A Guide to VC Insights

Marketplaces

May 2016
 Chapter 1: Introduction to Marketplaces



Chapter 2: Seeding, Growing, and Scaling a Marketplace



Chapter 3: Finding the Right Business Model for your Marketplace



Chapter 4: New Marketplace Types



Chapter 5: Marketplace Metrics



Chapter 6: Marketplace Tools



Chapter 7: Working with Investors



Conclusion
What’s an online marketplace?

A type of e-commerce site that connects those who

provide a product/service (sellers) with those looking to
buy that product/service (buyers)

Creates efficiency in an otherwise inefficient market

Product-Focused Service-Focused Product + Service

Two elements to every marketplace

1. Aggregates sellers and their inventory

2. Includes a transaction element
– A true marketplace manages the entire transaction - from listing
to payment processing - with the service and goods delivered
offline.
– Some initiate but do not process transactions, such as lead
generation sites where providers send quotes through the
platform (Thumbtack).
Marketplaces defined by role of participants

B2B (business-to-business) B2C (business-to-consumer)

Makes procurement and supply Existing businesses use platform
chain more efficient for long-tail and/or individuals formalize their
SMB market. activities into a business.

P2P (peer-to-peer)
Private individuals sell
to others.
Two metrics of a marketplace

1. Gross Merchandise Value (GMV)

– Total dollar value of everything sold in a time period
– This is not the platform’s revenue.

2. Take Rate
– Percentage of GMV the marketplace takes in fees
Five factors to consider in a marketplace*

1. High fragmentation
2. Buyer/seller relationship
3. High purchase frequency
4. Total available market (TAM)
5. Being part of the payment flow

* Source: All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces by
Bill Gurley. All 5 factors (or 10 on Bill’s list) are not required to build a good marketplace, but the more you have,
the higher the potential of your marketplace.
High fragmentation

Most value is created in a highly fragmented market.

– Buyers need help connecting to sellers.

Higher fragmentation = higher take rate

– It reduces the negotiation power of participants.
– By contrast, when there are few suppliers, they won’t want to
share in the economics with a new marketplace, resulting in a
lower take rate.
The buyer/seller relationship

When buyers are loyal to their supplier, the value of a

marketplace is reduced.
– As an example, once consumers find a doctor they trust, they
will not shop for another for some time.
– This is also true for commoditized products where products are
sourced from the same supplier (e.g. diapers on the consumer
side and raw materials for businesses).
High purchase frequency

Know the difference between how often a buyer uses a

service versus the marketplace.

“All things being equal, a higher frequency is obviously better…

where the consumers can rely on the marketplace as a utility.
Many failed marketplaces attack purchasing cycles that are way
too infrequent, which makes it much more difficult to build brand
awareness and word-of-mouth customer growth.” - Bill Gurley
Total available market (TAM)

Can your marketplace create new value?

How big is the total available market and how much can
you capture?
Being part of the payment flow

The potential take rate is much higher when money is

exchanged on the marketplace instead of offline.
How to win against the incumbent

1. Lower the take rate

2. Go vertical: new categories or geographies
3. Develop a 10x better product
4. Bring unique inventory to underserved markets
Network effects

When a new user is added to the network, it increases the

value of the service to all other users
– Network effects ≠ virality
– Virality = rate of user adoption

Marketplaces usually have low virality but high two-sided

network effects, which creates defensibility.
 Chapter 1: Introduction to Marketplaces



Chapter 2: Seeding, Growing, and Scaling a Marketplace



Chapter 3: Finding the Right Business Model for your Marketplace



Chapter 4: New Marketplace Types



Chapter 5: Marketplace Metrics



Chapter 6: Marketplace Tools



Chapter 7: Working with Investors



Conclusion
Building a marketplace

There is a chicken and egg problem in the early days of a

marketplace: getting both buyers and sellers onto the
platform.

First, you need to devise an effective strategy for

increasing supply.

Next, you need to get to that virtuous cycle of supply and

demand.
Stage 1: Seeding your supply

1. Identify unique supply, e.g. those who don’t sell online

2. Convince existing sellers to list on your platform
3. Bring customers to a provider
4. Pay for inventory to artificially create supply at the
outset, but know it’s not scalable
5. Aggregate inventory that is listed elsewhere, but know
you will run the risk of becoming a cross-platform utility
rather than your own marketplace
Stage 2: Growing a Marketplace

Holy Grail: The Virtuous Cycle of Supply & Demand

High Number of
Quality Suppliers

Helps to Draw Even

Attracts More Customers
More Customers

Brings More Suppliers

The cycle continues as a self-sustaining growth engine until supply

& demand reach critical mass to be “winner takes all.”
How to create a virtuous cycle (1/2)

