a16z Podcast - a16z Podcast: The Marketplace Rules

Episode Date: February 18, 2015

Online marketplaces are growing much faster than e-commerce overall. Why is that? And what new kinds of marketplaces powered by the internet and mobile are we now seeing? a16z's Jeff Jordan and Anu Hariharan share their observations here and also explain what makes marketplace powered by software and reputation work -- as well as how to manage tensions, trust, and marketplace community reactions around change.

Welcome to the A16Z podcast. I'm Michael Copeland. And we are here today with Jeff Jordan and Anu Hari Haran. Welcome, guys. Thank you. Great to be here. Great to be here, Michael. So we're going to talk about marketplaces. And I've talked to you guys a bit about this. And you guys are noticing that marketplaces as a sort of general category is growing, marketplaces online, I should say, or at least powered by online, are growing much faster than e-commerce. And I just kind of want to start with like, what's going on here? I mean, marketplaces have been around since there were two people, one who wanted to buy something and one who had something to sell. So what are you guys seeing right now?

I mean, I think that observation is right. We're seeing marketplaces just exploding. And I think one of the reasons is there are no governor or limitations on how fast most marketplaces can grow. I mean, there's kind of the company, most of these marketplaces are virtual. And, you know, when a good idea comes in, there is just. no limit to growth where e-commerce is dealing with warehouses and product sourcing and things like that. So great marketplaces, you know, just, you know, when they catch a cord, they really catch a cord. And you just seem absolutely explosive growth in a ton of areas. So give us an example

here. Let's start with a marketplace that you guys are seeing that's growing like gangbusters. You know, I'm proud to be on the Airbnb board. It's a huge business. It's an incredibly rapidly growing business. It's a business with a fanatical following that helps evangelize. the business to their friends. And, you know, this has, you know, our investment thesis when we got into it almost four years ago was it had the chance to be kind of the next gen eBay. And it's so far, knock what's lived up to that hype. Well, you know a fair bit about eBay having run one of its largest divisions there. So we want to talk more about eBay, I'm sure. But are there consistent themes that you're seeing in these marketplaces that we can start to identify?

I mean, first of all, I think eBay and Airbnb are like, these have the same genetic makeup, just, you know, it's the second generation up there. It's economic empowerment, acute, quaint idea that, you know, the community took and made into a monster site, you know, key core trust and safety issues that the firm overcomes. But, no, I mean, I think marketplace, you know, I think they're kind of almost rules for managing marketplaces. I recently blogged on this. and that, you know, those rules are pretty much transcend different verticals, different stage businesses and, you know, are incredibly important in managing marketplaces. Yeah, and even though the core principles are the same, I think, like, social and mobile has enabled marketplaces, you know, the shopping on marketplaces even faster, and that's probably

helped grow this well. To give an example, like Airbnb uses social information identity to sort of build a trust and safety, right? And then mobile helps you shop easier because it's even more frictionless and one-click checkouts are becoming popular. So those tools have definitely enabled marketplaces today to grow even faster. Yeah, that velocity, and let's talk about mobile for a little bit. I mean, are the way that people are availing themselves of marketplaces different because of mobile? I mean, am I on my phone all day long buying things or booking a room?

I think different categories of marketplaces have been benefited by mobile. all have been benefited by mobile. They're certain that have been enabled by mobile. People marketplaces, for example, when, you know, your order in groceries, the delivery person has the small computer in their pocket that enables them not only to see what to pick, but where in the store it is, you know, the productivity improvements, where the driver is to pick it up. So their logistical optimization.

So when some mobile is absolutely enabler, in all other marketplaces, though, you're just seeing activity migrate from PCs to mobile. I mean, in almost every business I'm working in, mobile is at least as large as the PC now in gaining share rapidly. Interesting. Well, let's talk about the components of a good marketplace. And Anu, maybe you can outline some of those for us. I mean, what is consistent across these marketplaces that are growing so quickly?

You know, Jeff, you mentioned trust in safety, reputation, et cetera. What are some of those components? Yeah, I think the big thing about a marketplace is really there are two components, have the sellers and the buyers. So, you know, usually you see marketplaces, if there is a long list of fragmented supply, then, you know, aggregating them and making the transaction more easier for the buyer is where the marketplace really shines. So even if we take the example of grocery, Instacard, you know, people marketplace is one component, but if you look at the broader aspect, they are partnering with grocery chains, right? The Whole Foods is already

a partner with them. So they're enabling grocery chains on one side and consumers on the other side to be able to buy the groceries online and then using the people marketplace to deliver it within an hour or two, right? So the aspects there is building the supply, building the customer demand, the buyer is important to build that liquidity and then how do you sort of fulfill the service? And in a lot of great marketplaces, the predecessor was incredibly inefficient. So on eBay, it was incredibly inefficient if you were a collectible lover to to do your collectibles. So I told Bob Kagle was the early board member from Benchmark at eBay.

