3 Characteristics of Successful Marketplace Businesses
Revolution has made multiple marketplace investments from our funds including BusBud, FedBid, Handy, Optoro, PolicyGenius, SpareFoot, and Vinfolio. From the company names, it’s fairly obvious that these companies fall across multiple industries — these examples are in travel, government contracting, home services, logistics, insurance, storage, and wine. And while each industry is very different, they share three common characteristics required for a successful marketplace investment:
1. Large (enough) core market: Valuable marketplace businesses typically take lots of time and capital to reach meaningful scale and profitability. We often see tens of millions of investment dollars needed to reach $100m of gross transaction volume. Companies that are being built in industries that offer limited headroom for long-term growth often feel pressure to pivot towards ancillary revenue streams too early in their life cycles. This can put strain on two of the most precious resources for entrepreneurs — time and money. Be wary of getting spread too thin too soon!
Uber & Airbnb both built massive businesses on the backs of their core products before diving deep into new verticals: Uber has rapidly built a sizable food delivery business and Airbnb just announced that it will add experience and transportation bookings to its marketplace.
2. High barriers to disintermediation: A marketplace can usually asses its worth by answering a simple question — does it create enough value to both the buyer and seller that both parties will become repeat users? If a marketplace is needed to solve a problem only once, or if the market maker can easily be removed from the buyer/seller equation, then the value proposition breaks down quickly.
High-touch services such as babysitting or personal care that are more intimate in nature are at high risk of disintermediation as buyers tend to put a premium on trust and consistency of experience. Operators in these categories should be wary of ongoing, one-to-one relationships that find ways to disintermediate the middleman and should put systems/incentives in place to maintain an end-to-end marketplace solution.
3. High frequency and/or AOV: Building a marketplace business is not easy — the platform must use technology to aggregate supply, which is often highly fragmented, and efficiently connect that supply with demand, which has increasingly had the luxury of choice in the VC environment of late — just look at the onslaught of food delivery platforms in most major cities!
All of this work by the marketplace is typically rewarded with a small % fee of the overall transaction value — the marketplace’s “take-rate.” In order to build a large business on what are often low take rates (usually 1% to 20%), marketplaces need to solve high-frequency problems — think cab rides or food delivery — and/or high-value problems with large average order values — think flights and hotel rentals.
Successful execution in the early days of a marketplace business is often closely linked to these key characteristics. Management teams who have these business model dynamics working in their favor should reap the benefits of stronger unit economics, higher growth, and of course heightened investor interest.
Revolution is excited to invest more time and money in 2017 behind marketplaces that are built to-last given the remarkable traits they are known to carry: network effects that can lead to high-growth, high barriers to entry at scale, and the potential for “winner-takes-all” outcomes.
Note: Revolution’s marketplace investments include BusBud, FedBid, Handy, Optoro, PolicyGenius, SpareFoot, and Vinfolio
