Marketplace business models and stocks

[ratiman]

Maybe some CoBFers are interested in discussing the new business models and moats created by the internet and mobile phones, specifically marketplace businesses that benefit from network effects. Marketplaces can encompass many different kinds of businesses but classic examples include eBay, Opentable and Grubhub. Online marketplaces may not look like classic value investments, but the moat created by the network can be nearly insurmountable, and the low capex requirements make them very appealing profit machines once the network is established. The stocks can trade at huge multiples when the model is working, but there is enough controversy around some of the stocks to create large disparities between private and public valuations. Opentable is a good example of a stock that the public markets probably undervalued, and Yelp and Grubhub are not trading at high valuations at the moment.

 

There are a ton of VCs who regularly post their thoughts on network/marketplace businesses, some are posted below.

 

Why marketplaces deserve huge valuations, the example of Linkedin:

 

http://abovethecrowd.com/2011/05/24/all-revenue-is-not-created-equal-the-keys-to-the-10x-revenue-club

 

What makes a good marketplace:

 

http://mahesh-vc.com/3-key-elements-of-every-good-consumer-marketplace/

 

The disparity between VC opinion and public markets:

 

http://mahesh-vc.com/this-is-why-public-and-private-market-valuations-are-completely-different/

 

 

 

 

 

 

 

 

 

 

[Pelagic]

Wow I was actually going to start a discussion on this myself. I recently built and launched a small marketplace and has so far been well received by its market, still very early though as it's only about a month or so old. I saw a real need for it in the industry in order to connect buyers and sellers which as of now is almost exclusively done through word of mouth and finally got around to putting things together.

 

The thing that attracted me to investing time/capital in a marketplace is the winner takes all nature. Even small marketplaces can dominate their sector by providing the peer-to-peer community aspect which allows users to rate their experience and steer other members of the community toward quality providers (think AirBnB). Personal experience has made me rethink some of the valuation multiples I see in the marketplace space. Due to the winner takes all nature of marketplaces, it can make sense to forego earnings today for larger market share, and then slowly raise fees/transaction costs as your marketplace becomes the leader. Thanks for the links, I've been devouring everything I can find about the marketplace sector for the last few months.

[ratiman]

Cool. Do you have a link to your site?

[ratiman]

This thread isn't going to be just links to this guys site, but this post is  worth reading.

 

http://mahesh-vc.com/this-is-how-public-consumer-marketplaces-are-valued/

 

Here is the conclusion:

"I’m a huge fan of many marketplace businesses in the private sphere.  Many of these businesses certainly deserve a premium valuation and I expect some of them to be successful public companies in time.  However, looking at the above data is very sobering.  What I see are large scale, profitable and fast growing marketplace businesses in exciting markets that are worth shockingly little relative to private comps.  I’m both excited and scared to see how things will shake out."

 

 

What he doesn't really mention is that many of these consumer marketplaces face stiff competition and the uncertainty is hurting the valuation. Often tech company IPOs are the result of adverse selection - the worst ones come public because they have no other way to raise money. 

 

HomeAway competes with AirBnB and Priceline and all the much larger travel sites (AirBnB gets great press but HomeAway is actually much larger). Zillow doesn't own its own data, which may not be a real problem. Grubhub competes with Eat24 (Yelp) and Ubereats and lots of people in local food delivery. Yelp competes with Google and Tripadvisor, Angies List competes with Homeadvisor and Thumbtack.

[Pelagic]

Cool. Do you have a link to your site?

 

Sorry didn't see this until now. Yeah www.BoatEasy.net, it's a marketplace aimed at connecting boaters and marine service providers. I'm working on building the supply side with a variety of quality service providers before I really start advertising it to the public. I tested the waters so to speak with a free marketplace site before this and had a good response from both sides of the market and decided to go ahead with building a more functional site.

 

Thanks for the links, I guess it's time I contribute one as well so I found this blog pretty good on the marketplace sector, he has a lot of different posts on the topic since he's a VC in the field and early employee at ODesk http://acrowdedspace.com.

[Pelagic]

One more article on marketplaces and some of the industries they're targeting

http://venturebeat.com/2015/03/14/uber-mint-and-square-investor-rob-hayes-shares-what-he-looks-for-in-community-driven-companies/

[ratiman]

Thanks for those two links, I was looking through the acrowdedspace posts in particular. He has an interesting perspective because he ran marketing for oDesk from the beginning. He focuses a great deal on aligning incentives - if the incentives are warped, then the marketplace won't work. His criticism of care.com focuses on the misaligned incentives (don't agree but valuable perspective). 

