No End to Marketplace Opportunities

I’ve been exclusively focused on marketplace and network effect business opportunities for the past several years.  Sometimes people challenge me on the focus with something to the effect of “all the good marketplaces have already been built.” The theory is that the great big markets have been built and have strong network effects so any new startups will be stuck going after tiny markets or hopelessly competing for big ones.  

They are wrong.

I obviously believe that there is no end in sight for great marketplace opportunities. I spend every day thinking about these things so I would focus on something else if I thought there were no good opportunities left.  

I don’t believe anyone before Uber’s launch thought there could be a $50B taxi marketplace.  I think the same people that say “no more good marketplaces” would have passed on Airbnb because VRBO had already won the market and passed on WeWork because Regus was already global.

There are 3 big buckets of opportunity and the following are reasons why there is no end in sight for great new startups.  

Disrupting Big Incumbents

1) Innovator’s Dilemma – Every large incumbent suffers from some of the Innovator’s Dilemma.  It’s a well known concept from Clayton Christianson.  While a big incumbent is stuck working on their existing core business and platform, early stage startups can focus on new platforms or niche parts of the market to build up initial traction.  

2) “Divinely Discontent” Customers – This is a Bezos quote from one of his annual letters.  The divine discontent of customers is fantastic news for marketplace startups – they will grow tired of the existing incumbents if they’re not constantly upping their game and improving the customer experience faster than early stage startups.  OfferUp and Craigslist presents a great example here.  Many investors claimed that “you can’t compete with Craigslist” before OfferUp was born.  They were right that it was exceptionally challenging and that Craigslist had an extremely strong network effect, but that doesn’t mean it’s impossible.  Craigslist users had finally had enough after more than a decade of a user experience that simply was not improving.  The constant discontent of customers means that they are ready and willing to switch.  You just need to overcome the existing network effects, but since customer expectations are constantly improving and many network effects (without reinforcement) tend to plateau after a certain amount of scale, it’s only a matter of time before a big opportunity presents itself for the taking.  

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3) Niche Managed Marketplaces – Within many verticals, there are opportunities to significantly improve customer experience.  Let’s take a look at GOAT.  Ebay has been around forever, and GOAT comes along out of nowhere and destroys Ebay’s sneaker vertical – a surprisingly large segment of GMV.  Now, by itself, that might not seem like it is a huge opportunity to just pick off 1 of 100 categories on a big marketplace, but when a managed marketplace attacks a vertical, they can typically take a much higher rake than a traditional horizontal marketplace and also have the opportunity to go much deeper in the industry.  In the sneaker example, GOAT can take a much higher rake than Ebay, and then could continue to expand in the vertical by sharing trend data with manufacturers, taking pre-sales,  launch their own line of “original content”, or even sell sneaker insurance

4) Mobile is Still the Next Big Thing – every time a new platform emerges, there will be opportunities to build new marketplaces if the incumbents don’t move fast enough.  I’ve heard time and time again from large companies that collapsed some type of refrain like “we were slow to make the move to ______.” While many people are off focused on drones and crypto, I remain bullish on mobile opportunities, especially for B2B use cases. We’ve obviously seen some disruption on mobile already, but I think many industries are still waiting to be disrupted by the great mobile platform we have available now.  And if AR/VR or something else becomes a ubiquitous new platform, all of these opportunities will start over again to disrupt the companies on the previous platforms.  

Untapped Opportunities

5) B2B Marketplaces - I’m a big fan of B2B marketplaces.  Early in my mechanical engineering career I got involved in a lot of procurement activities of everything from epoxy and lab supplies to custom-machined pistons out of a rare steel alloy.  I used to flip open my gigantic McMaster Carr catalog and spend a few hours every day searching on Google and calling around to suppliers after I found their crappy website.  Then I would fill in a paper form in triplicate and take it to my procurement office.  Well guess what… that industry hasn’t changed much.  And in case you were wondering, some of these industries are absolutely massive.  The steel industry is about $900B per year.  The commercial real estate industry is around a trillion dollars per year.  The chemicals industry is $767 billion just in the US.  Most of these industries have been ignored and underserved by tech startups, but change is coming.  

6) Still Low Existing Utilization - Despite a decade of talking about the sharing economy, collaborative consumption, on-demand economy, etc - the utilization rate of key assets is still very low.  I just met with a couple marketplaces helping hotels sell day passes to their pools and spas.  There are 5 million hotel rooms in the US across about 55,000 properties… and until now, apparently nobody ever thought to try to rent out their pools for the day.  My office sits idle about 16 hours per day.  My house is vacant for about 8 hours every day.  Construction equipment sits idle in yards constantly.  Millions of people around the world have skills and knowledge that are underutilized.  

New Industries

7) New Industry Creation – New industries start as the Wild West and become organized by marketplaces over time.  Consider the fracking industry in this country. It has absolutely exploded in size over the last several years, but the infrastructure behind the industry is lagging behind a bit.  This has opened up a new opportunity for a marketplace in one of the most unusual ones that I’ve seen recently, SourceWater.  Sourcewater is a marketplace for water.  Anytime someone wants to frack a well, they need a few million gallons of water to start and then about half that amount of water comes back out of the well and they need to dispose of it.  Turns out to be a challenging logistical problem that a vertical marketplace could solve very well.   In a few more years, who knows, maybe there will be a marketplace for used drones and electric scooters.  

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