Online marketplaces have been around for a long time. Amazon and eBay headlined the first generation. Those companies began in the mid-1990s. They offered thousands of products in hundreds of markets and turned into digital behemoths.
The second generation began at the turn of the century. StubHub appeared in 2000. LinkedIn started in 2002. Zillow in 2004. YouTube in 2005. These companies were more specialized.
Today, Airbnb, DoorDash, Instacart and Postmates are the top-ranked startup/private marketplace companies according to venture capital firm a16z and data analytics firm Second Measure. Second Measure, which analyzes billions of purchases to track real-time consumer behavior, ranked these companies by gross merchandise value (GMV). GMV is the total dollars consumers spend with each company.
These four companies come from the third generation of marketplaces. They launched between 2008 and 2013. They’ve used mobile apps to improve convenience and accessibility, and to reach a much larger base of customers.
These companies are really big. They generate billions in revenue each year. The top four marketplace startups account for 76% of the GMV among the top-ranked 100 marketplace companies. They’ve disrupted grocery shopping (Instacart), food delivery (DoorDash and Postmates) and travel (Airbnb).
But besides these four, no other company from this third generation has truly achieved scale. Which means they’ve also left huge swaths of the market virtually untouched.
That represents a big opportunity for startup investors. A new generation of online marketplace companies is emerging. They’re harnessing technology that adds convenience and is customizing the user experience to a degree never before seen.
What Comes Next?
Specialization.
Take Zillow. The real estate market company boasts a market cap of $7 billion. And Zillow covers a lot of territory, from buying and selling homes to renting apartments and sourcing home loans. But Zillow’s platform treats them all the same. So more specialized companies are moving in to disrupt specific parts of the homebuying process. For example, Compass, Opendoor and Flyhomes are targeting the homebuying/home selling vertical in ways that are difficult for Zillow to do.
Specialization doesn’t limit the ultimate size of startups as much as you’d think. The better startups can please their customers with features seemingly meant just for them, the more market share they can capture. These companies have chosen to pursue 10% or 20% of a narrower market rather than 1% or 2% of a bigger and broader market.
And that gives them a huge upside. Investing in the early stages is a particularly effective strategy for online marketplaces. Startups that operate in this space tend to grow quickly early. Annual growth of 3X to 5X isn’t unusual. And valuations climb quickly as well. In the later years, their growth slows. And so do the increases in their valuations. We like our members getting in early on marketplaces and taking advantage of the rapidly escalating valuations.
So look to buy early into companies that were started three years ago, or even more recently. They’re still small. Their fastest growth lies ahead. And many of them are trying to disrupt the older and broader digital marketplaces (eBay, Craigslist, LinkedIn, StubHub and YouTube, to name a few). Also look for startups attacking broken and inefficient marketplaces in industries as diverse as art, pets, games and beauty.
Marketplace companies, with their powerful network effects, can create their own large universe of buyers and sellers. We’ve seen it with Amazon, Airbnb and others. These companies will continue to exert a great disruptive force on the economy and transform dozens of currently untouched industries.
The disruptors of yesterday are now being disrupted by the latest generation of marketplace companies. You’re not too late to invest. In fact, you’re just in time.