 

http://acrowdedspace.com/post/92861578762/why-im-short-crcm

 

 

Another good site is T. Tonguz, here he is about picking Craigslist apart.

 

http://tomtunguz.com/the-new-marketplaces/

 

[Pelagic]

Thanks for those two links, I was looking through the acrowdedspace posts in particular. He has an interesting perspective because he ran marketing for oDesk from the beginning. He focuses a great deal on aligning incentives - if the incentives are warped, then the marketplace won't work. His criticism of care.com focuses on the misaligned incentives (don't agree but valuable perspective). 

 

http://acrowdedspace.com/post/92861578762/why-im-short-crcm

 

 

Another good site is T. Tonguz, here he is about picking Craigslist apart.

 

http://tomtunguz.com/the-new-marketplaces/

 

I'm curious why you disagree with his assessment of care.com? I'm of the opinion that the "network" or "community" aspect of a marketplace is probably the most important thing they can bring to the table to add value. A key part of which is the ability for users to rank one another and provide valuable feedback other users can see. In the caregiver space this is incredibly important but even in a marketplace like Uber where interactions are relatively brief, it's nice to be able to know who you're dealing with. I would even argue that once you go down the route of allowing users to pay a premium for their ranking you transition from being an open marketplace to something akin to a referral service steering users toward those who pay the most.

 

A variation of that model I've seen involves a sliding scale take as a percentage of services where service providers in the marketplace who allow the marketplace to collect the most as a % rank highest.

 

If you've ever used Quora their marketplace topic has some good discussions as well. https://www.quora.com/pinned/Online-Marketplaces

[ratiman]

I'm a bit of a bore on the topic of care.com (you can check out the crcm thread) but as long as you asked . . .

 

 

The way Care works is, you can join for free, but to communicate, one side has to be a member. So let's say that you are a very highly sought after babysitter - you are educated and white. Boom - a family a will immediately contact you, even if you haven't paid the fee. No adverse selection problem, it's free and easy for the most highly sought after sitters to find a family. And if you're not highly sought after, you pay the fee, and people still ignore you. So there is no adverse selection problem. If you look at Sittercity, it has a much higher black provider base (according to Alexa stats), and that's because it's free for sitters to join Sittercity. In fact the problem is so acute for Sittercity that it had to create a whole new brand, Hello Chime.

 

http://www.hellochime.com/

 

What do you notice about the eight faces on the site? Notice a pattern? So yeah, Breinlinger is wrong, because racism.

[ratiman]

Match/Tinder filed s-1. (this might load slowly for some reason).

 

https://www.sec.gov/Archives/edgar/data/1575189/000104746915007908/a2226226zs-1.htm

 

Dating sites were one of the original marketplaces, but they're not necessarily a great business. Match looks very profitable (about 25% cash flow margins on $800M of revenue) but that doesn't take into account the huge investment that went into building the business via acquisition ($1.3B of goodwill). Once that's figured in, the returns on capital don't look as good. And there's no reason to believe Match won't be forced to acquire all of its future competitors or face expensive competition.

 

This is a good discussion of dating as a marketplace business.

 

http://andrewchen.co/why-investors-dont-fund-dating/

 

Here are the reasons usually given for why investors don’t do dating:

 

    Built-in churn

    Dating has a shelf-life

    Paid acquisition channels are expensive

    City-by-city expansion sucks

    Hard to exit

    Demographic mismatch with investors

 

[Pelagic]

I'm a bit of a bore on the topic of care.com (you can check out the crcm thread) but as long as you asked . . .

 

 

The way Care works is, you can join for free, but to communicate, one side has to be a member. So let's say that you are a very highly sought after babysitter - you are educated and white. Boom - a family a will immediately contact you, even if you haven't paid the fee. No adverse selection problem, it's free and easy for the most highly sought after sitters to find a family. And if you're not highly sought after, you pay the fee, and people still ignore you. So there is no adverse selection problem. If you look at Sittercity, it has a much higher black provider base (according to Alexa stats), and that's because it's free for sitters to join Sittercity. In fact the problem is so acute for Sittercity that it had to create a whole new brand, Hello Chime.

 

http://www.hellochime.com/

 

What do you notice about the eight faces on the site? Notice a pattern? So yeah, Breinlinger is wrong, because racism.

 

Point taken. I would still argue that paying for ranking in the marketplace probably weakens the community effect over the long term. In care.com's case I guess other factors (race and education) play a much higher role than feedback from the community. Personally I'd be inclined to go with sitters who come highly recommended by others, regardless of race rather than someone who's new to the community.

