Remember Webvan and Pets.com? The world of digital marketplaces has moved light years ahead in the past two decades. What has changed? My colleagues at SVB Analytics, a non-bank affiliate of Silicon Valley Bank (SVB), recently completed an analysis of more than 140 private marketplace companies to identify the drivers and success factors behind companies such as Uber, Airbnb and Lending Club. Coinciding with the first release of this data, these companies presented at a full-day SVB event in New York – Marketplace Mashup – where more than 100 companies and their investors gathered to discuss changes in the market.
Intuitively, we know that smartphone technology has disrupted how we communicate and conduct business. How this is playing out in the creation and sustainability of marketplaces – and separating the winners from the losers – is fascinating.
The explosion of mobile platforms has given rise to new applications of the marketplace model. Pioneered by eBay and Amazon, a digital marketplace is a platform that uses technology to facilitate transactions between independent providers and end-users of a good or service. The massive growth of users connected to the internet, particularly those connecting via smartphones, has enabled vertical-specific marketplaces to emerge and thrive.
At the core, it is a numbers story. The growth of verticalisation mirrors the adoption of smartphones and emergence of apps. Just five years ago, invested capital in marketplaces was evenly split between vertical and horizontal plays. Today more than 80% of the investment is in companies focused on vertical-specific solutions. Mobile penetration in that period grew from less that 10% worldwide to more than 30% and growing, and it increases daily as devices become more affordable.
Vertical marketplaces provide a clear, focused solution for a specific purpose. As mobile traffic accelerates, these marketplaces have a distinct advantage in creating streamlined solutions that work well in a mobile environment. Even with larger screens, mobile interfaces are best suited for simple, focused experiences that take seconds to complete. Advances in payments technology, particularly around on-demand use, contribute to the simplicity and convenience ofthese applications.
Technology is changing consumer behaviour. As mobile traffic reaches critical mass and the world becomes more urbanised, the opportunity to unlock the latent value of underutilised assets, creating new efficiencies through collaborative consumption, is greater than ever.
Successful businesses in the sharing economy help facilitate the necessary level of trust for online transactions to take place by allowing service providers to build credibility and ensuring a quality experience for end-users. Online reputations are becoming a more reliable indication of offline trustworthiness, and features like a credible review system forboth service providers and end-users help to foster trust between market participants.
I was recently looking for a dog sitter and realised there is no more scanning Craigslist ads – DogVacay provided an easy-to-use solution to find a nearby sitter I could trust.
Despite the many external factors driving marketplace adoption, do not be misled that the evolution of a marketplace guarantees success for everyone – or even many. Compared with other internet business models, marketplaces consume significantly more capital at a faster pace. Many of these business models demand heavy upfront investment to build a two-sided network, both on the demand side – consumers – and on the supply side – service providers. Customer acquisition is expensive, especially if you have to do it for two distinct user groups. The payoff comes for businesses that are able to become market leaders and eventually benefit from the network effect, the point at which each new user enhances the value of the entire platform.
The SVB Analytics data supports this winner-take-all theory. A majority of marketplace financings is around two to fourtimes invested capital. As market leaders emerge, these companies are raising significantly more capital at much higher valuations – in some cases, at more than quadruple the invested capital multiples of smaller competitors.
What is more, several vertical marketplaces are maturing quickly, meaning there is less opportunity to disrupt more established verticals. SVB Analytics reports that the majority of investment now is in growth-stage companies with well-developed networks. As some sectors are increasingly saturated with capital, consolidation is afoot. They found 65% of acquisitions are of companies that have raised less than $20m, and occur within two years of receiving first funding, a sign of increasing talent acquisitions.
What does the future look like? SVB Analytics finds that while transportation, food delivery, financial services and hospitality services are rapidly maturing, real estate, education and logistics are among segments that are in earlier stages of growth.
As established marketplaces continue to build trust with users and establish a network of underutilised assets, market leaders will have the ability not only to dominate their existing markets, but also to expand the size of these markets by introducing new use-cases for their services. But the potential for these companies can be exponentially greater, as leading marketplaces can begin to leverage the credibility and infrastructure that they have built in their initial markets to expand into tangential markets. This vertical consolidation, mirroring that of the horizontal consolidation of the first wave of marketplaces, will create several huge companies encompassing several tangential verticals. Uber, for example, is beginning to experiment by using its fleet of drivers to deliver groceries and other goods, and in some places pick your kids up from school.
At the same time, market leaders in the sharing economy are finding that disrupting traditional business models does not come without battles with incumbent providers and governments asserting regulatory oversight and, of course, competition from upstarts.
Changes in technology and consumer behaviour have set the stage for marketplaces to thrive in coming years. As more industries are disrupted by the new marketplace model, it is clear the sharing economy is here to stay.