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

Summary

The video script offers a comprehensive guide for building successful marketplaces, highlighting 12 key factors. It emphasizes the importance of network effects, identifying the right playbook for different marketplace types, and addressing asymmetries in supply and demand. The speaker also stresses the need for providing economic advantages, considering frequency and average sales price, and preventing multi-tenancy and disintermediation. The script concludes with the significance of owning the payment flow, market fragmentation, market size, and the potential to expand into adjacent markets.

Takeaways

• 🌐 The core of a successful marketplace is the network effect, where both supply and demand sides contribute to each other's growth, creating a self-sustaining ecosystem.
• 📚 Understanding the type of marketplace is crucial, whether it's two-sided, one-sided, three-sided, or an insider marketplace, as each has different dynamics and strategies for success.
• 🔍 Identifying asymmetries in supply and demand is key; marketplaces often start with an excess on one side and must work to balance it to create a functional market.
• 💰 Providing an economic advantage to one or both sides of the marketplace is essential for sustainability and growth.
• 🔄 Frequency of transactions is important; higher frequency can lead to stronger customer loyalty and a more robust marketplace.
• 💰 High Average Sales Price (ASP) can significantly impact the potential size and success of a marketplace, especially when combined with frequency.
• 🚫 Watch out for 'multi-tenancy' where suppliers can easily switch between platforms, which can erode profits and create challenges for the marketplace.
• 🛑 Disintermediation, where direct relationships form outside the marketplace, can be detrimental and needs to be prevented to maintain the marketplace's relevance.
• 💼 Owning the payment flow is vital for marketplaces as it provides better control over revenue and the ability to offer additional services.
• 🏪 High fragmentation in the market can be advantageous for marketplaces as it reduces the risk of being dominated by a few powerful players on either side.
• 🔑 Solving the complete need for one side of the marketplace can lead to deeper integration and loyalty, reducing the risk of disintermediation.
• 🌟 While market size is important, the potential for growth, especially if the marketplace can expand the market itself, should not be overlooked.

Q & A

What are the 12 key factors to consider when building a successful marketplace?

The script outlines 12 factors: network effects, the right playbook for market type, asymmetries in the marketplace, economic advantages for participants, customer frequency, high average sales price (ASP), avoiding multi-tenancy, preventing disintermediation, owning the payment flow, market fragmentation, solving complete needs of one side, and the overall size of the market.

Why is the network effect important in a marketplace business model?

The network effect is crucial as it is the core of what makes a marketplace business work. It creates a virtuous cycle where the value of the marketplace increases as more participants join, making it hard for competitors to replicate.

What is meant by 'playbooks' in the context of marketplace types?

Playbooks refer to the strategies and approaches tailored to the specific type of marketplace, whether it's geographically constrained, has one-sided or two-sided dynamics, or involves multiple stakeholders.

How does a marketplace prevent multi-tenancy issues?

To prevent multi-tenancy, a marketplace can focus on fulfilling all the needs of participants so they have no reason to use multiple platforms. This may involve exclusive contracts or creating a more comprehensive service offering.

What strategies can a marketplace use to prevent disintermediation?

Marketplaces can prevent disintermediation by owning the payment flow, creating strong relationships with both sides of the market, and implementing features that discourage direct deals outside the platform.

Why is the frequency of customer transactions important for a marketplace?

Frequency is important because it helps build customer loyalty and provides a solid foundation for the marketplace to expand into other services or products. High-frequency transactions can also lead to a larger market share.

How does a high average sales price (ASP) benefit a marketplace?

A high ASP can lead to a more profitable marketplace, as it requires fewer transactions to reach significant revenue milestones. It also indicates that the marketplace is dealing in high-value goods or services.

What is the significance of market fragmentation in a marketplace?

Market fragmentation is important because it can indicate the potential for a marketplace to consolidate supply or demand, creating a more efficient and profitable platform. However, too much concentration can lead to less leverage for the marketplace.

Why is solving the complete need of one side of the marketplace important?

Solving the complete need of one side can lead to increased loyalty and retention, reducing the likelihood of multi-tenancy and disintermediation. It also positions the marketplace as an indispensable tool for that side of the market.

How does the size of the market impact the potential success of a marketplace?

A larger market size offers more opportunities for growth and revenue. However, the script also suggests that even in smaller markets, if a marketplace can capture a 'white-hot center' and expand into adjacent markets, it can still be successful.

What can a marketplace do to enhance the network effect?

A marketplace can enhance the network effect by showing participants the activity happening within the platform, designing products that encourage interaction, and creating features that retain and strengthen the network effects.