[ratiman]

Angies List got a bid from IACI. Not totally surprising (IACI owns Homeadvisor) but I've got to say that I was about to post about ANGI not looking like a company I would want to own. It burns $10M a quarter and has about $0 net cash, and it was actually losing customers from the monthly sub business. Both YELP and ANGI capitalize software costs, which makes EBITDA look healthier than it is. Don't software companies expense R&D? Apparently not.

 

Anyway, the ANGI bid is at 1.4x 2016 revenues, and Yelp is at 2.2x and growing much faster than ANGI (via https://twitter.com/ChetKapoorSF/status/664557418802601984 )

 

[Jurgis]

Some musings from a marketplace business my relatives trying to start.

 

It seems that unless you get a huge market, the fees are a significant hurdle, especially for international marketplaces.

Paypal charges 3-7% for CC funded purchases including Paypal fees, currency conversion, cross-border fees.

And that's assuming you can get your website approved for Paypal chain payments that splits the purchase between seller and your seller's fee (whatever percentage you charge for the marketplace). AFAIK getting website approved for chain payments is nontrivial (realistically month+ dealing with Paypal approval dept.). If you don't do chain payments, then the Paypal overhead is 3-7%*2 (not exactly, but possibly), since you have to do two transactions: buyer to you, then you to seller.

 

Assuming you are running niche business and want to charge sellers a fee of 5-10% for using your marketplace, you get to total 8-17% seller's overhead for chain payments, or 11-24% without chain payments. That's very unattractive to sellers.

 

Pelagic, if it's not a secret, how do deal with this on your BoatEasy marketplace? Do you charge sellers anything? Or is the business model to run on ads? You can private message me if you prefer. :)

[Pelagic]

Haha no secret. We charge a 5% fee plus PayPal takes their cut. The problem is this... I don't think the 8% total cut is too high but I'd like to lower the PayPal part. Working on setting up direct bank transfer to minimize cost and explore other payment options. As it is its just ok and fairly low compared to a lot of other marketplaces. Also you have to set up your PayPal account as a business account in order to receive payments, which is free, but is confusing to some and requires a bit of handholding.

 

I used ShareTribe's template for the marketplace https://www.sharetribe.com and they had PayPal integrated and are adding a couple others. I understand outside the US it can be much higher. All things to consider, as it is I really haven't had any pushback from vendors over the 5% fee and have actually had a couple people say that it could be higher.

 

Overall building the marketplace has been a lot of fun. There's a lot more to a marketplace than the transactions themselves with users often using our integrated messaging service to network and message back and forth on a lot of different things broadly related to our marketplace. I've been operating under the mantra "if I build it they will come" and focusing 99% of my efforts save the occasional social media post on building the supply side of the marketplace. Unfortunately it's the low point of the boating season right now and I kind of wonder how seasonality will impact earnings later on as the marketplace becomes more established.

 

I picked up (downloaded) a copy of Platform Scale the other day since a friend in a related marketplace business recommended it. Haven't had much time to read it but from what I've read so far it's been interesting. http://www.amazon.com/Platform-Scale-emerging-business-investment-ebook/dp/B015FAOKJ6

[ratiman]

I've been looking to buy a car and noticed that there are lots of sites for buying cars. Here is a list with alexa site ranking.

 

Craigslist - 13

Autotrader - 345  Private

Truecar  - 1091 (TRUE)

Autobytel - 5217 (ABTL)

cars.com - 403 (Gannett)

ebay        -  7

carfax - 974    (private)

edmunds - 444  (private)

carmax - 740  (KMX)

 

So those are the car sites out there. It's a competitive business. This is definitely not a winner take all kind of marketplace business. The suppliers have too much leverage to let any one site dominate. By the way, my experience has been that Truecar has the best site.

[DCG]

Cool. Do you have a link to your site?

 

Sorry didn't see this until now. Yeah www.BoatEasy.net, it's a marketplace aimed at connecting boaters and marine service providers. I'm working on building the supply side with a variety of quality service providers before I really start advertising it to the public. I tested the waters so to speak with a free marketplace site before this and had a good response from both sides of the market and decided to go ahead with building a more functional site.

 

Thanks for the links, I guess it's time I contribute one as well so I found this blog pretty good on the marketplace sector, he has a lot of different posts on the topic since he's a VC in the field and early employee at ODesk http://acrowdedspace.com.