And the site resonated with him because he collected duck decoys. I believe the artist was named Oscar Peterson, like the penis. Oh, yeah. But Bob lived in Michigan and used to have to drive around to antique stores and collectible stores, you know, scattered throughout the state in search for Oscar Peterson duck decoys. On eBay, they came to him. And so it took a, in the analog world, an incredibly inefficient process and made, you know, it efficient. Discovery was efficient.

Global supply was aggregated and efficiency. A lot of marketplaces take that inefficient analog thing and just magically make it efficient. So we certainly see that in the case of Airbnb, you know, putting all these rooms, beds, treehouses, you know. Eagleos, castles, boats, yachts. Yeah. And are there other categories that you guys are starting to see or that you think are ripe because of the inefficiencies or the fragmentation? So the mobile first marketplace is, for example, let's take furniture, right? The earlier way of selling was typically on Craigslist. And it's a web, you know, desktop application. You have to take a picture with a photo,

with a camera, and then upload it. Now mobile, you just take a picture on your phone. It's so easy to upload that picture onto the whichever site you want to list. So the friction for the seller as well, has reduced, right? Mobile has enabled that. And then the buyer can also determine based on proximity on the mobile, saying, okay, I want to shop around my area, and then use that to sort of make the entire experience more seamless. So that furniture would be one category. You're also seeing B2B marketplaces like, you know, rental equipment, construction equipment for rent. There is also Chris Dixon's theory of, you know, come for the tools and stay for the network. We're seeing this more in like event spaces, right?

Providing tools for the suppliers and thereby aggregating the suppliers and then the buyers will come to the stuff. I mean, OpenTable was an example of that. Early on, we sold tools because we needed to digitize the restaurant's inventory. Our entry strategy to get the restaurant because we didn't have a network

when the company started was to give them tools. Once they had the tools, we were able subsequently well down the road to then send diners to them and that's now the overwhelming value proposition, but it started with the tools. Well, let's talk about maybe OpenTable, but other marketplaces that you've been involved with, Jeff.

And how do you balance the buyers and sellers? Because the difficult part about a marketplace is that, especially ones that are successful, or I guess maybe only those that are successful, is that the people who are in there all the time, whether it's eBay or OpenTable, they love it. And they sort of feel like they have ownership of it. So how do you balance buyers and sellers and who's running the show? I mean, it's one of the most interesting things about managing a marketplace. It's two sides, or in some marketplace, it's three sides. And who goes there? In every marketplace I've managed, the seller paid the company, but the buyer, I believe,

is where all the value is. Sellers, businesses, small businesses, aspiring small businesses will typically go wherever they think consumers are in quantity. So the true asset that eBay has, that Open Table has, is that the buyer or diner is coming to the site and the merchants come to try to find them. So you always had this interesting attention. The sellers were paying us, but we would bias towards the buyers all day long because if you make the buyers happier, it worked.

And so that got put to the test because Amazon and Yahoo launch auction businesses early in eBay's life. And they went for free. So every seller in the world said, I'll list my site there. It didn't work because they couldn't get the buyers to show up there. So eBay, even though we were charging, the other ones were free, you know, we kept all the business because we were keeping the buyers happy. Interesting. And in the open table example, people came to eat, you know, meals at your restaurant, even though you had to pay as a restaurant owner open table for the service. Yeah. And, you know, it is one where, again, we said in the Open Table Road Show that a restaurant would be rational to use a free competitor who gave them free hardware and free software because they would lose access to the open table.

Diner Network. And that got tested a number of times, including Urban Spoon, that not only was giving their service away for free, they were giving the proprietors a free iPad to use their service. But the diners didn't use it. And so restaurants would say, oh, iPod form factor, same service for free. They'd try it. And we'd get calls two days later saying, oh, my God, my restaurant's empty. We're to all the diners ago. I got to go back to Open Table. So how do you think then? It sounds to me like that that network is really, vital to like the vitality of your your business how do you maintain that like preeminent network i mean what are the things that you have to do i mean why marketplaces

are interesting from an investor perspective is the network they are they are almost always network affects businesses so it's um you know the more people who use it the more valuable it is so at ebay the more buyers there were the more sellers that attracted the more sellers and selection you attracted to more insinuance the buyers open table more more diners led to restaurants being more interested more restaurants led to satisfied buyers so that That is the business. I mean, and so, you know, every time the code you use in investing deck is a wheel where you have the two sides of the marketplace, restaurants. And the more restaurants we have, the more diners coming in the other way, the more diners, the more restaurants.

