a16z Podcast - The Next Wave of Marketplace Startups

Episode Date: March 24, 2021

In the tech world, marketplaces are a hot topic. That term—marketplace—encompasses a huge swath of services we use every day, from grocery delivery to online shopping to remote learning. How have marketplace dynamics changed since pre-pandemic, and what COVID-propelled consumer behaviors will persist into 2021 and beyond?  In this episode, we discuss the most promising marketplace companies and categories on the rise, based on data from the Marketplace 100, a ranking of the largest and fastest-growing consumer-facing marketplace startups and private companies.The report provides rich fodder for looking ahead at the future of marketplaces: Which companies are on a tear and which are locked in close competition? Which marketplace categories are poised for growth, and which may make a comeback? Host Lauren Murrow is joined by a16z consumer team partners Connie Chan, D’Arcy Coolican, Jeff Jordan, and Sriram Krishnan. 

Hi and welcome to the A16Z podcast. I'm Lauren Murrow. In the tech world, marketplaces are a hot topic. That term marketplace encompasses a huge swath of services we use every day, whether ordering groceries or restaurant delivery, shopping online for fashion and streetwear, taking online classes, or even getting weed delivered. But how have marketplace dynamics changed since pre-pendemic and what COVID-propelled consumer behaviors will persist into 2021 and beyond? We at A16Z have long been obsessed with marketplaces, company building, analytics, endlessly seeking out network effects. So this week, we launched our now annual Marketplace 100, a ranking of the largest and fastest-growing consumer-facing marketplace startups and private companies. The report, which you can find at A16Z.com slash Marketplace 100, is a data-packed breakdown of an unprecedented year. It also provides rich fodder for looking ahead at the future of marketplaces. Which companies are on a tear and which are locked in close competition? Which marketplace categories are poised for growth and which may make a comeback. We discuss all

these questions in this podcast with A16Z consumer team partners Connie Chan, Darcy Kulikin, Jeff Jordan, and Sri Ram Krishna. As always, none of the following should take in as investment advice. See A16Z.com slash disclosures for more information. The first voice you'll hear after mine is Sri Ram, followed by Connie, then Darcy. Off the bat, what jumps out at you looking at the data this year? For me, I think there are a couple of things which now look obvious in retrospect, given everybody's been stuck at home for the last year. One is people have a lot more free time.

And second is when you're not able to spend money the same way you've been able to before, you try and find an alternate way to spend and invest it. So I think if you look at the rise of companies like Masterclass, it makes sense that when you are spending a lot more time at home, you want to invest in yourself. So I think that's one interesting trend. You see with several companies here. And I think the second one is tied to the idea of you're not able to spend money in the categories that you were able to do in the past. So you can invest and spend money in new categories. So I think the rise of things like cameo speak to that

too. That was the fastest growing marketplace category overall, celebrity engagement. What do you attribute that to? And does that affect your thinking on other experience-based marketplaces? For marketplaces, it's about growing supply and demand and lockstep, right? And so for a lot of the things that happened in marketplace, there was a growth in the demand side for those things. But cameo is a really interesting one where the supply of the artists, the actors, the famous influencers, they were the one who all of a sudden had a bunch of free time and saw cameo as a great way to still make money. And when all of a sudden got so much more new supply and then more time from each source of supply.

You just now have a much stronger value proposition. My take on this is, if you look at the last decade of social media companies, the historical contract between the large consumer social platforms and these influencers has been, you give us content and we'll give you distribution. That's been the deal. But in the last few years, there's been a new behavior of, okay, but is there a monetary transaction where you can engage directly with your fans? And I think Patreon is one example with tipping and everything.

