A Guide to Marketplaces

May 2016
VC InsightsA Guide to Marketplaces

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?
Product-Focused Service-Focused Product + Service
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

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).
Two elements to every marketplace

B2C (business-to-consumer)
Existing businesses use platform
and/or individuals formalize their
activities into a business.
B2B (business-to-business)
Makes procurement and supply
chain more efficient for long-tail
SMB market.
Marketplaces defined by role of participants
P2P (peer-to-peer)
Private individuals sell
to others.

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
Two metrics of a marketplace

Five factors to consider in a marketplace*
* 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.
1. High fragmentation
2. Buyer/seller relationship
3. High purchase frequency
4. Total available market (TAM)
5. Being part of the payment flow

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.

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
High Number of
Quality Suppliers
Attracts More Customers
Brings More Suppliers
Helps to Draw Even
More Customers
The cycle continues as a self-sustaining growth engine until supply
& demand reach critical mass to be “winner takes all.”
Holy Grail: The Virtuous Cycle of Supply & Demand

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

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.

3. Develop an ecosystem that supports third-party apps
and services
– e.g. Other startups offering guest screening and catering for
Airbnb hosts

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

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

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.

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.
As the industry matures, new marketplace models emerge.
New marketplace types
Buyers SellersMarketplace

For odd jobs For laundryTo buy and deliver groceries
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.
On-demand marketplaces

Uber Other
Underlying
Commoditized
Services
People tend not to care who drives
them from A to B.
People do care who cuts their
hair, babysits their children, etc.
High Purchase
Frequency
Regular usage leads to customers
using the same service - urbanites
may use Uber multiple times a day.
Lower purchase frequencies
make it difficult to retain
mindshare.
True On-
Demand Use
Case
Sufficient liquidity on the supply
side is required and creates a
barrier to entry since a new
competitor will need to launch with
hundreds of providers.
When services are delivered with
more flexible timing, it’s easier for
competitors to enter a vertical or
new location, and there’s less of
a winner-takes-all dynamic.
Why there won’t be an Uber for every vertical

Managed marketplaces
Pros Cons
Can be a game-changer when
dealing with high-value ticket items
Cuts into gross margin and adds operational
complexity. May need to reach massive scale in
order to reach profitability
Can create new supply and demand
by helping buyers overcome trust
issues
Risk involved if you guarantee the sale and take on
sellers’ inventory. What if you end up sitting on
inventory that’s can’t move?
Processes/operations are vertical-specific. This
offers little synergy to move into a new vertical.
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

Hosts local meet-ups
and added community/
team functionality
Holds driver meet-ups
and community rallies,
which have become
Lyft traditions
Community-driven marketplaces
Brand and sellers form communities with others who have
similar interests.
Created online forums,
which triggered micro-
groups to form

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.

Marketplace Metrics
The dashboard is
separated into 3 parts:
1. Overall marketplace
metrics
2. Seller/supplier
metrics
3. Buyer metrics
We created a marketplace KPI spreadsheet.

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
* recommended at a minimum
General KPIs Engagement KPIs*
Number of suppliers
Supplier growth rate
Number of listings
Listings growth rate
Average listing price
Sell-through rate
Customer acquisition cost (CAC)
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 Engagement 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)
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)
* recommended at a minimum

Marketplace Tools
Don’t reinvent the wheel! Leverage existing tools.

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

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!
Angela Kingyens
@atkingyens
angela@versionone.vc
@bwertz
boris@versionone.vc
Boris Wertz

A Guide to Marketplaces

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