So what you need to, the hardest part is getting that network effect started. Right. You get chicken and egg issues. You can't, you know, at Open Table, you had to start with the supply because until you got the supply, it was completely uninteresting the diners. and other places you can you know you can get demand for you know from the consumer but the supply is you know slower to come that that's probably a little more in Airbnb's case the Airbnb is arguably supply constraint but so let's use Airbnb as an example it could have early on it had that issue in San Francisco where somebody trashed somebody's apartment horribly

and they could have lost their network had they not really doubled down and proven to everyone that they had trust and safety measures put into place and so I want to know that you've built this network. It's a flywheel, and yet what do you need to have in place to make sure that it maintains? One is constant improvement, and trust and safety is an area that typically is important for marketplaces because large-scale marketplaces have tons of strangers doing business with tons of strangers. So, I mean, the Airbnb, I thought, was a great example of taking a challenging situation and

making the business demonstrably better through things like the Airbnb Guarantee. and, you know, better trust and safety and, you know, the things that are, you know, really important to the business. I thought they, you know, they took that example and made, and ran with it, you know, quite hard. Right. The other thing, you have to keep it efficient. You know, you've got to be worried about raising prices too high. A lot of, it's easy to raise prices when you have a network effect, but, you know, I think that hurt eBay in the long run versus Google. So, right. Yeah. And on the trust and safety aspect, like if you observe the customer behavior today, quite a lot of people, see an Airbnb apartment actually Facebook the person to sort of see if this person is, you know,

what their background is to get comfortable before they rent the place. So social has sort of enabled to build that trust. The other advantage Airbnb has is the supply and the demand actually overlap, right? So for example, I was first a customer of Airbnb, but then I was open to listing the place as well. So only some marketplaces have that overlap effect where you could also be the supply. Like in the case of open table, it's restaurants and the customers. But so now we're saying a lot more marketplaces that are coming up with unique perspectives where, you know, like both the supplier and the customer is pretty much the same. So once you've established a network, you have this trust on the part of the buyers. Do you have the permission to go in

different directions? And are you seeing that? I mean, I think in a lot of the great marketplaces, they develop a community. And that community kind of works with, you know, in a high, model with the marketplace to define where it goes. So a lot of a strategy we did at eBay was watching how the community was using the eBay site and trying to enable what they were doing what they were trying to do. So eBay started as a collectible site. One product manager one time realized that he loved collectible cars and he searched for Ferrari or mozzarella or which one and he found two real ones on the site and we're like, we sell cars. Well, it turns out if you didn't live in New York or Los Angeles, it's hard to buy the Roserati or Ferrari.

And so that was a market inefficiency that a company was creating. So we then built eBay Motors to enable that pursuit of that business. Airbnb's the same thing. It started kind of airbeds in a shared apartment. Now you can get full homes. You know, people have listed boats. They're probably the single largest site for car sharing, collaborative economy, is on Airbnb. listed cars. And, you know, they're hard to find. The company, you know, the opportunity

if they wanted to enter the car business in a huge way because they are, you know, they're being listed. But it's that collaboration between the marketplace and their community. And frankly, the best strategy we had at eBay was just watching like a hawk what they were doing and then try to make it easier. Interesting. And do you personally, I mean, I want to, Jeff, how you think about this, the Steve Jobs view of the world where people don't know what they want until you give it to them. I mean, is there kind of a balance that you should strike? Or does it depend on your jobsian personality or what?

Yeah, I think I subscribe to that view on product development. I mean, the, the, if you, you can listen too much to your community. And a lot of the early community members were want to hold on to what was original. So when we were trying to, when I took over managing eBay, it was 100% an auction site. And there were a lot of people who were not attracted to the auction format. in particular women were not attracted to the kind of the competitive last minute, slug it out, win the bid process. So we had this incredibly innovative concept to offer fixed price retail like everyone else.