Outlines

00:00

🚀 Introduction to Marketplace Dynamics

The speaker, a managing partner at nfx, a seed stage venture capital firm, introduces the topic of marketplace dynamics. They have experience investing in over 60 marketplaces and building several. The focus is on the 12 essential factors for creating a successful marketplace. The speaker emphasizes the importance of network effects, explaining how they are the core of a marketplace's success. They illustrate the concept with examples like Lyft, where the presence of drivers attracts more drivers and riders, creating a self-sustaining cycle. The speaker also discusses the importance of enhancing network effects through product design and retaining users to build a robust marketplace.

05:00

🌐 Understanding Marketplace Types and Asymmetries

The speaker delves into the different types of marketplaces, such as two-sided, one-sided, and three-sided marketplaces, using examples like Uber, Craigslist, and Match.com to illustrate the differences in their dynamics and network effects. They also introduce the concept of asymmetries within a marketplace, explaining how identifying and leveraging these imbalances between supply and demand can be crucial for a marketplace's success. The speaker advises on the importance of focusing on either the supply or demand side, depending on the type of asymmetry present in the marketplace.

10:04

💰 Providing Economic Advantages and Frequency of Transactions

The speaker discusses the necessity of offering economic advantages to one or both sides of a marketplace to ensure sustainability. Examples such as Square and Craigslist demonstrate how providing such advantages can boost revenues and user engagement. The concept of transaction frequency is also explored, with the speaker highlighting how high-frequency transactions, like in food delivery or fashion marketplaces, can build loyalty and expand into other services. The speaker warns against marketplaces with low-frequency transactions, suggesting that they require different strategies to succeed.

15:05

💎 High Average Sales Price and Multi-Tenancy Risks

The speaker emphasizes the importance of a high average sales price (ASP) in marketplaces, using Airbnb and outdoorsy as examples to show how high ASP can lead to significant business valuations. They also introduce the concept of multi-tenancy, where service providers can operate on multiple platforms simultaneously, and discuss the challenges it poses to marketplace profitability. The speaker suggests strategies to mitigate multi-tenancy, such as fulfilling all user needs within a single platform to discourage users from spreading across multiple services.

20:07

⚠️ Disintermediation and Payment Flow Ownership

The speaker addresses the issue of disintermediation, where direct relationships are formed outside of the marketplace, using Homejoy as a cautionary example. They suggest techniques to prevent this, such as offering unique value within the platform to keep users engaged. The importance of owning the payment flow is also highlighted, as it provides better opportunities for revenue generation and service expansion. The speaker advises marketplaces to ensure that payments are processed through their platform to maintain control and add value.

🏪 Market Fragmentation and Complete Need Satisfaction

The speaker discusses the impact of market fragmentation on the success of a marketplace, noting that high fragmentation can be advantageous by reducing the leverage of concentrated players. They use examples to illustrate the challenges faced when dealing with a few powerful buyers or suppliers. The speaker also introduces the concept of solving the complete need of one side of the marketplace, suggesting that providing essential tools or services can increase loyalty and prevent users from seeking alternatives.

🌟 Market Size and Potential for Growth

The speaker concludes with a discussion on the size of the market and the potential for growth. While investors typically prefer large markets, the speaker argues that smaller markets can be advantageous if they can 'bleed' into adjacent markets or if the marketplace itself can significantly expand the market size. Examples like Lyft and Uber are used to demonstrate how the existence of a marketplace can increase overall market activity. The speaker encourages considering the potential for market expansion when evaluating the size of the market opportunity.

Keywords

💡Network effect

The network effect is a phenomenon where a product or service gains increased value as more people use it. In the context of the video, it is the core principle behind the success of marketplace businesses. The speaker emphasizes that for a marketplace to thrive, it needs to create a network effect where the participation of both supply and demand sides enhances the value for each participant. For instance, the more drivers on Lyft or Uber, the more convenient it is for riders, attracting even more drivers and riders to the platform.

💡Marketplace types

Marketplace types refer to the different structures and dynamics of marketplace businesses. The video discusses various types such as two-sided marketplaces like Uber and Lyft, one-sided marketplaces where both buyers and sellers are looking for the same thing, and three-sided marketplaces which include an additional layer of complexity. Understanding the type of marketplace is crucial for developing the right strategies, as each type has unique network effects and growth dynamics.

💡Asymmetries

Asymmetries in a marketplace refer to imbalances between supply and demand. The video script mentions identifying and leveraging these asymmetries to create a successful marketplace. For example, a marketplace might have an excess of one type of supply and not enough demand, or vice versa. Recognizing and addressing these asymmetries can help a marketplace to grow by attracting the necessary participants to balance the scales.