1. Identify and double down on things that work in your

marketplace
– What works on both supply and demand sides? (i.e. within
certain geographies, audience segments, price points, etc.)
– Initially, you may have to manually recruit members and do
things that don’t scale (e.g. Airbnb rented a $5,000 camera and
took professional pictures of New York listings).
How to create a virtuous cycle (2/2)

2. Be patient: marketplaces take time

– Can take 3+ years to establish buyer and seller communities
• e.g. Indiegogo was founded in 2007 but broke out in 2011.
– Look for signals that you’re on the right track, such as:
• Increased word of mouth from early adopters
• Increased repeat usage from buyers
• Increased listings from sellers
• Positive user feedback
Stage 3: Scaling your marketplace (1/5)

1. Foster trust and safety

– Establish trust and credibility with transparency
• Use a rating system, user reviews, or testimonials
– Consider some level of guarantee like service quality, delivery
time, or payment
– Follow up personally whenever the terms of a transaction are
broken
Stage 3: Scaling your marketplace (2/5)

2. Support power sellers – those who earn a living off your

marketplace
– e.g. ThreadFlip gives its sellers boxes and mannequins to help
them display used clothes, and holds regular one-on-one calls
for feedback.
– e.g. eBay’s offers power sellers priority customer support, unpaid
item protection, and “top-rated Seller” designation.
Stage 3: Scaling your marketplace (3/5)

3. Develop an ecosystem that supports third-party apps

and services
– e.g. Other startups offering guest screening and catering for
Airbnb hosts
Stage 3: Scaling your marketplace (4/5)

4. Prevent leakage
– Always a risk that buyers and sellers will settle the transaction
offline, which prevents your marketplace from capturing revenue
– Have a great UX for your users to communicate
– Consider adding a rating system that suppliers value and buyers
need in order to trust quality
Stage 3: Scaling your marketplace (5/5)

5. Build a moat
– Uniqueness of your supply will likely fade over time
• Suppliers will seek out opportunities on other marketplaces
• Competitors will grab market share that you discovered
– Protect your supply
• Lower listing fees for unique inventory
• Tie sellers to your site through reviews
• Find innovative models like Uber’s leasing model
– Protect buyer mindshare
• Find the right product mix to become a frequent destination
for your customers
 Chapter 1: Introduction to Marketplaces



Chapter 2: Seeding, Growing, and Scaling a Marketplace



Chapter 3: Finding the Right Business Model for your Marketplace



Chapter 4: New Marketplace Types



Chapter 5: Marketplace Metrics



Chapter 6: Marketplace Tools



Chapter 7: Working with Investors



Conclusion
Finding the right business model

Fees introduce friction to buyers and sellers transacting.

Whoever is charged will try to go off-platform.

The right business model depends on your marketplace:

– If buyers make purchases with little back and forth, then seller
transaction fees are the way to go.
– If the marketplace acts purely like the classifieds, listing fees
make more sense.

Most marketplaces will take fees from sellers since demand is

the limiting factor for growth.
Listing fees

Charge suppliers to list on your site

– Since sellers pay to list an item, they invest time into each listing
and only list items with a high chance of selling which helps
create a better experience for buyers.
– All vendors are hit equally, no matter how many sales they make
on the site. This may discourage some from listing and make it
difficult to gain new suppliers.
Transaction fees

Take a cut from each transaction

– Fairest for suppliers as they only pay a fee when they sell
something
– Less friction for a seller to join when there are no upfront fees
– If you only charge when a sale is made, you lower the supplier’s
risk of losing money
Subscription fees

Charge buyers for access to the marketplace

– Value proposition needs to be strong to entice buyers to pay a
subscription.
– Unlike a SaaS tool, which can be continually useful, the lifespan
of a marketplace’s utility can be limited.
– e.g. Angie’s List charges buyers a membership fee in order to
search the directory and view ratings; Care.com has a freemium
model with enhanced services for both buyers/sellers.
Enhanced seller services

No listing fees but charge for optional services

– Low entry cost brings more suppliers, but revenue may be
modest so “freemium” works best for companies that serve a
huge market, such as Etsy.
Lead-based model

1. Charge suppliers to contact customers when services

delivered offline (e.g. Thumbtack).
– Works with new connections but ineffective with a high frequency
of purchases from same vendor.