 

 

What does there not seem to be a way to search by location on your site? I have a boat, and if I was looking on your website for a service, the first thing I would want to do would be to view companies/providers in my location. Instead, it mainly seems to show locations in Florida and the Caribbean.

[DCG]

I picked up (downloaded) a copy of Platform Scale the other day since a friend in a related marketplace business recommended it. Haven't had much time to read it but from what I've read so far it's been interesting. http://www.amazon.com/Platform-Scale-emerging-business-investment-ebook/dp/B015FAOKJ6

 

 

I recently read this book - or at least around half of it. It has some good info, but is much more academic than I was hoping for (meaning that a lot of it reads more like a text book than a general retail book to me).

[Pelagic]

Cool. Do you have a link to your site?

 

Sorry didn't see this until now. Yeah www.BoatEasy.net, it's a marketplace aimed at connecting boaters and marine service providers. I'm working on building the supply side with a variety of quality service providers before I really start advertising it to the public. I tested the waters so to speak with a free marketplace site before this and had a good response from both sides of the market and decided to go ahead with building a more functional site.

 

Thanks for the links, I guess it's time I contribute one as well so I found this blog pretty good on the marketplace sector, he has a lot of different posts on the topic since he's a VC in the field and early employee at ODesk http://acrowdedspace.com.

 

 

What does there not seem to be a way to search by location on your site? I have a boat, and if I was looking on your website for a service, the first thing I would want to do would be to view companies/providers in my location. Instead, it mainly seems to show locations in Florida and the Caribbean.

 

You can use the map view on the home page and search like that. We're still pretty new so most of the postings are in Florida/Caribbean.

 

https://www.boateasy.net/en?view=map

 

A better location search is something I'm working on and will have a new layout for the site that will feature listings close to you and enhanced search to help you find them, it is still definitely a work in progress and yours is something I've heard from others.

[Pelagic]

I've been looking to buy a car and noticed that there are lots of sites for buying cars. Here is a list with alexa site ranking.

 

Craigslist - 13

Autotrader - 345  Private

Truecar  - 1091 (TRUE)

Autobytel - 5217 (ABTL)

cars.com - 403 (Gannett)

ebay        -  7

carfax - 974    (private)

edmunds - 444  (private)

carmax - 740  (KMX)

 

So those are the car sites out there. It's a competitive business. This is definitely not a winner take all kind of marketplace business. The suppliers have too much leverage to let any one site dominate. By the way, my experience has been that Truecar has the best site.

 

I think one of the articles I posted earlier in the thread had a good explanation for why it's hard for a single site to dominate the car sales marketplace.

They came up with a graph with the item's price on one axis and the frequency of transactions on the other axis. Cars are a high price low frequency transaction, you're not going to develop the traditional network effects from users you see in other marketplaces where users make multiple transactions. Once a user buys a car, they're done with your site for a few years, unlikely to revisit it and remain engaged. The same would go for other big ticket items we usually only buy once every few years or more, houses, boats, private aircraft etc. Remember the sites also have competition with the traditional dealers who can develop a relationship with their customers to keep them coming back and often its the dealers that they visit when their car needs maintenance.

 

Now if we could just find a high priced/high frequency transaction and make a marketplace for it  ;D

[ratiman]

One way to think about it is the marketing dollars are working capital. And ideally the working capital has a high payback ratio and high velocity. Match has a high ratio (roughly revenues/marketing) and fast velocity (let's say three months). So it doesn't really matter how often the customers come back, as long as each customer generates a profitable ratio (the rule of thumb is 3x is a healthy ratio). The velocity is interesting. Quick payback (like Match) means that the marketplace will show quick profits, and Match was pretty much immediately profitable. But the problem is that quick payback means less of a moat.

 

Truecar is a good example. It just started it's branded service like two years ago and was spending $800 for $300 of revenue. Just two years later, and facing over a half dozen rivals, it's already profitable. The payback period is nearly instantaneous. A deal closes in a few days, and Truecar receives a bounty. So if you want to defend your marketplace moat, you're better off with a slow velocity. It will take new competitors much longer to get their money back.

 

[ratiman]

Zillow is another marketplace (though in the sense of lead-gen), VIC has a good bearish write-up:

 

http://www.valueinvestorsclub.com/idea/ZILLOW_GROUP_INC/136421/messages/109116#messages

 

The stock is almost half as cheap now, so good call. The VIC write-up basically says that the brokers control the listings and have the leverage vs. Zillow. That makes sense. But the vast majority of deals are done by a few agents, who want their listings on Zillow. Zillow will ultimately benefit the best agents. The best/highest producing agents will promote themselves direct to the consumer on Zillow, leaving the brokers/franchisors helpless to stop the Zillow momentum.

