Report: Online Marketplaces Outpace the Entire Tech Market

Nearly a year has passed since we released our annual report on the future of marketplaces and a lot has happened in the past twelve months. The report, which was published near the start of the pandemic, focused primarily on the immediate impacts on digital marketplaces. Today, while COVID-19 has not yet been eradicated, countries across the world are vaccinating people at a growing pace and infection rates are stabilizing in many countries. There is now some light at the end of a long tunnel.

Rather than only looking back at how marketplaces performed during these turbulent times, we chose to also look ahead and see how they will continue to shape our post-COVID world. To do so, we’re releasing a series of reports, beginning with a deep dive market overview. Additional reports on specific marketplace trends that we are particularly excited about will be released over the next several months. Stay tuned for more!

To kick off the series, we’re going to first analyze how marketplaces have developed over the past 12 to 15 months.

• Which marketplace business models thrived due to COVID? 
• What new product innovations are shaping the future of marketplaces?
• What did we get wrong when predicting the impacts of COVID-19 in our last report? 
  

I answer those questions (and more), summarize key takeaways from the report, and share my interpretations and predictions below. 

Key Takeaway 1: The marketplace business model thrives in times of crisis

Despite an overall challenging economic environment, the tech sector has been thriving as the pandemic has been a catalyst for digital transformation. Within the technology sector, marketplaces have developed particularly strongly (+70%), outperforming the Nasdaq (+50%). In fact, marketplace unicorns grew 2.5 times more than the wider market, which saw growth of 23% across the board. We identified two main reasons for this, both of which follow the same logic: Marketplaces scale “easier” in any direction - upwards or downwards.

1. Acceleration of revenues: Categories that benefited from the pandemic, such as digital health, delivery/logistics or fashion, were able to gain market share from their offline competition and saw increased usage due to an overall shift to online consumption.
   
   
2. Resilience in business model: Categories that have been negatively impacted by the pandemic in the “physical world” (travel, mobility, etc.) benefitted from a stronger resilience of the marketplace business model compared to other businesses. Their asset-light model decreases direct exposure to negative market swings.
   

Take AirBnB as an example:

1. Its exposure to drops in accommodation prices is only indirect.
2. While its commissions face pressure as GMV decreases, this is still better than having to sell owned inventory at below cost.
3. AirBnB’s fixed cost base is structurally lower and more flexible compared to “asset heavy” competitors or incumbents (e.g. Marriott). As the supply side is negatively impacted, price elasticity will further drive liquidity at a marginal cost of zero to the marketplace.
   

Bottom-line: Being “just” an intermediary means carrying less financial risk and hence being less exposed to negative swings in the market.

Key Takeaway 2: Marketplaces are increasingly connected and becoming more “full stack”

The pandemic not only served as a catalyst for growth but also for product innovation. More precisely, we have been observing a continued development towards more “full stack marketplaces'' that try to capture the full value chain end-to-end, from one side of the marketplace to the other. One driver of that is likely the abundance of cheap capital (see key takeaway 3 below) which benefits “asset-heavy” business models. 

Marketplaces that are more asset-heavy often retain better control over the user experience and, therefore, product delivery to each side of the marketplace. In this context, the emergence of “embedded finance” has also supported more asset-light marketplace models to continue to compete against their asset-heavy counterparts. 

Key Takeaway 3: Asset-heavy models continue to be on the rise

In last year's report, we incorrectly predicted that the pandemic would particularly benefit asset-light marketplace models. We failed to anticipate the strong impact that economic support programs by global governments would have on capital markets. Falling interest rate levels and the resulting abundance of cheap capital - be it debt or equity - have been beneficial for asset-heavy approaches which, by definition, are more capital intensive. In the short term, this approach: 

1. is more “forgiving” when it comes to marketing and business model efficiency i.e. unit economics; 
2. helps to jumpstart the marketplace and kick off the flywheel;
3. enables the marketplace to quickly grow market share, gain ground versus (potential) competition and move more quickly towards “critical mass” or liquidity.
   

I’ve previously covered this observation about the “counterintuitive evolution of CACs” for marketplaces.

In the current market environment, it’s no surprise that companies like Gorillas or Cazoo have seen a lot of investor interest. However, time will tell whether these models can be operated in a profitable way that is sustainable in the long-term. Getting there will certainly require further product innovation beyond just “cheap money.” This recent quote by Niklas Östberg, CEO & Co-Founder of Delivery Hero, hits the nail on the head:

Just recently, Delivery Hero announced that they are bringing the quick commerce model (back) to Germany i.e. Berlin. Its healthy, high-margin marketplace business allows them to subsidize a loss-making quick commerce business while still innovating on product (e.g. delivery robots) to increase efficiency of their quick commerce activities.

Stay tuned for more

How will marketplaces continue to evolve in the future? We will shed some more light on this in our upcoming reports which will deep dive on topics from Fintech-enabled marketplaces and sustainable consumption to B2B marketplaces and regulated markets.

At Speedinvest, we see almost 2,000 investment opportunities every year in marketplaces alone. We, the Marketplaces & Consumer Team, are constantly impressed by the high degree of innovation that resourceful, driven founders continue to bring to the marketplace ecosystem. We continue to be extremely excited about the future of marketplaces and believe that the best is yet to come. Please get in touch if you’re a Pre-Seed or Seed stage founder building a marketplace or platform business.

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