What's Next for Marketplace Startups

well hello YouTube my name is Frank Chen and we're gonna have a hallway conversation today well what's a hallway conversation it's exactly like it sounds we have tons of conversations here in the office with each other as we're thinking about what kinds of companies should we invest in and what we're gonna do is take you inside the sausage factory so that you can hear a conversation exactly like that so today I'm here with Legion who works on our consumer investing team welcome Lee and today we're gonna talk about marketplaces so everybody knows eBay eBay is an awesome place to find anything because it connects buyers and sellers and ever since I Bay and how it's been thirty years something like that eBay was definitely an internet 1.0 company we've been waiting for a hundred at scale marketplaces there's so many awesome benefits you get when you bring people buyers and sellers together but there haven't been there haven't been a hundred at scale marketplaces and Lee has been wondering why and so maybe let's start talking about why aren't there a hundred at scale eBay sized marketplaces for buying services yeah well first I want to back that up with one statistic so I was doing research about services and how they how important they are to the economy so services represents two-thirds of private sector spend by consumers in the economy but when I looked up the statistics online I think the Bureau of Labor Statistics has a statistic that only 7% of the services that we purchase are digital meaning that they have been mediated by the internet so despite the huge amount of sponge that we have on services very few of them are actually occurring online and I think there's a four there's four reasons why that is the case I think services are obviously really complex when we go to a service provider and we're looking for a haircut or a babysitter or child care a hotel room there's so many different attributes that we're looking for there's so much complexity in our value function of things that we value for instance for a babysitter are they good with children do they speak other languages do they know CPR how kind are they services are super heterogeneous and and difficult to standardized into skews the way that goods are and that complexity makes it really difficult to capture the relevant information in a marketplace hard to skew of fine exactly how many different attributes yeah I think another reason why services have sort of been under penetrated is that there's no clear metric of success or what quality looks like so what a good service experience has been for me it might not be viewed the same way by another consumer so what one consumer thinks of as a five-star experience could be three stars for someone else going back to my point about the very complex value functions that consumers have beauty is in the eye of the beholder exactly yeah we think another reason why services have been slow to come online is because a lot of services are performed by small business owners and individual owner operators and these businesses typically don't have the tools or the resources to really invest in going online setting up a webpage making sure that their availability is somehow listed online and that their bucket ball so a lot of it still remains offline for that reason I think of my favorite near neighborhood barber where I get my haircut Belmont Hair Studio is this delightful family they're immigrant and family and they love cutting hair and they love talking to people but their sign of the prices and services available they haven't touched that for three decades yeah and often when you call them it's actually it's been updated and the prices have gone up versus what's online because that web page is probably 20 years old yeah it's the absolute last thing they think about yeah exactly and then I think another key aspect that distinguishes goods from services is that goods the stages of the value chain from manufacturing to production to shipping it to a warehouse to consumption and purchase by a consumer all of those stages and the value chain can sort of be split apart and broken up and serve and each tackled by a different company in a different marketplace so for instance Amazon is responsible for keeping things in stock and making sure that your orders get fulfilled services are a bit more complex because they involve this very synchronous creation and receiving a value by the consumer oftentimes services happen at the same place at the same location in an in-person meeting between the service provider and the consumer so there's difficulty in extracting pieces of the value chain that can actually be brought online like if you're going to go in for a haircut and meet with your barber and actually set up a time to do that then it's probably likely that it might be easier today to just schedule that in person or to do the payment in person while you're getting your haircut rather than breaking up those stages of the value chain in Chow marketplace so all of those are reasons that we don't have a hundred at scale marketplaces right it's hard there's lots of complexity in skew fi right products and attributes there's lots of complexities in delivering but a couple companies have managed to emerge and I think what you did in the blog post was you started looking at the history of the marketplaces that have been successful so when you dug into the history what did you find yeah so we really assumed out and thought about the last say 30 years of marketplaces and what's been built so far and when we took that survey of the history of service marketplaces what we found was that there's there's pretty clearly been various eras of marketplaces specific specifically there's been four major paradigm our models for marketplaces that have been trying to tackle services so in the beginning in the early days of the internet in the 90s the first attempt at bringing services online were