Lesson from 3billion+ marketplaces - Josh Breinlinger, Jackson Square Ventures

Introduction

The speaker introduces himself and his experience in marketplaces. He also provides an overview of the companies he has been involved with.

• The speaker is from San Francisco and works at Jackson Square Ventures, an early-stage fund that invests in SAS and marketplaces.

• He was on the founding team of Upwork (formerly oDesk) and ran various aspects of the company.

• The speaker has also invested in other marketplaces such as Strava, OfferUp, Rented, Craxy, Kindly Care, and Alto Pharmacy.

Lesson 1: Key Elements of a Successful Marketplace

The speaker discusses key elements that make up a successful marketplace.

• A perfect marketplace should have all the dynamics of the industry and product being built.

• Productivity gains are important for both buyers and sellers.

• Network effects are crucial to creating a sustainable marketplace.

• Trust is essential for building a successful marketplace.

Conclusion

The speaker concludes his presentation by encouraging listeners to check out his blog for more detailed lessons on building successful marketplaces.

• The speaker's blog contains more detailed lessons on building successful marketplaces.

• Having all the key elements does not guarantee success but it increases your chances.

Characteristics of Successful Marketplaces

In this section, the speaker discusses the characteristics of successful marketplaces and how they reduce transaction costs for buyers and sellers.

Key Characteristics of Successful Marketplaces

• Successful marketplaces reduce transaction costs for buyers and sellers by taking on tasks that happen outside of the typical platform.

• Marketplaces function better when there is high fragmentation, irregular usage, and no disintermediation.

• Interacting with a whole bunch of different suppliers is better than just finding one seller because it creates more value for the marketplace.

• Disintermediation can cause problems for marketplaces when buyers and sellers establish their own trust and want to get off the platform.

Examples of Marketplace Successes and Failures

• Nannies fail as a marketplace because once you find a nanny, there is no need for a marketplace.

• Aircraft maintenance fails as a marketplace due to low fragmentation in the industry.

• Locksmiths fail as a marketplace due to low frequency of usage.

Frequency of Usage vs Frequency of Match

In this section, the speaker discusses how he charts all marketplaces based on two important variables: frequency of usage and frequency of match.

Charting Marketplaces Based on Two Variables

• The two most important variables are frequency of usage and frequency of match.

• While some services may be used frequently, such as nannies or house cleaners, they do not require frequent matches with new providers.

• Other services may require frequent matches with new providers but are not used as frequently, such as aircraft maintenance.

• The most successful marketplaces are those that have both high frequency of usage and high frequency of match.

The Supplier Picks Model

In this section, the speaker discusses the supplier picks model and how it applies to different marketplaces.

Different Marketplaces Require Different Approaches

• The speaker believes that different marketplaces require different approaches.

• For example, buying a home requires a buyer picks approach due to the lack of standardization and customizability.

• On the other hand, services like locksmiths and plumbing require a horizontal platform rather than a vertical one.

• The speaker cites Thumbtack as an example of a successful horizontal platform for home services.

• OfferUp is another example of a marketplace that started with high-frequency baby and kid items but has since expanded into 30 different categories.

Rake Factors in Marketplaces

In this section, the speaker discusses rake factors in marketplaces and how they affect pricing.

Understanding Rake Factors

• The average rake for marketplaces is around 20%.

• Fully managed marketplaces can charge higher rates (50-70%) due to taking ownership of quality and deliverables.

• Platforms with insurance, compliance, scheduling, etc. tend to have slightly lower rates (10-20%).

• Peer-to-peer markets often start at zero rake but build up over time as demand increases.

The Importance of Fill Ratio

This section discusses the importance of fill ratio in a marketplace and how different types of matches impact it.

Types of Matches

• Double commit is the worst for fill ratio as there are many opportunities to fall out of the process.

• Buyer picks with a single commit is better than double commit, but still not ideal.

• Supplier picks is the best option for fill ratio as it allows for first-come, first-serve job claiming.

Quality Control in a Marketplace

This section discusses quality control in a marketplace and how to attract high-quality people while retaining them.

Quality Control Strategies

• Screening can be time-consuming and ineffective at predicting who will do great work.

• Instead, optimize who gets what work, retain the best people, and expel the worst people.

• Don't waste too much time on screening; instead, focus on attracting high-quality people to your network.

Quality Monitoring and Retention

The importance of monitoring quality in a marketplace, the negative impact of bad actors on high-quality users, the need to be aggressive in removing low-quality users, and the importance of retaining high-quality users by increasing their wages.

Designing for High-Quality Users

• Bad actors can cause a vicious cycle of low quality that drives away high-quality users.

• High-quality users want to be around other high-quality people and will leave if there are too many low-quality users.

• To prevent this, it is important to aggressively remove low-quality users and retain high-quality ones.

• One way to retain high-quality users is by increasing their wages as quickly as possible.

Onboarding and Educating Users

The importance of educating new marketplace users, matching new and repeat successful users, using community forums for product feedback, and deleting employee accounts to experience the user onboarding process.

Educating New Marketplace Users

• Every marketplace is different, so it's important to educate new users as they come onboard.

• Matching new and repeat successful users can increase the odds of success.

• Community forums are a great way to get product feedback from your user base.

• Deleting employee accounts each week forces them to go through the onboarding process again and helps identify any annoying steps that need fixing.