Now, a number, a large portion of the community was convinced we're going to kill the golden goose. That if you put fixed price next to auctions, you'd constrain how high auctions would go. There were all kinds of doomed day things. We just had a passion and thought, you know, that we were talking to buyers. we thought it would expand the universe, we thought the two were potentially compatible. So we presented them with something. Now, if it didn't work, we probably would have unwound it. But I do think in that there's cases, particularly in marketplaces, where you have to have

that strong point of view on, this is the right way to go, because there are people who are heavily resistant to change, and you're often changing something they're passionate about, which kind of ups the ante a little bit. As more and more value moves to these marketplaces, and I know Airbnb, there's billions and sort of value that goes through it, and, you know, we're going to see more and more of this in other marketplaces. But how do you protect against fraud or can you protect against fraud? I mean, it's absolutely critical. And, you know, I'd probably be parts that the phrase terminology we always use is trust and safety, and they're different. Safety is the reality, how safe is the

experience and you always want to make it more safety. Trust is how do users perceive the safety of the experience? And both are important. You could actually have safety without trust. You can have, you know, trust without safety. But the two, I typically work in tandem. And, you know, for, I mean, for any time you get meaningful exchanges of money going both ways, you have to work on it. Trust and safety is in areas that's evolved a ton since I was actually, you know, early on at eBay. Early on at eBay, everyone in the internet wanted to be anonymous, you know, so there were usernames and, you know, eBay didn't necessarily want people to interact a lot directly. So we were a content.

to it that, you know, kind of kept both sides relatively anonymous. That's just changed completely. Airbnb has, you know, it's all about true identity, your social network. You know, they verify often, verify a lot of users that they are who they say they are through some online verification techniques that are pretty elegant. And so, I mean, there is nothing more important in a marketplace than people both being safe and feeling safe. Another part of that is the seller reviews, right? So nowadays, the reputation of the seller is critical. And sometimes it also translates across marketplaces. There's still not a way to do that effectively. But for example, in the case of Airbnb, the customer does look for, you know, what's the rating? And they also

try and discipline the reviews by response times. And your listings get featured, depending on how well you've been doing as a seller. So that's another incredible way to sort of make sure that, you know, you're making the buyer experience more seamless. could be incredibly powerful on both eBay and Airbnb, the sellers with great reputations earn more. They're selected more. They can charge higher rates because they're both trust and safety. They're a trusted source to prove an experience. If 20 other people adored this host and the place, I'm probably going to like it too. If no one's reviewed that, you know, it's just it's a little bit buyer beware. Yeah. And it's different than the sort of static, you know, stamp of a

that was used in other marketplaces, right? Like, it's continuous. It's like yesterday this person went there and had a great experience. I trust you even more, right? Yeah, yeah. What about payments? And the reason I asked us, so Apple Pay,

you know, it hasn't been rolled out too broadly, but who should be kind of holding the bag if there is something that's not quite right or money goes away or awry or something? I mean, ultimately, I think the marketplace has to put their money. their mouth, money where their mouth is. If they're saying it's safe, they pretty much have to get a long way towards making sure it's safe and guaranteeing it. It's scary as

all get out. Because early on, I mean, anytime you have strangers sending money to strangers in many meaningful quantities, you're going to get attract fraudsters. So, you know, that can range from the, you know, the idiot down, you know, across the highway who, you know, we used to have guys who would steal money on eBay and have the money sent mailed to their home address. You know, it was not really hard to find those guys. And the police showed up shortly there. Yeah, contrast that with, you know, most of the fraud on eBay and PayPal was organized crime typically out of Eastern Europe where they had incredibly talented computer science professionals

who lacked a lot of commercial opportunity. So this was how they were earning their living. And keeping up with those guys was really hard. But you had, in reality, it was an arms race to make the site safe. And then ultimately, you know, at eBay, we did the buyer protection program. Airbnb did the Airbnb guarantee. You have to, in reality, make it safe and then create that trust feeling off and through putting your money where your mouth is. Yeah.

And I think here the buyer expectation has also evolved over time, right? If you look at the Craigslist days, you just saw the listing. and then the rest of the interaction or the transaction happen outside of the Craigslist platform. But as marketplaces have evolved over time, the buyer expectation for what the marketplace offers has only increased. And for example, if you look at second-hand marketplaces today, like we see quite a few in clothes, the buyer does expect the marketplace to make sure that the clothes are well curated and looks like what it is in the photographs. So there's a lot more work the marketplace does these days, and therefore the payment flows are also going through the marketplace. I mean, is part of the velocity that you're seeing in marketplaces because, you know, the precursors, eBay, and I want to actually ask about Amazon how this fits into it, but we're used to, you know, these marketplaces now and we, at some level, are more comfortable?