what we call the listings era basically web pages that were digitized versions of the yellow pages so in the yellow pages you just had you know an entire book full of service providers that you could go down and actually call marketplaces from this era were pretty similar to that so examples of this would be Craigslist or Yelp which basically gave consumers a huge list of all of the available service providers nearby but it really put the onus on the consumer to have to do the legwork and clicking on all those links finding their contact information reaching out coordinating with the provider setting up a time to meet offline and actually transacting offline yeah and so there was definitely a set of people who loved browsing through Yellow Pages ads right the ones at the back or they loved looking through classifieds ads in newspapers and sort of highlighting them and clipping them out that like for most of the people that's a miserable experience like that's the last thing that you want to find a great hairdresser or to find a great daycare you don't want to go through lists and lists and lists and you kind of are suspicious of the big ads because you're like oh maybe like you know they're spending all their money on advertising and not on actual childcare right and so for most that was a pretty bad experience yeah so browsing listings is a pretty miserable experience yeah and I think listings it's not only tedious and a lot of work for consumers there were also problems with trust so for services that required some component of trust where you were potentially letting someone into your home or letting someone interact with your child it was really difficult to to go onto these listings platforms and have high confidence that the service provider that you were speaking to would actually be someone that you could trust yeah one of the fun facts from this era is if you can find yellow pages go look you might have to go to a museum to try to find one of these things but if you look at locksmiths you will see a lot of locksmiths named a and triple-a locksmiths and and the reason for that is they would actually show up first in the listings right and so if there was something like that you could do to gain traffic to your business it's gonna create trust problems right which is what makes triple-a locksmith any better than zze locksmith but for for some reason we do have a lot of triple-a locksmiths and very few zze so there was definitely some gaming going on I think the modern-day counterpart to the a locksmith example is providers who are just listing their service over and over again on the Craigslist you'll see those duplicate listings if you go back a few pages because it's chronologically ordered and so the people who rise to the top are the ones that just post a ton of time yeah and they'll post small variants right I'm a home theater installer San Jose home theater installer Cupertino right so yeah you're like I know that's that's you same you so that was the listings error so pretty miserable from an end-user experience point of view right like I'm browsing I don't know who's there I don't have a trust like what happened next like how did how did we get past the well Craigslist still exists but it's not the marketplace for everything yeah so what we started seeing next is companies started addressing those issues of trust of difficulty of finding providers and tediousness of actually reaching out to these folks by picking off various pieces of Craigslist and and creating what we call unbundled craigslist marketplaces and so there's that famous graphic that you can probably see online which is like the Craigslist homepage and basically every single category now has its own specialized marketplace that tackles just that particular category so for instance home services which used to be which is still its own Craigslist section now we have Angie's List and thumbtack and toss rabbit that are just doing home services in the childcare section we have things like CARICOM and there's a bunch of other examples so basically the next generation of marketplaces unbundled Craigslist and created verticalized marketplaces around a specific service category so that they could offer richer features better filtering technology better ways for users to be able to search and uncover the right provider for them so by specializing you could build features tailored to the service providers that you are trying to connect with consumers so that's a good example of that yeah so an example that I like is on Angie's List Angie's List actually has like a certification process that contractors and home service providers can actually go through so that they get a little badge on their listing which is like Angie's List certified exactly recommend it and a lot of these vertical vertical eyes marketplaces have some sort of similar credentialing or verification or recommended process because what they're trying to do is they're trying to help consumers figure out what's good quality versus what's poor quality what who are the service providers that have a lot of good customer satisfaction versus the ones that you know are more average and so this is this is trying to tackle that problem of search and discovery yeah so the badge of awesomeness helps preserve as providers stand out from each other I remember this era well because I was actually working at a consumer company called respond comm which was a participant in this we were trying to be a marketplace that would let you find local service providers and the way it worked is you describe what you want in your own words and you'd fill out a form and then we would take that and send it to a list of local service providers and they would bid on your business so kind of a reverse auction you would say I will change that lock for $50 or you've got another one saying now I'll change the outlook for $75 or something like that and one of the things we ended up having to do is that for every