Will Orde, an investor at Oxford Capital, argues that the UK is a leading marketplace builder and looks at how we can spot the next generation of winners.
In the technology industry, we are used to particular technologies hogging the limelight. AI, machine learning and blockchain are centre stage at present. However, business models go through hype-cycles too: SaaS, open-source and freemium have all had their time in the sun.
Online marketplaces are yet to bask in glory, despite underpinning some of the world’s most successful online businesses: Alibaba and Amazon to name two leviathans. This surely represents a model that has been short-changed and undervalued, especially in the UK, which has produced many successful marketplace business in recent years. ASOS, Secret Escapes and Zoopla are three businesses that fly the flag proudly for the UK. It is worth stating the obvious here: marketplaces can be super-profitable. Rightmove recorded a 73% EBITDA margin in 2017.
As a UK-based technology investor, I want to see a new generation of marketplace businesses flourish. There are certain key characteristics that a marketplace needs to succeed, and below, I have analysed those which suggest a marketplace model is right for a business, and that it is primed to succeed:
Marketplaces need potential buyers to want to buy from different suppliers each time they transact. This user-behaviour arises when a product is highly commoditised, and users only care about price. This is true of the current state of car insurance (Comparethemarket); or a market where every product is different, like buying houses (Rightmove) or designer furnishings (eporta). This is probably the most important characteristic to look for, and needs to be a fundamental part of how users expect to transact.
When multiple different suppliers sell their wares on one platform, trust becomes a critical factor. Buyers will ask themselves: Who am I buying from? Will these goods be safely delivered? Will the goods I am buying be of a good quality? Who do I complain to if they are not? Equally, sellers will want to know that buyers are good for their money and not waste time on spurious enquiries, this is especially true for B2B marketplaces. The marketplace needs to play a central role in providing trust to both sides of the market, whether this is through proactive action like screening new suppliers before allowing them on the platform, or using the crowd to determine trust through reviews.
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Another indicator that a market is ripe for an online marketplace to enter the fray is a painful buying process. Marketplaces add value here. Even though it seems arcane, many industries are still rife with clunky online processes, paper forms, excel spreadsheets, and telephone calls. These can all be digitised and embedded in the workflow of an online model.
There are plenty of industries left where incumbent suppliers are not digitally native – heavy industry and food production are two examples. These sectors move slowly, and struggle to attract new customers. Marketplace models are useful here, as they can take on the ‘customer acquisition’ role.
If you are either an investor evaluating a marketplace business model, or an entrepreneur building one, the question of “is this business working?” is harder to answer than expected. Simpler business models, such as ecommerce, work on the expectation that customers buy goods from ‘day zero’, and that revenues will grow in line with marketing spend. Marketplaces are more complex.
Every marketplace needs to fight two battles from the beginning: it has to attract supply and demand. It’s the proverbial chicken and egg problem. No supplier wants to sign up for a marketplace with no buyers; and buyers are unlikely to find what they’re looking for if there are too few suppliers. Until a critical mass is reached on both sides, traction will be slow; but when critical mass is reached, improvements are rapid.
However, everything is clear in hindsight. It is very easy for me to laud Zoopla and Rightmove after they have both proven to be successful – but what are the signs of a promising marketplace at an early stage? Conversion is the leading indicator for me, and it is one that requires careful analysis to properly understand. As an entrepreneur or investor, ask the questions: How does conversion compare to other marketplaces? Are there any niche use-cases or audiences that demonstrate strong conversion, as this may pre-empt the behaviour of the broader customer base? What product improvements are the company making, and will these lead to increases in conversion? Alongside conversion, positive customer satisfaction and regular repeat purchasing-behaviour are both strong signs of health.
The UK has succeeded in building marketplace businesses in the past, and will do so again. As an investor, I look forward to backing the next generation of globally scalable marketplace businesses, and believe they will be found right here in the UK.