to try to give the economic advantage to one or both sides if your marketplace doesn't give an economic advantage to one or both sides it's not going to be sustainable flat out you can't just say oh it's simpler but the price is the same for both sides those marketplaces don't work if you look at square right if you're a vendor and you're trying to sell more stuff it gives you an economic advantage because now you can have you can take credit cards by putting in that little dongle right that gave you a huge economic advantage 20-30 percent bump in revenues instantly does it give an advantage to the buyers no but it did to one side and that was to the to the supply side okay and that was enough to get them going Craigslist gives economic advantages to both I get it cheaper I get to sell something at all otherwise I would've thrown it out right Airbnb I've got this apartment suddenly I have a huge economic advantage I'm making six thousand dollars a year Oh wasn't making before that's gonna keep me on there over and over again and on the other side the demand side getting a cheaper experience than I would have buying a hotel so when you look at successful businesses make sure you're you're really adding to the economic value if you aren't then figure out how to and if you can't figure it out then get out of that business and get into a marketplace where you can next slide the fifth thing frequency okay look to see how rapidly your customers come back and do it again next slide for instance why do you think everyone got into the food delivery business when they were looking at marketplaces it's because of frequency it was the thing that consumers eat three times a day they might order food twice a day that's a really high frequency it's a good basis on which to build loyalty to actually own that demand side and then you can expand out into other sorts of deliveries so why when uber went into delivery do they go to goober eats frequency you're looking for frequency same thing with Poshmark like this is this used clothing marketplace which is now doing 600 million in gmv it's a huge company but they're doing it because the people who are buying this stuff and the people who are selling the stuff are doing it very frequently every day the people using Poshmark are getting on seven times a day to look at the different fashion that they can buy because buying fashion is something that people do on a weekly basis okay alternatively you've got companies like indeed which created a jobs marketplace where people are only changing jobs every year and a half three years five years right well some of you probably every six months because you're getting fired I'm just kidding but you you know this is not a super frequent activity they were still able to build a big marketplace but they had to really develop Play Books and approaches that allowed them to make a business with such infrequent purchases Helix this is a marketplace for people to put in your your DNA typing you know your your 23 meat type of thing and then buy things because of that how often do you actually type your DNA once maybe twice because your wife or husband doesn't believe you you know 12 years later but you're not doing it very frequently they're still trying to build a marketplace in that space with really infrequent activity but in general frequencies better than in frequency okay be clear about that next slide the sixth thing looking for high ASP average sales price high ASP right so next slide so if you look at air B&B you know what 600 bucks average order size you look at outdoorsy right more than $1,000 order size per order if you could hire $10,000 every time they make a placement it's $10,000 that's a high ASP right that's right up there with diamond rings right which is what Blue Nile was built on so if you've got high as Pete how many if you if you're selling something for $10,000 how many do you need to sell before you have a hundred million dollar business it's like nothing you can do in a month hey I'm kidding but it's a lot easier if you're selling big-ticket items okay and so when you look at marketplaces why do you think so many people are sitting in real estate market places because it's the biggest ticket item it's the biggest ASP alternatively again Poshmark you know they were down around 40 bucks per purchase opentable one buck opentable makes one dollar every time someone makes a purchase right so they better they better have high frequency at $1 again different playbooks multiple billion dollar companies but understand where you are infrequent on ASP and all things being equal higher ASP is better and so when you take high frequency or relatively high frequency and high ASP you get something like Airbnb right 20 30 40 billion dollar market cap alright next level okay the seventh thing out of 12 watch out for multi tenant what's multi tenant Multi tending next slide is this every driver can multi tenant if they want to they are a tenant on uber they are a tenant on lift I am a tenant on lyft and uber as well I favor lift when I can't use lift I switch over to Hoover alright there's a problem for both of these companies these companies are losing money in every trip when will they turn a profit it'll be interesting to see it's gonna be a real challenge for them think about this with your market what can you do to keep people from multi tending on your marketplace how can you fulfill all their needs so that they will stop multi tailing watch out for this because this can really erode your profits all right it'll it'll put you in a fundraising cycle which will road your equity and maybe kill you if you can't get that B and C and D round all right be careful multi timing next the age thing disintermediation what's that homejoy all right this is a marketplace for people to come in and clean your home they were disintermediated because the person would come into your home they'd find the person on your on the home joint marketplace they'd meet the person they'd like the person they would then hire the person full-time because they met them in person and they liked them this is a marketplace which naturally tends to monogamy it naturally tends to monogamous relationships and they didn't look at the unit economics and they didn't block the dis remediation before they ran out of the 50 million dollars that they raised famous crash-and-burn marketplace scenario pretty basic reasons for them crashing okay didn't have to happen all right next one be hired these guys have they get paid ten thousand bucks so if I'm a company and I'm hiring someone I have a pretty big incentive not to tell hired that I hired the person because I can save ten thousand bucks if hired doesn't know so what is hire do famously they send a they send a message to the the person who's been on their platform and says hey we want to send you a bottle of champagne for 150 bucks where