service provider they wanted to know different things the locksmith wants to know do you need me now do you need to change locks what do you need me to do whereas the window covering person needed to know how many windows and do you want blinds or do you want curtains and do you want short or fuzzy right right and so we ended up having to build these specialized forms for every service provider so that when they got the request they could respond to it intelligently so the specialization helped sort of streamline the communication yeah between somebody wants something and then somebody who was providing something right God so that was sort of era 2 which is we moved out of straight listings and we moved to an era where there were specialized feature sets for the marketplace and that and then what happened what was next yeah so then starting in the late 2000s early half of the 2010s we saw the rise of a ton of on-demand marketplaces or what we call in the blog post uber 4x marketplaces so these I think though the Y now for those that generation of marketplaces was really the advent of mobile and the rapid adoption of smartphones by consumers and service providers all of a sudden people could know where various providers were located relative to them so you had location that you could do matching on people could respond to requests immediately rather than waiting until they got home to their computer and could check their email and so this was really conducive to an on demand model where you could receive a service very quickly almost immediately in real time without having to wait and to have a back and forth messaging process over potentially multiple days and so the on-demand model of marketplaces was really conducive to simple services that were very atomic and simple transactions that could you could do matching four in a very quick algorithmic way without you know matching on various different complex dimensions you didn't have to ask 27 questions it's kind of push button and something useful happens right car arrives a somebody who will pick up your stuff that Costco arrives or whatever right exactly and I think another thing that we saw happen with this generation of marketplaces is that because the matching happened in an algorithmic centralized way what happened was that the supply side sort of became more obscured and sort of abstracted away for consumers so as a consumer you would say something like my uber driver picked me up or I'm getting food delivered through door - you wouldn't think of the counterparty of the transaction as being that actual end provider the way that you did in previous generations of marketplaces yeah you didn't know their name you just wanted to know that like I don't know they had four stars or more or something like that right that was good enough yeah that's otherwise they were fungible right maybe they're sort of replaceable yeah and that's because these on-demand marketplaces really nailed in on a singular use case and took hold of that entire end-to-end transaction from discovery to matching to payment and actually a transaction and so because that entire service delivery process was captured by those marketplaces people didn't really think of the the unprovided on top of mine for the consumer mm-hm they were sort more or less replaceable thanks as long as you're reputable and strong enough to carry my boxes I don't really care who carat who shows up to carry my boxes yeah and we also saw I think a large reckoning with this generation of marketplaces as well where a lot of the startups that were trying to become over 4x didn't ultimately end up lasting and surviving standalone companies and we think that that's because the model got applied probably a bit too liberally to serve as category that weren't as conducive to to the on demand model so there's a lot of services out there that actually don't need to be delivered immediately that people are willing to wait for there's other service categories that are more complex where consumers actually want to know who they're interacting with at the end of the day rather than just the platform itself mm-hmm and that gave way to the next era of marketplaces exactly so where the person actually mattered they weren't fungible and so what do you guys call this area yeah so the most recent era of marketplaces is something we call the managed marketplace era so managed marketplaces went a step beyond all the previous eras of service marketplaces and really providing a ton of value on to the consumer as well as to the service provider in takling even more complex services and doing a heavier operational lift and so these managed marketplaces take on some additional value add or functionality that consumers and suppliers really value that they previously had probably been doing themselves so examples of this would be honor which is one of our portfolio companies that provides eldercare honor actually interviews vets recruits caretakers who they employ as w-2 employees so that they meet some sort of minimum standard bar and they can be trained and they can provide really high quality service and previously in you know in the CARICOM era of care marketplaces the end user the end consumer would have had to reach out to a bunch of different professionals interview all of them and do all of this work now a platform like honor is taking on that work and the operational heavier left on our behalf yeah Seth and crew are doing such a good job and he was explaining to me the last time I was chatting with him about how complicated it is to find you the perfect person to do the perfect task and interact with just the right person right there's so many variables like what language do they speak and they lift heavy things and are they punctual or not and all of these things are very complicated and lead you to either have an okay or a great experience right so they actually have to use machine learning algorithms to match service providers to