💡Economic advantage

Providing an economic advantage to one or both sides of a marketplace is essential for its sustainability. In the video, the speaker explains that a marketplace must offer clear economic benefits to either the supply or demand side, or both, to incentivize participation. For instance, Airbnb offers homeowners the opportunity to earn significant income from their property, while guests benefit from lower-cost accommodations than traditional hotels.

💡Frequency

Frequency refers to how often users engage with a marketplace. The video emphasizes the importance of high frequency for building customer loyalty and establishing a strong presence in the market. Businesses like food delivery services benefit from the high frequency of meals ordered by consumers, while others, like job marketplaces, face challenges due to the infrequency of job changes.

💡Average Sales Price (ASP)

ASP is the average amount spent per transaction in a marketplace. The script discusses the significance of a high ASP for the financial success of a marketplace. Marketplaces with high ASP, like real estate or luxury goods, can achieve significant revenues with fewer transactions compared to those with lower ASP, such as daily deals or small purchases.

💡Multi-tenancy

Multi-tenancy in the context of marketplaces refers to participants using multiple platforms simultaneously. The video warns about the risks of multi-tenancy, where suppliers or service providers are available on competing platforms, which can erode profits and make it difficult for a marketplace to establish a unique value proposition. For example, a driver working for both Uber and Lyft can switch between platforms, reducing the exclusivity and loyalty to any single platform.

💡Disintermediation

Disintermediation is the process where an intermediary platform loses its value as participants find direct ways to engage with each other, bypassing the platform. In the video, the speaker cites Homejoy as an example where customers and service providers met through the platform and then hired each other directly, leading to the platform's failure. Strategies to prevent disintermediation include creating strong value propositions and dependencies that keep participants engaged with the platform.

💡Ownership of payment flow

Owning the payment flow means that the marketplace controls the financial transactions between buyers and sellers. The video script highlights the importance of this control for capturing revenue, adding services, and preventing disintermediation. By managing the payment process, a marketplace can ensure its continued relevance and revenue stream from each transaction.

💡Market fragmentation

Market fragmentation refers to the distribution of market share among various players in the supply or demand side. The video discusses the benefits of high fragmentation, where no single player dominates, making it easier for a marketplace to establish itself without being overly influenced by a few large players. Conversely, low fragmentation with a few dominant players can make it difficult for a marketplace to gain leverage and prevent disintermediation.

💡Solving complete need

Solving the complete need of one side of the marketplace means providing such comprehensive value that participants are less likely to seek alternatives outside the platform. The script mentions software as a service (SaaS) that integrates deeply into a participant's business operations, making them reliant on the marketplace for their core activities. This deep integration can create strong ties and retention, reducing the likelihood of multi-tenancy or disintermediation.

💡Market size

Market size is the potential scale of a marketplace's target industry or sector. While the video acknowledges the importance of large markets, it also points out that smaller markets can be successful if they can bleed into adjacent areas or if the marketplace itself can significantly expand the market size. The existence of a marketplace can sometimes create new demand, as seen with Uber and Lyft, which increased the overall market for rides.

Highlights

The importance of network effects in marketplace businesses and how they are essential for driving growth and competition.

The necessity of having both supply and demand sides in a marketplace to create a network effect and sustain the business.

Different marketplace types, including two-sided, one-sided, three-sided, and multi-sided marketplaces, and their unique dynamics.

The significance of identifying asymmetries in supply and demand within a marketplace to leverage them for business advantage.

Providing economic advantages to one or both sides of a marketplace to ensure sustainability and growth.

The role of frequency in marketplace success, with high frequency activities leading to better customer loyalty and business growth.

The impact of Average Sales Price (ASP) on marketplace valuation, with higher ASPs often correlating with higher market caps.

The challenge of multi-tenancy in marketplaces and strategies to prevent it from eroding profits and market share.

Disintermediation as a risk in marketplaces and creative solutions to prevent users from bypassing the platform.

The critical role of owning the payment flow in a marketplace for added control, revenue, and service opportunities.

The benefits of high market fragmentation for a marketplace, allowing for more opportunities and less competition.

The risks of a marketplace with few powerful buyers or suppliers and strategies to mitigate the challenges they pose.

The potential for a marketplace to solve the complete need of one side, increasing loyalty and preventing multi-tenancy.

The importance of market size in evaluating a marketplace, with small markets offering opportunities for rapid growth and expansion.

The potential for marketplaces to expand the size of the market they operate in, creating new opportunities and growth.

The comprehensive list of 12 key factors to consider when building a successful marketplace business.

The speaker's experience and insights from investing in over 60 marketplaces and building several himself.

Transcripts

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]