You know, it's an interesting question. I mean, it's essentially a superior business model because, you know, at least from the, you know, central, for most companies and most verticals, if you're doing a two-sided marketplace where both sides of the marketplace are doing all the, work and you're orchestrating, you know, they're typically very high margin can grow very quickly because there's, you know, no physical constraints on their growth. And so, I mean, they can be some of the best business models you could ever imagine. I mean, they're beautiful. I mean, eBay's, I think, we've got operating margins of 40 or 50 percent. Right. And we have the tools in place to sort of initiate or allow for all kinds of marketplaces. One of which, I want to, like, Like, because people have taken a run at this for a long time as used cars. Like, are we going to start to see that, I hope, become more efficient or less fragmented?

Yeah, so there are new companies that are emerging in the used car marketplaces. I think the biggest friction in the used car marketplace used to be that, you know, you would either go to a dealer, there was no price transparency, and even when you knew the price, you didn't know the quality of the car, right? Everything was so fragmented, and it was, it's a very big ticket item, and people, you know, wanted someone to back it. So what you're seeing now in the used car marketplace is, you know, mobile people marketplace have all enabled that concept to do it better. For example, the ones we're seeing right now, they send, you know, mechanics to your home if you're trying

to sell your car. They help you price the car. They list it for you on the site. And as a buyer, you know, you can decide by either doing a test drive or, you know, you know that that organization has that marketplace has guaranteed and has actually, you know, had mechanics check the car, right? So if you see that those types of marketplaces, they actually changed the way the user used to buy. They've really improved the entire experience. Before I had to work with the dealer. I had to contact the buyer.

I had to contact, you know, a mechanic. I had to work with a lot of different parties while now I just work with the marketplace. I mean, again, it's another example where the analog process was incredibly inefficient. There's only two places that anyone makes money in the car. business reputedly. One is service and the other is the resale of used cars. New cars are the lost leader to get those two businesses. So aggressive entrepreneurs are trying to use digital to address inefficiencies. Well, let's hope they succeed. Amazon, how does this fit into this kind of whole universe of marketplaces? I mean, Amazon adopted the marketplace model. Actually,

it was funny. When I was at eBay, there was a company that launched that got a lot of attention, an incredibly smart launched done by an entrepreneur named Josh Koppelman, who now is leading at first round capital. He registered the URL Ebazon because he thought half was a hybrid between eBay and Amazon. And then basically also hoped there would be a bidding war between the two companies, which came close to being true. We paid a lot for half. But what Amazon has done, the insight is the marketplace,

they basically emulated half. I won't say copied because that would be pejorative. On to the listings in their marketplace, people, you know, they have an SKU and this is the Amazon listed and then other people can list too. You know, one of the secrets of it, dirty secrets of Amazon is their first party business isn't growing very fast at all. Their third party business is exploding. And a lot of people think that's where Amazon makes most of its commerce margin from. That the third party commissions where they, again, have very little cost to serve. You know, some of them they fulfill.

But, you know, that is, you know, that is their growth engine in commerce right now. They've got a few others, too. That's an incredibly well-managed company like the cloud, you know, Amazon Web Services. But, you know, their merchandise strategy, their commerce strategy is a third-party strategy right now. Right. And it's another sort of group of proof points around the power of network and marketplaces, et cetera. And they also have guidelines for shipping and they constantly monitor the seller rating. So all the principles that we talked about, you know, still are.

and it has to hold true for that marketplace to do well. Any fragmented or inefficient areas of verticals that you would like to see tackled next or that you are seeing? I mean, they're just showing up everywhere. I mean, if you look at one of my favorite infographics is a picture of the Craigslist homepage with each vertical with the marketplace that's attacking it. So short-term rentals would be Airbnb and ride sharing is Lyft and Uber. But, I mean, Craigslist, from my search, is being hollowed out.

I mean, they're not innovating. They're not providing a great user experience. So entrepreneurs are going into each of those verticals and building highly tailored, highly specialized, high value-added experiences that are resonating with consumers. So I think Craigslist indirectly is spawning tens of hundreds of billions of dollars of market cap. It's just market cap that, you know, that capitalist entrepreneurs might have tried to capture for themselves. Right. Well, Anu, Jeff.

I will be looking for my furniture site, my used car site, and every other marketplace I can think of. Thank you guys so much. Thank you. Thanks, Michael.