maximize the chances that you'll actually have a great experience because it is complicated yeah exactly I think of the managed marketplace era and this managed model as being a really good model for services that are complex that require higher trust that maybe have higher stakes involved or potentially like are involving higher value transactions so for instance open door is another example of a managed marketplace for buying and selling real estate this is another one of our recent investments but rather than following the existing model of real estate in which most real estate agents actually are contracting or independent contractors and they work on Commission open door actually I think employs people to go show these homes to help homeowners sell their homes and they actually they're super managed because they actually purchased the home from you if it doesn't solve within a certain time frame yeah one of the Alex who's the General Partner who led the investments theses is that 10 or 20 years from now we'll be buying homes from corporations rather than people because corporations have processes technology they can bring to bear to sort of make sure every experience is awesome right they're pricing it right they're staging your home right they're showing you the right houses where as individual operators individual agents may or may not have the experience to do that a total sense that like we would professionalize things like that and for the most important things in our lives right what house do we live in who takes care of our parents when they can't take care of themselves or who watches my kids while I'm at work right all of these things really need this era of management right you need to trust the service provider you need to try the company bringing you just the right set of people yeah exactly I think I've managed marketplaces as a model that works really well if the existing customer experience is really suboptimal in like a less managed version managed marketplaces can often create an extremely Wow customer experience that you would have never been able to accomplish before had the customer still been looking for a service provider on for instance the listings platform right and it's a lot easier for them right you don't get a list of six people that you then have to call an interview and schedule and figure out how to pay and all that yeah exactly yeah awesome so that was sort of the managed marketplace era well that was a fun romp through history we like to do these historical walks through all of the types of investments we made so we talked about listings from the 90s we talked about the unbundled craigslist era we talked about the uber 4x and then we sort of had just been talking about managed marketplaces where you need higher trust for the service provider on the other end what are you excited about now yeah so we ask ourselves that every day and thinking about what investments we should make and so zooming out of this entire historical picture I think are one of our observations about the best marketplace investments and the best market place companies are that they tend to be marketplaces that have more constrained supply than demand so the the biggest marketplace outcomes that we've seen or the biggest marketplace companies that we've seen are ones in which they've always struggled to keep up with the demand on the platform so really good examples of that would be Airbnb and uber so during the entire lifetimes of both of those companies there's always been an excess of demand and supply has always struggled to keep up there's never been enough home owners who are willing to open up their homes because there's just so many consumers who want that kind of authentic travel experience similar with uber ever since that business model was pioneered they've always had more trouble relatively more trouble finding drivers than finding consumers who actually want to ride and so we think that this is actually a really key insight because we think that the best market place company is the ones that can grow to be the biggest and really scale are going to be the ones that tap into some sort of latent demand that already exists in consumers that consumers already really want but are unable to access today and so in other words we're looking for categories where there's a lot of demand that is being unfulfilled today and so that leads us to what we think is next which is regulated services and marketplaces that address regulated services so we the reason why we zeroed in on regulated services is because by definition there is an artificial constraint on supply in those service categories and there's regulation that exists to basically be able to say who is able and who is not able to provide this service to consumers and so we think those are really promising categories for people to build companies in what are some examples of services the service industries that are regulated yeah so you can go on to the Bureau of Labor Statistics and I'll actually give you like a huge long list of all of these professions but the major ones would be law accounting medicine and healthcare those are the major professions where a huge majority of those service workers are actually regulated and like her of the bar or certified by the state of California exactly or exactly has passed the Medical Board of California etc and then you get down to actually like professions where there's not as much risk to public health and and wellness if the provider is not certified so for instance in some markets and some geographies florists actually need to be certified in order to operate a flower shop and to practice as a florist I didn't know that and people have been driven out of business because they can't afford to go through that licensing process another example of this is in many geographies interior designers actually need to be licensed in some way in order to decorate other people's homes so there's there's categories