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Online Marketplaces: Our Perspective

By Lead Edge Capital Quarterly Letter Q3 2014

This was featured in our Quarterly Investor Update Letter from Q3 2014.

Breaking Down Online Marketplaces

One of the most exciting areas we’ve examined over the past few years is online marketplaces. It is our belief that part of Alibaba’s success came from the fact that it was a scalable, low touch online marketplace that could command highly attractive unit economics. To that end, we made it a point to spend significant time in 2013 and 2014 building a further perspective on online marketplaces, with the intent of deploying capital into these types of businesses. As such, in early 2013, we brought on Lorrie Norrington (ex-President of eBay) as an Operating Partner and have since completed multiple marketplace investments. Over the past 18 months we’ve gathered significant thoughts which we wanted to share with you.

How do we segment the market?

We split online marketplaces up into three buckets:

How do online marketplaces generate revenue?

Take Rate Model – Marketplace takes a percentage of all money spent through the system

Seamless BBC

Transaction – Marketplace takes a flat fee per transaction OpenTable

Supply Side Subscription / Listings – Suppliers pay a fee to list products / services on the platformhomeaway and vivareal

Advertising – Suppliers pay to achieve higher rankings on search listingsTaobao and Zillow

Demand Side Subscription – Company charges users a subscription fee to join a siteSitter and Care.com

What traits do we look for in online marketplaces?

Not all online marketplaces are created equal.  Through evaluating hundreds of online marketplaces, we’ve identified certain characteristics that make some more attractive than others:

When marketplaces exhibit most of the traits above, they become sticky, and ultimately, highly profitable.  Suppliers stay on the platform because they see a positive ROI in their ability to find buyers.  Buyers go on the platform because it is the best place to find what they are looking for.  Due to the fact that both parties continually see such benefit, there is no need to circumvent the platform, and all constituents are satisfied.

The lock-in described above creates wide moats around the platform and meaningful barriers to entry.  Once dominant, many of these businesses have monopolistic characteristics, which can lead to superior long term economics due to the minimal costs of running the platforms.  The best ones are simply technology platforms, extracting a large piece of the pie on a repeatable basis, and can run at 50%+ operating margins.    Needless to say, these are the types of businesses we like!

Where do we see opportunity?

International Replication

 

 

 

 

 

 

 

 

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