thing that Twitch does has been another example. And with Cameo, I think what you're seeing is celebrities are at home too. So a lot of your typical revenue streams don't exist. And on the other hand, there's this kind of new pattern where people are like, hey, I'm willing to spend a few dollars to support my favorite celebrity or spend a few dollars to give Connie a shout-out from her favorite movie star. Connie, who's your favorite movie star? It's a Chinese singer. Well, okay, I'm pleased to spend $500 and give Connie a shout-out. So you're seeing this across multiple spaces now where a shift from advertising-based monetization to having creators directly

have a monetary relationship with their fan base. I also feel like during COVID, being part of this new direct monetization from your fans with micro-transactions or small transactions also became more socially acceptable. I think one part of it was it became less taboo on the supply side, but it also became much more desirable on the demand side and that people wanted to support these creators who were potentially not performing or potentially not generating any revenue. So there was a change in the mindset of it on the demand side as well. You don't just see that in Cameo, but you also see that in Ban Camp and some of the other people that grew really quickly. So 25 companies were brand new to the Marketplace 100 this year, meaning they didn't

make the less last year, but they achieved a certain level of scale this year. Many of them are startups, so maybe some of them are companies that are not yet, household names. What are some of the most interesting in your opinion, whether that's the business model or what it says about consumer behavior in what we're spending money on. I love the assurgency of outdoor sites. Makes perfect sense during COVID. We're in Hip Camp, but also you see Tentor and glamping hub. It is fascinating that things can take off during COVID. I'm going to say whatnot, which is indicative of the rise of collectible. Collectible is now, because it's all kinds of things like Cryptopunks, right? But also just things like Pokemon cards, Bunko Pop, sports cards.

Part of that might be a function of people having more time, but also innovating on new formats for shopping. So rather than like a flat one photo listing, you have this interactive live video experience, which I think takes the experience to a completely different level than, say, an eBay listing marketplace. It kind of reminds me of the sneaker marketplaces back a few years ago, and that it's these really passionate niche communities where the activity is split amongst different platforms, some of what's happening on social networks, some of it's happening on different marketplaces, but it's a very strong community and a very passionate community. And then they're taking this new marketplace experience, which in what not case is live streaming,

a new format that works well with their inventory. And for Goat and StockX, that was verified sales. And so it was a different layer of the marketplace and a new structure to the marketplace. but it then unlocked this new community on the singular platform, which is a really cool trend that you're seeing with collectibles as well. And I think another what is well-timed during COVID is Good Dog, which is a marketplace for people to find animals from trusted breeders. And that one grew pretty tremendously through COVID. But they take what was historically a local, maybe regional market of breeders,

and then they expand that nationally. And then they also build trust, which is another huge thing that can accelerate a marketplace very, very quickly. Yeah, Darcy, weren't you in the market for a pandemic puppy at one point? They're hard to find. There is like year-long wait lists for them. I don't know if puppies or collectibles are harder to find right now. I think the other trend which stands out to me in terms of new companies is Westier

Collective, which is a vintage shopping company based out of Europe. So I grew up in India and growing up, the idea of used clothes secondhand was always seen as something you would do when you can't actually offer new clothing. But I think that has really changed the side guys. last few years where the themes of sustainability, the themes of doing what is the right for the environment, that is driving this new momentum towards thrift shopping, finding used clothing. It's always been affordable, but now there's a social cause motivation behind it too, which seems new in the side guise, in a way which maybe wasn't a decade ago, which I think is notable.

And I think what's interesting with those marketplaces, you're not shopping necessarily from like the local Goodwill, you're shopping, secondhand clothing from another individual. And so in some way, it's the function of, yes, there's more acceptance of secondhand clothes. But there's also a desire for everyone to have their own small businesses, everyone to be able to generate revenue with all these new internet tool marketplace. So one thing that's interesting is that by looking at the companies, we're also able to notice these broader trends, right? So let's talk about some of the emerging categories that stand out.

We just talked about secondhand fashion. So that's companies like Kurtzzi, D. Pop, and Vestiere Collective. Another one I want to talk about is the rise of niche or specialty food and beverage companies. So companies like Chau Bus, which specializes an authentic Asian food, Mercado, which is independent grocers and specialty food shops. What does this say about are eating behaviors or changing consumer preferences? Obviously, the man got supercharged during COVID for food and restaurant. And then that let us get deeper into the supply pool, into more specialty restaurants or Longdale restaurants.