where we think licensing makes a lot of sense to protect the public health and then there's categories where we think that there could actually potentially be an unlicensed supply pool that meets a lot of the lit the latent demand that exists out there mm-hmm so a little like lyft when they thought about gee do you need a taxi medallion in order to drive your car around their argument was no you have a car a proven track record of safety because you haven't gotten in any accidents so why don't we let you drive your car around exactly and without that kind of unlock without expanding it to the unlicensed pool of potential drivers there's no way that uber or lyft could be anywhere near the size they are today yeah so it sounds like the first thing that we're looking for is we don't necessarily have to have consumers learn a new habit right it's something that they do already get your haircut or whatever or go get a medical procedure right so it's something that you're doing already but we think that the crop of startups will make this experience better and why don't you provide some examples how will regulated service marketplaces make your life better first as a consumer of these services yeah I think we've all had experiences where we have tried to get access to a service provider in a regulated industry and we come upon challenges and accessing that service so for instance it might take months to get an appointment with a particular specialist in a medical field or perhaps it's cost prohibitive for you to receive interior design services because those people need to be licensed so this shows up in the consumers lives in the form of like decrease in access higher prices that you have to pay longer waiting lists or just generally having difficulty accessing that type of service yeah so that definitely sounds better right ready supply I can meet with somebody sooner I can have the same service at a lower price yeah so what are the challenges startups have in making all that magic true right because they need to unlock the supply side to be true right so there's a few strategies that we walk through in the blog post about how can marketplaces actually unlock the supply side in these regulated industries one of them is in some industries it's enough to just make discovery easier of these license providers if today there's no resource for people to turn to in finding licensed providers potentially just having having a place where you can go and be connected to them back to listings exactly we're a good search right yeah good search so an example of this is like ZocDoc which helps consumers find doctors previously where where consumers have to call and leave voicemails and try to make appointments they can now do that online so that's that's one strategy another strategy for unlocking supply is is hiring and managing the providers themselves as a platform go full stack exam your employees right so the managed model and under the managed model the outcome of that is that companies can really raise the level of service and quality and accessibility and make these service providers a lot easier to access and have a consistent standards bar for them to really elevate their consumer experience got it so down this path you're likely raising more money because having them on your books is more expensive rather than having them as contractors but your argument is that in some of these marketplaces you have to have that extra increment of quality for the service to work right yeah potentially there is just huge variance among the licensed supply pool such that a managed marketplace can really come in and relieve consumers of that problem of finding the high-quality supply the next strategy that we identified in unlocking supply is companies that are augmenting or expanding the license supply pool so a perfect example of this is lyft or uber so expanding beyond the current pool of professional livery drivers who are other people in the population that could provide a similar service perhaps not the same one that consumers had experienced before but something that met the same the same consumer need and you can apply this model to other industries as well so a startup that we recently met with is building a marketplace for buying a dog as a pet so I don't have any dogs but what I've heard is that it's just really difficult for consumers to find a good response well dog breeder and a healthy dog exactly and a lot of the dog breeders live in other geographies or other states and it's not easy to go and visit them and so what good dog is doing is it's actually finding these breeders in the middle of the country that otherwise you couldn't get connected to and creating its own set of standards as an alternative to alternative to the licensing that exists today which doesn't necessarily map to what consumers actually value and expanding the supply pool there so rather than the traditional license you trust a good dog to find a good breeder and you trust it because they're doing all the vetting and all of the standards and all the training that the breeder you get connected to will be first-rate yeah and then the last strategy to unlock supply in these regulated industries is using a on automation so probably your favorite category so today in order to be a truck driver in the US you have to be licensed and this is the most common profession in most states in America and yet we're still extremely supply constrained when it comes to the truck driving industry there just needs to be a lot more drivers on the road than there are today and so there's a number of companies working on self-driving trucks to relieve the industry of that supply challenge I've also seen startups that are applying AI to dermatology and skin care so there was a company I met with recently called mg acne in which you take a selfie of your face and it uses AI to detect pimples or discoloration and instead of sending that to a dermatologist to review they