2. Stay close to the transaction by productizing service

and simplifying user experience
– e.g. Elance offers hourly/project tracking and billing solutions
that encourage the provider (freelancer) and customer to stay on
the platform.
 Chapter 1: Introduction to Marketplaces



Chapter 2: Seeding, Growing, and Scaling a Marketplace



Chapter 3: Finding the Right Business Model for your Marketplace



Chapter 4: New Marketplace Types



Chapter 5: Marketplace Metrics



Chapter 6: Marketplace Tools



Chapter 7: Working with Investors



Conclusion
New marketplace types

At their core, every marketplace is similar: there’s a seller

and a buyer and it acts as an intermediary to bring these
two sides together.

Buyers Marketplace Sellers

As the industry matures, new marketplace models emerge.

On-demand marketplaces

Smartphones can summon anything: this is the “on-demand” economy.

It is a continuation of the sharing economy, exemplified by Uber and

Airbnb, where people turn underused assets (home, car, time, etc.)
into a source of revenue.

Today’s on-demand marketplaces match jobs with contractors.

For odd jobs To buy and deliver groceries For laundry

 Why there won’t be an Uber for every vertical

Uber Other

Underlying
People tend not to care who drives People do care who cuts their
Commoditized them from A to B. hair, babysits their children, etc.
Services

Regular usage leads to customers Lower purchase frequencies

High Purchase
using the same service - urbanites make it difficult to retain
Frequency may use Uber multiple times a day. mindshare.

Sufficient liquidity on the supply When services are delivered with

True On- side is required and creates a more flexible timing, it’s easier for
Demand Use barrier to entry since a new competitors to enter a vertical or
Case competitor will need to launch with new location, and there’s less of
hundreds of providers. a winner-takes-all dynamic.
Managed marketplaces

Those that take on additional parts of the value chain to

deliver a better overall experience.
– e.g. Beepi (P2P marketplace for used cars) will buy your car if
you don’t sell within 30 days
Pros Cons
Cuts into gross margin and adds operational
Can be a game-changer when
complexity. May need to reach massive scale in
dealing with high-value ticket items
order to reach profitability

Can create new supply and demand Risk involved if you guarantee the sale and take on
by helping buyers overcome trust sellers’ inventory. What if you end up sitting on
issues inventory that’s can’t move?

Processes/operations are vertical-specific. This

offers little synergy to move into a new vertical.
Community-driven marketplaces

Brand and sellers form communities with others who have

similar interests.

Created online forums, Holds driver meet-ups Hosts local meet-ups

which triggered micro- and community rallies, and added community/
groups to form which have become team functionality
Lyft traditions
SaaS-enabled marketplaces

Sellers are attracted to a useful free tool, then encouraged

to participate in the marketplace.
– Chris Dixon described this approach as “come for the tool, stay
for the network.” (e.g. OpenTable, Zenefits)
– Some sellers may wish to use your tool but fear joining your
marketplace because of competition.
– Requires ongoing use of the marketplace, may not work in cases
where consumers prefer a “monogamous relationship”.
Decentralized marketplaces

Fee-free and user-driven marketplaces with flattened

hierarchies and decentralized control: anyone sells,
anyone buys.
– Everything from trust, rules, identify, to payment, operates at the
peer level.
– OpenBazaar allows users to conduct P2P transactions with the
help of notaries, Bitcoin, multi-signature transactions, and a
reputation system.
– Decentralized marketplaces need to figure out how to monetize
and create defensibility without inherent network effects.
 Chapter 1: Introduction to Marketplaces



Chapter 2: Seeding, Growing, and Scaling a Marketplace



Chapter 3: Finding the Right Business Model for your Marketplace



Chapter 4: New Marketplace Types



Chapter 5: Marketplace Metrics



Chapter 6: Marketplace Tools



Chapter 7: Working with Investors



Conclusion
Marketplace Metrics

We created a marketplace KPI spreadsheet.

The dashboard is
separated into 3 parts:
1. Overall marketplace
metrics
2. Seller/supplier
metrics
3. Buyer metrics
Overall Marketplace Metrics (1/2)

Gross merchandise value (GMV)

= Total sales dollar value for good or services purchased through
marketplace over a certain time.
– Track GMV growth rate on a monthly and yearly basis
– Understand its makeup by customer acquisition channels, paid
versus organic, etc.

Average order value (AOV)

= GMV / Total number of transactions
Overall Marketplace Metrics (2/2)

Revenue
= Income that the company receives (e.g., transaction fees, listing
fees, premium seller/supplier services, etc.).