should we send it let us know when you've been hired and who you who hired you right that's really gosh sweet that's really nice of them and you type it in and they're like and then they know who to call hey we hear you hired so-and-so no I guess what I did okay so I'm in my ten thousand dollars so that's how they've been closing the loop on disintermediation all right and so think of techniques to close these loops and these loops will take place if you can have about 10% disre mediation or below that'll be okay anything above that you should start to panic and really start working on features to block it tutor.com same thing this tends to monogamy once I find a good tutor for my math or for my piano or whatever I'm gonna want to stay with them I'm gonna go around the platform and not pay the 10% 20% fee all right the other thing that we do with the Marketplace's as well often will say for the first one we get 50% of the revenue from your first visit subsequent ones we get 5% or something like that so that you still have a robust marketplace but you disincentivize the supply from going around you and getting the payment directly you work on their calendars you would there's lots of techniques you can use to stop the disintermediation next slide 9 thinks out of 10 owning the payment flow for me this seemed kind of obvious I've been surprised at how many marketplaces don't intuitively understand that if the payment comes through them they're gonna have a much better opportunity to take their percentage to take their rate to add on extra services to do upsells to increase the ASP all those things are true if you control the payment you want to be the place where the payment comes through if you're not currently moved to model where you're putting that payment wall up in front of them take the money in your possession and then hand it out to whoever needs to get it in that process but you've got to own the payment flow if you can number 10 look for a high fragmentation some of these markets are too concentrated on either supply or the demand side for you to make a real marketplace right an example if you've got a broad fragmentation on both sides that tends to be pretty good next next this is less good because you've only got a few demand side people that you can go after and they're gonna have more leverage over you to disintermediate you to multi-tenant to do all those things example with hired they're going after engineers there's only a few big hires like Google Facebook but it's impossible for hired to tell their demand side do all of your hiring through hired so there's multi tending like crazy on this side it's really easy for them to disintermediate because of their communication with the whole ecosystem because they have 800 recruiters on staff and so that's an example where this is less good it's possible but it's less good okay next slide you've got the this is really hard when you get down to a market where you've got you know tens of powerful buyers maybe even a few per geography it starts to get pretty hard okay and the next slide this is almost impossible when you've got two big players on one side and I have a lot of people come to me with the marketplace saying hey we've got a relationship with that person now I'm like yeah but you're gonna have no economic leverage it's gonna be really hard for you to build a significant business and as soon as they change their policy or make an announcement in the Wall Street Journal that they're switching off of you to an internal system even if they don't like your ability to raise money's gonna go to hell your ability to hire people go to hell and so this is this is nearly impossible to do so if you see yourself in a marketplace we've got two three big oolagah all of got ballistic players it's really hard this is a reason why we haven't invested in some of the things trying to work on uber and lyft platforms because it's just long-term once you start to be relevant they're gonna try to smash you down if you start to take too many rents out of the system all right next slide eleven solving the complete need of one side of the marketplace or not so for instance you could build SAS software so that some some sub partier supply you know uses you all day to run their whole business or to interact with all of their customers so for instance IV which is a company that just was purchased by house they built software for that interior designers would use their software six-and-a-half hours a day to manage all of their clients okay and that allowed them to be in the payment flow that allowed them to keep them from multi tailing that it allowed them to get all the other things okay so this eleventh one is really important if you can do it think how can I do this for one side or both next last one size of the market okay so this is the first thing everyone tells you so the the basic rule of thumb for investors is I got to love the management and I they have to be oh go after big market I agree with that but with some caveats which is why I've got the star there next slide in marketplaces smallish markets tend to bleed really quickly if you find that white-hot center so if you start selling books you might be able to bleed from books into other things over time right if you start helping college students share photos you might be able to bleed and other things over time like Facebook tip so I personally as an investor I'm not so worried about the exact team you're going after today as long as I can see that there's gonna be adjacent markets that with a white-hot center and a really intense community a lot of liquidity in one area you're gonna have the capital and the brand affiliation to move into adjacent markets pretty quickly the other caveat I'd put on this next slide is that in rare cases the fact that your marketplace exists you're actually going to be able to double triple quadruple the size of the market again lyft and uber are good examples of that you know more people are taking rides now than they were five ten years ago simply because these platforms exist if you can prove that this is true early on this should give you a lot of enthusiasm because now you're going after market that's much bigger than everyone else knows because the existence of your marketplace is gonna help it grow better okay last slide that's it so we've got a lot of content that we're producing around marketplaces and network effect businesses at that URL so go sign up for the email if you want some more stuff directly from us and I'm gonna be around the rest of the day and I've got another talk later thanks guys [Applause]

Channel: Marketplace Conference

Views: 9,346

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Keywords: The Marketplace Conference, Speedinvest, Crux Capital, Marketplaces, Speedinvest x

Id: 4v_DLwmPMME

Length: 23min 34sec (1414 seconds)

Published: Tue Apr 24 2018