use AI to review it and to determine the correct product or correct ingredients that you should be using on your skin that's a clever way to get around the constraints apply a board-certified dermatologists exactly you can sort of replace the basics of what they do right it's not like an advanced thing it's sort of the very basics what creams and what what should you do with your skin precisely and for for companies that are you know not not issuing prescription ingredients and asking consumers to go get a prescription I think that kind of solution is perfect because otherwise there's a lot of people out there who would never have the time or the resources to go to an actual dermatologist for help got it so of all of the companies that you sort of met in this regulated services arena what are some of your favorite categories like what are you personally excited about yeah so personally I am really excited about the mental health and wellness piece so therapy today is a product that is really what I think of as a luxury product so mental health is something that people can really only access if they are really wealthy and have extra time and money to pay for it most psychiatrists are network and so they can charge prices of you know even $600 an hour and so this is really a product that most people can't access and so I'm excited about the potential for a marketplace that perhaps leverages a an automation perhaps make some of the service delivery asynchronous rather than synchronous for a marketplace to really come in and improve access to that kind of service and I've seen a few attempts at this so far that I think are pretty clever and interesting so one startup based in San Francisco is called basis and they're using unlicensed but trained people in the community to basically serve as therapists and so the concept is that you have an hour-long long conversation with someone who isn't actually a therapist who knows the techniques to help you identify problems or actually tackle issues in your life that can really improve your mental health and your happiness and so let me let me play a board-certified psychotherapist and give you the emoji which is oh my goodness we're really gonna let untrained on board certified psychotherapists out into the wild and like coach people like what could possibly go wrong so how do we answer that question yeah I think that's going to be something that they need to tackle and really figure out how to address because I think there is definitely a limit of the types of cases and the types of patients that the unlicensed but trained model can be applied to I think for a large portion of the population that's just going through everyday stresses and anxiety having someone to talk to is just a great resource in and of itself so maybe we pick patients that aren't most at risk exactly yeah and perhaps for the patients that are most at risk they can be then routed to or sent to you know an actual licensed therapist so mental health is one category you're interested in what else yeah another vertical that I think this kind of regulated service marketplace could be really applicable to one that is very near and dear to my heart is something in the beauty space so a lot of makeup artists today have to be licensed as cosmetologist and they have to go and receive that licensing and pay the fees associated with that and so makeup artistry is actually also a luxury good today so we think of celebrities as people with you know makeup artists that they have following them around doing their makeup every day maybe for special events women will splurge for a makeup artist but on a day to day basis we have to do our own makeup and we have to figure it figure it out ourselves and so how can we give every woman that experience of having a personal makeup artist who helps them look their best and feel confident every day I think that would be a really interesting application of AI and a lot of the themes that we talked about in this conversation to really improve access to that kind of service yeah I love the idea that you're gonna democratize the service by bringing the prices down and I love the idea of sort of maybe makeup artists building their brand by YouTube and so like you're kind of following them anyway and then now they could actually do your makeup I think that's a great idea and then if you could offer encouragement to entrepreneurs who are starting companies in this space what what would you say to them yeah I would just say that there's so many opportunities that are still left there's a table in our blog posts with the various regulated professions and examples of startups that are tackling them and you'll probably notice that many of them are actually blank and don't have any names listed next to them and that's because we couldn't find any startups that are doing it and so I would just say to entrepreneurs that there are so many service categories that are still left to build marketplaces in marketplaces for services are a huge opportunity because services represent 80% of the US GDP and so there's a ton of opportunities left and if you're working on any of them we'd love to hear from you all right startup land if one of those empty spaces in the blog post has your name on it because you can't stop thinking about it you're at the breakfast table and you're like I can't stop thinking about this then think about starting a company and come Sealy well thanks Lee for joining us in this hallway conversation thank you we hope to do lots more of these and so if you liked this conversation leave us comments subscribe to the channel and if you have thoughts about what other hallway conversations you'd like to hear about let us know so see you next time

Channel: a16z

Views: 48,149

Rating: 4.9156737 out of 5

Keywords: startups, a16z, entrepreneurs, marketplaces, technology, andrew chen, andreessen horowitz

Id: zl14Ty5-0Ko

Length: 40min 30sec (2430 seconds)

Published: Fri Dec 21 2018