Take rate
= Revenue / GMV
Seller/Supplier Metrics
General KPIs
Number of suppliers
Supplier growth rate
Number of listings
Listings growth rate
Average listing price
Sell-through rate
Customer acquisition cost (CAC)
* recommended at a minimum
Engagement KPIs*
Cohort analysis: % of suppliers still
active 1 month and/or 1 year after
signing up
GMV retention: average % of Month
1 GMV generated by suppliers in
Month 12
Concentration: % of revenue
generated by the top 20%
suppliers
Net promoter score (NPS)
Buyer Metrics
General KPIs
Number of buyers
Buyer growth rate
Average dollar amount purchased
per buyer
Average number of orders per buyer
Average order growth per buyer
Customer acquisition cost (CAC)
* recommended at a minimum
Engagement KPIs*
Repeat buyer contribution:
% of buyers who have purchased
more than once
% of GMV generated from buyers
in previous months
GMV retention: average % of Month
1 GMV generated by buyers in
Month 12
Concentration: % of revenue
generated by the top 20% buyers
Cross pollination: % of buyers who
spend in another category
Net promoter score (NPS)
 Chapter 1: Introduction to Marketplaces



Chapter 2: Seeding, Growing, and Scaling a Marketplace



Chapter 3: Finding the Right Business Model for your Marketplace



Chapter 4: New Marketplace Types



Chapter 5: Marketplace Metrics



Chapter 6: Marketplace Tools



Chapter 7: Working with Investors



Conclusion
Marketplace Tools

Don’t reinvent the wheel! Leverage existing tools.

 Chapter 1: Introduction to Marketplaces



Chapter 2: Seeding, Growing, and Scaling a Marketplace



Chapter 3: Finding the Right Business Model for your Marketplace



Chapter 4: New Marketplace Types



Chapter 5: Marketplace Metrics



Chapter 6: Marketplace Tools



Chapter 7: Working with Investors



Conclusion
What investors look for

We encourage you to read Bill Gurley’s outline of 10 factors to

consider when evaluating marketplaces. Our 5 most important
criteria are:
1. High fragmentation
2. Regular frequency of use/purchase
3. Discovery/new buyer-seller relationships (vs. monogamy)
4. Total Available Market
5. Transactional (being part of the payment flow)

These aren’t the only ones that lead to success: some VCs feel
that a marketplace with low purchase frequency can be offset
by high AOV.
What traction we want to see

Every startup is different and we conduct our due diligence

on a case-by-case basis.
– There is a general set of questions we use to evaluate a
marketplace and assess a startup’s product-market fit.
– Please refer to the guide for an example using Headout, a
Version One portfolio company.
Valuation multiples for marketplaces

The main multiple we like to use for marketplace

businesses is GMV.
– Rule of thumb: marketplaces at scale are valued at roughly 1x
annualized GMV or typically about 6-8x annual revenue
– Assumptions for valuation:
– Scale > $1B GMV
– YoY growth >= 30%
– Take rate = 10-15%

There’s a currently a disconnect between the valuations for

public and private consumer marketplaces.
Example: Etsy

GMV multiple was as high as 1.7 immediately after IPO.

2015 Total Revenue ~$270M

2015 Total GMV ~$2.4B
Take Rate 11%
YoY Growth ending Q1 2016 40%
Market Cap (as of 5/11/2016) ~$963M
Revenue Multiple 6.8
GMV Multiple 0.76
What about early-stage marketplaces?

Early metrics don’t count into valuation. We’re evaluating

the team, idea, and vision.

As the marketplace starts to scale fast, the multiples are

often very high because growth is high as well.

Ultimately, however, your marketplace will be valued at 1x

GMV.
What you should focus on

Early-stage founders should focus on:

1. Growing GMV
2. Proving out take rate

Occasionally, we see impressive GMV but no proof that

companies can get a significant take.
– A marketplace that generates leads might have a low take rate of
2-3%. In this case, GMV must be 5x bigger than a comparable
marketplace with 10-15% take rate.

The bottom line? Don’t wait too long to prove out

monetization
 Chapter 1: Introduction to Marketplaces



Chapter 2: Seeding, Growing, and Scaling a Marketplace



Chapter 3: Finding the Right Business Model for your Marketplace



Chapter 4: New Marketplace Types



Chapter 5: Marketplace Metrics



Chapter 6: Marketplace Tools



Chapter 7: Working with Investors



Conclusion
Looking ahead

Marketplaces are tough to build, but once they reach liquidity, they can
be even tougher to kill.

Buying and selling is an integral part of daily life, and there’s still great
opportunity for innovation in new verticals, models, and monetization
strategies.

More than a third of Version One’s portfolio is marketplace companies.

We continue to learn from successes and how to overcome challenges.

We’re excited to be active investors in this space and are looking

forward to the journey ahead.
Thanks for reading!

Boris Wertz Angela Kingyens

@bwertz @atkingyens
boris@versionone.vc angela@versionone.vc