Many of today’s largest technology companies are marketplaces. Of the six companies that are worth more than $1T, half of them (Amazon, Facebook, Alphabet) have marketplace business models. Most consumers use a marketplace every day without even realizing it—for shopping, ordering takeout, or finding the right vendor for a home improvement project. The list goes on. 

What defines a marketplace? Marketplaces are businesses that connect supply and demand. In my investment focus area, these connections are built with software. 

Why do I like marketplaces? Marketplaces have two-sided network effects that create defensibility once the company achieves scale. This makes a marketplace company more durable once it reaches a certain size. A professor opened my eyes to two-sided network effects fifteen years ago. Much has been written on this topic over the years, so I won’t go into it here. But one data point that showcases the impact of network effects is, according to NFX’s research, 70% of the value created by tech companies since the internet became widespread in 1994 has been from network effects businesses. In addition to my interest in marketplaces from an investment perspective, I have navigated them as an operator during my six years at Yelp, three of which I spent as the CEO of Eat24.

At Canvas Ventures, we lead Series A investments in marketplaces, fintech, healthtech, and the infrastructure layer that powers them. Canvas has invested in marketplaces across industries, from Transfix to Zola to Flyhomes. Recently I’ve invested in NuBrakes (tech-enabled auto repair on demand), ResQ (all-in-one technology platform for restaurant repairs and maintenance), and Darwin Homes (tech-enabled property management). Prior to Canvas, I invested in CloudKitchens, Faire Wholesale, and other marketplaces as well.

When getting to know a marketplace, I like to ask myself the questions below. Of course, these won’t all get answered in a first meeting, but a few founders and fellow investors have found this checklist helpful:

Marketplace Checklist: 16 Questions

1. Which side of the network values the other side more? The tell-tale sign here is if one side of the network is being subsidized more than the other. For example, Uber famously guarantees the driver side of the network $500 or even more for signing up, but the rider side of the network only received a paltry $20 subsidy, and even that might be eliminated.
2. Is there an effective and proprietary method for distribution to each side of the marketplace, especially the more highly valued side?
3. How strong are cross-side network effects, is there a metric that can measure that, and how has it tracked over the last year?
4. Are there same-side network effects, and how strong are they?
5. What are switching costs for each side? Is there multitenanting? 
6. What are LTV and CAC for demand and supply side?
7. What does user retention look like and does it improve for newer cohorts with time? 
8. What does liquidity look like, and how do you measure it (e.g. average amount of time from supply being posted to fulfilled/met with demand)?
9. What is frequency of use (transactions per month) for demand and supply side?
10. What is average transaction size for demand and supply side?
11. What is the marketplace take rate or monetization model, and what is the the sustainable take rate over time and why?
12. Does it get easier to acquire incremental supply and incremental demand as this marketplace grows?
13. How fragmented is supply side?
14. Is there an initial focus on one or two geographies or categories, and how strong are the network effects there?
15. What is the winning strategy for that initial market, and what is the plan to scale beyond that?
16. Is there a new product enhancement to the marketplace/transactional user experience, such as Eat24 allowing more convenient food ordering from a mobile app vs. the old model of making phone calls and needing a paper menu?

While I don’t only invest in marketplaces, I do tend to take more meetings in this category, along with software that helps to enable commerce and marketplaces (e.g. OfferFit), foodtech, and proptech. My investments can give you a sense of what I’m interested in. If you have a company that I need to hear about, you can find me on Twitter, and my DMs are open: @newmike.

Additional Marketplace Resources:

• https://www.lennysnewsletter.com/p/how-to-kickstart-and-scale-a-marketplace
• https://hbr.org/2006/10/strategies-for-two-sided-markets
• https://medium.com/@nfx/70-of-value-in-tech-is-driven-by-network-effects-8c4788528e35
• https://www.forbes.com/sites/mikeghaffary/2019/10/17/marketplace-checklist-how-to-analyze-labor-marketplaces/?sh=201f53dd716f
• https://www.forbes.com/sites/mikeghaffary/2019/07/17/marketplace-checklist-how-amazon-built-the-largest-marketplace-in-the-united-states/?sh=45027ecc105
• https://www.forbes.com/sites/mikeghaffary/2019/05/30/marketplace-checklist-how-airbnb-built-a-35-billion-business-on-its-brand-strength/?sh=6be282c56147
• https://www.theconsumervc.com/mike-ghaffary-canvas-whats-next-after-the-iphone-unpacking-web3-metaverse-and-remote-first-products-and-is-this-the-time-to-be-investing-in-b2c-or-b2b/
• https://andrewchen.co/marketplace-startups-best-essays/
• http://abovethecrowd.com/2012/11/13/all-markets-are-not-created-equal-10-factors-to-consider-when-evaluating-digital-marketplaces/
• https://techcrunch.com/2017/05/25/anatomy-of-a-managed-marketplace/
• Anatomy of a Service Marketplace (P Izhutov)
• https://blog.usejournal.com/the-anatomy-of-a-marketplace-16b9d4ee8174
• https://www.nfx.com/post/network-effects-manual