 

Below I've quoted from a San Diego real estate agent making this case for Zillow. Here is his Zillow page. Wouldn't you want this guy working for you?

 

https://www.zillow.com/profile/Jim-the-Realtor/

 

You can find his Zillow posts here.

 

http://www.bubbleinfo.com/?s=zillow&x=0&y=0

 

"Zillow is becoming the Amazon of real estate. The Zillow Group already has 70% of the mobile real estate traffic.  They’ve had over 500 million homes viewed on mobile devices, or 185 homes viewed per second!

Their new Premier-Agent mobile app will alert realtors to incoming leads immediately, and give them the consumer’s Zillow home-search history, and their social media accounts.  A big advantage when trying to build rapport with a potential new client! Zillow has also developed additional tools for their agents to use when managing contacts and transactions, and has a phone team who will call your leads and set appointments for you! They aren’t a brokerage, they have never sold a house (Their CEO still hasn’t sold his house that he listed in July), yet Zillow is providing a top-notch website, $100 million in advertising, and several powerful tools for agents to use to improve their business. Zillow is catering to the big agent-teams, and thus, that will be the future of real estate sales.  To build a big enough team to be able to afford $10,000 – $50,000 per month in Zillow ads."

 

Once selling history and rankings info is public, all the part-time agents with no track-record will go out of business:

 

"The lower-producing agents will be the first casualties, and they will just retire and watch from the sidelines as Zillow starts advertising that they have the best agents.  They don’t mind spending $100 million per year on those ads, and no other real estate company comes close. There are 11,000 agents in SD County, and around 3,000 sales per month.  Agents who sell 2-4 houses per year won’t be able to keep up with superior agents teams that will be outfitted by Zillow to dominate the market."

 

I don't really understand the US real estate market at all (it's pretty complicated) but this guy is right in the middle of it and he loves Zillow and thinks it's unstoppable. The idea that somehow the brokers/franchisors are going to once and for all stop the momentum of Zillow seems a little unrealistic. Once the audience goes somewhere else, it's probably gone for good.

 

[Jurgis]

If you go that line of argument, why not Redfin instead of Zillow? My "value investing" (read: cheap as hell) friends use Redfin.

 

No opinion about Zillow as investment.

[ratiman]

Zillow isn't a brokerage, but it is working with the hungriest agents to put all the marginal agents out of business. Redfin doesn't pay commissions, so it gets subpar agents even as it's competing with the rest of the industry. But you're right, Redfin has the best site, at least until the recent redesign.

 

http://www.bubbleinfo.com/2012/02/18/redfin-3-0/

 

 

[Pelagic]

A pretty good article on some of the challenges marketplace business models face.

 

https://hbr.org/2016/04/network-effects-arent-enough?utm_content=buffer0a0df&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

 

I liked the discussion on regulatory hurdles and how to overcome them. I think we're going to see the marketplace model expand into more regulated fields, healthcare in particular but I can envision the model taking hold in other sectors as well, and rather than banging heads with regulators, entrepreneurs will figure ways to either construct a framework with regulators or incentivize (bribe) them with added tax revenue.

 

In a lot of ways marketplace businesses that succeed in a regulated sector establish not one but two moats for themselves, they have the traditional network effects that come with a successful marketplace but additionally, new entrants aren't "in" with regulators and have an additional hurdle to overcome. Perhaps this is some of what investors see in Uber since it has the scale to work with regulators to achieve a solution for both parties. However, at the same time other ride sharing apps can often coattail on its success for a much lower capital outlay in marketing and legal fees so maybe there's still room for new entrants after the Ubers and AirBnBs pave the way into new regions. 

[Pelagic]

I'm always looking for interesting niche marketplaces and I thought this one was a bit more fascinating than the average pet massage provider marketplace (yes it exists or will soon).

 

https://www.raise.com

 

A marketplace for gift cards. Great, people have been selling them on Ebay for years, what's new? Well as I understand it electronic gift cards can be bought and received through the app on your phone instantly. An instant discount if you're in line checking out and look and find one for 10% off face value, you can use it then.

 

It's also interesting to look at the discount to face value for different stores, SHLD is holding up pretty well  ;D

 

It looks like one of their options for revenue going forward will be bundling their user data and selling the info back to the retailers since it gives them a direct line on who to target in ad campaigns.