Network Effects

The reality of network effects in marketplaces compared to popular belief.

Reality vs. Popular Belief

• Most people believe network effects keep getting better over time with more users (Metcalfe's law).

• In reality, network effects plateau at some point.

Reinforcing Network Effects

The speaker discusses the importance of constantly reinforcing network effects to scale a business. They use Uber as an example of a company that has done this well by introducing new service offerings once they had enough scale.

Importance of Reinforcing Network Effects

• Constantly reinforce network effects to scale a business.

• Using your scale to do new things is key to introducing new network effects.

• Counting on existing network effects in the initial product offering too much can lead to startups being disrupted quickly.

Uber's Success Story

• Uber has done a great job of using their scale to introduce new service offerings and reinforce network effects.

• They started with black cars, then introduced UberX, and finally added pool services.

NFX Blog

• NFX is one of the marketplace investors in the US with a great blog on reinforcing network effects.

Tiers and Segmentation

The speaker talks about how segmentation is important for marketplaces and how it follows the classic 80/20 rule.

Importance of Segmentation

• Introduce segmentation for users in marketplaces as it follows the classic 80/20 rule where 20% of users are doing 80% of the work.

• Create different tiers or segments for different types of users based on their performance or behavior.

Example from Rev

• At Rev, they promote their best workers to what they call "Rev Pro" tier which gives them certain benefits such as early access to jobs.

Disintermediation and Feedback Scores

The speaker discusses how users perceive the value in marketplaces and how feedback scores can be inaccurate.

Disintermediation

• Users perceive a lot of value upfront in marketplaces but it declines over time.

• Marketplaces have two choices to prevent disintermediation: increase perceived value or lower fees.

Feedback Scores

• Five-star feedback systems are fundamentally inaccurate as most scores tend to be centered around five stars.

• Humans think more on a three-point scale: loved it, hated it, or just okay.

Feedback Systems and Marketplaces

In this section, the speaker talks about feedback systems in marketplaces and how they can be improved. He also discusses the challenges of building trust and safety teams to combat fraud in marketplaces.

Importance of Private Feedback

• Massive inflation occurred when everyone gave everybody five stars.

• After making feedback private, signal in data improved and feedback scores dropped by a full point.

• Repeat transactions are more meaningful than giving someone five stars.

Meaningful Feedback

• Link from experienced users should count more than links from inexperienced users.

• Different types of marketplaces exist: commodity marketplaces and master marketplaces.

• Masterclass is an example of a master marketplace that could not exist on platforms like Udemy or Coursera.

Building Trust and Safety Teams

• Fraudsters eventually find their way into every marketplace, leading to a spike in fraud.

• Overreacting to fraud leads to the introduction of trust and safety teams with security measures.

• Balancing growth with fraud is important for marketplace success.

Hacking Liquidity

• Finding big aggregators can help get a marketplace off the ground.

• Providing value to one side can lead to growth on both sides (e.g., GitHub).

Liquidity Hacking

In this section, Josh discusses three methods for achieving liquidity in a marketplace.

Three Methods for Achieving Liquidity

• The first method is to focus on a small piece of the market to gain enough liquidity to get started.

• The second method is curation, where you only show highly qualified options to users.

• The third method is brute force, which involves going door-to-door and recruiting people until you have enough liquidity in the marketplace.

Investing in Kindly Care

In this section, Josh explains his investment in Kindly Care and how it differs from other nanny marketplaces.

Investment in Kindly Care

• Josh explains that he invested in Kindly Care because it helps families become domestic employers themselves, saving them money.

• He also notes that there are unique challenges with the elder care space that make it different from the nanny space.

Carpooling for Nannies

In this section, Josh discusses carpooling services for nannies and why he has not invested in them.

Carpooling Services for Nannies

• Josh has looked at carpooling services for nannies but has not made any investments because he believes that Uber has already taken over this niche.

• He thinks that dedicated kid or elder transportation services have a shrinking niche and will likely be dominated by big players.

Overview of the Company's Services

In this section, the speaker discusses the services offered by a company and its potential for expansion.

Potential for Expansion

• The company has a mini horizontal platform that offers various services such as dog walking, sitting, overnight care, grooming, dog food, and veterinary health.

• The speaker believes that the company is building a reasonably nice platform with potential for further expansion.

Thoughts on the Company's Future

In this section, the speaker shares their thoughts on the future of a particular company.

Great Company but Too Late

• The speaker thinks that the company is great but it may be too late to invest in it.

Competition from Naspers

In this section, the speaker talks about competition from Naspers and how they deal with it.

Dealing with Aggressive Competitors

• Letgo is funded by Naspers and is OfferUp's largest competitor in the US market.

• Naspers invests aggressively in acquisition through TV ads and other channels.

• However, OfferUp focuses on providing good user experience and cohort retention rather than just buying downloads.

• Irrationally spending competitors do not scare OfferUp too much.

Importance of Quality Control

In this section, the speaker emphasizes the importance of quality control in maintaining a healthy marketplace.

Kicking Participants Off Platform

• It is important to keep quality high by kicking certain participants off of the platform. This applies to both customers and suppliers.

• Firing customers who cause problems in your marketplace can be trickier to identify but it's necessary to maintain a good experience for everyone involved.