But then what has become clear is now there's enough demand and enough supply to build a more vertical oriented or niche solution. And you don't just need to rely on the horizontal platforms as well. So you can have something like Uber Eats and DoorDash, which are like massive horizontal platforms. Then you can also have something like Chau bust, which is much more vertical. And then when you're vertical, you can just have a better experience that's more designed for that specific verticals. So you can order plates from multiple restaurants and the same delivery.

because you've got enough density on the platform to actually do that, or you can have a UX that's specifically designed for that platform. And so as the top line number of food delivery kind of kept growing and growing, then the niche ones became big enough to sustain their own platforms and their own marketplaces. Yeah, like better search filters that are specific to that type of food, for example. So a lot of this is not just an increase on the demand side, but it made supply much more willing to get on board to. Like restaurants with their revenue from in restaurant dining wiped out,

we're much more willing to consider these online delivery platforms. And so I just can speak for the Chinese local restaurants around me. A lot of them were not on DoorDash prior to COVID. But because in restaurant dining was taken away as an option, they're all much more open to any of these third-party marketplaces. Something like half of food pre-COVID was consumed in restaurants and half was consumed at home, that changed. And so the digital alternatives for home food consumption,

and be they be a mess like Instacard and DoorDash and Uber Eats or new entrants. I know I was looking very much for assortment and new things to consume. You even ordered ramen from the East Coast, didn't you? I did. I'm Goldbelly. How much of this behavior do you think snaps back to the way the world was in February of last year? Or how much of it do you think is a permanent change? You're like, hey, you know, I kind of like ordering from places that I haven't heard of before.

I mean, it'll be a fascinating question and it's super hard to answer. Did people discover a wonderfully new way to free up a bunch of time or was it primarily safety driven? One real challenge to the immediate bounce back will be the number of small businesses that got destroyed by COVID. I saw some morbid stat along the way from Yelp saying over 100,000 small businesses had permanently closed their doors and that's just the ones who reported it to Yelp. And so the chain restaurants did pretty well throughout COVID, primarily on takeout, the small business owner got destroyed. I think there'll be a large vacuum for a while and hopefully small businesses come back. But there is definitely going to be a supply side imbalance for a while. One thing that was striking this year was the extreme concentration of GMV at the very top of the list. So we saw some of that last year where Airbnb, DoorDash, Postmates, and Instacart accounted for 76% of the Marketplace 100's total GMV.

And then, of course, over this past year, three of those went public or were acquired. So they're no longer on our list. This year, that concentration in GMV was even more pronounced. So one company accounted for just over 70% of the list GMV. So to what do you attribute that? And do you think that concentration at the top will persist in 2021? Or will it get spread around a bit? I think you're seeing a little bit of a historic graduation of the smartphone first generation

company. Airbnb at DoorDash and Poshmark, let go, all disappearing off the list, just created a bit of a vacuum that Instacart was the last early winter standing. I do think that the online marketplace model is extremely robust, and there will be other companies growing in to take their place. And that's an interesting question, because if you look at the data, so beyond the top three marketplace companies in the ranking, no company accounts for more than 1.5% of consumer spend. And then no company numbers 4 through 100 are separated from their immediate neighbors by more than half a percentage point. So that indicates that the competition is really

intense below those top three. How does a marketplace company break out to become numbers one, two, and three? I mean, personally, there are a few things I look for. One is if it works, it can be big. And sometimes I can surprise you early on. I didn't think Airbnb. When I first heard of the concept, I didn't immediately imagine it being tens and tens of billions of dollars of GMV. Typically, marketplaces thrive where there's fragmented participation, particularly in the supply side. You don't want a very concentrated supply side because then the suppliers have power.

But if you do the hard work of aggregating a very fragmented supply base, it can become extremely powerful. Open table would be an example of that where the average restaurant owner who listed on Open Table when I managed it, the median was one restaurant. It took enormous amounts of effort to get all those restaurants onto open table. Once they're on, it's pretty powerful. I think another thing to call it, too, is it a category that has tailwinds? And there's a category that's kind of growing in the aggregate.

If you look at something like online food ordering, it's kind of lifting all the boats that are riding that way of things like streetwear and, you know, sneakers and stuff like that is another example of that. Let's say next year we don't have these big giant companies at the top of our list. what do you think are contenders to move up into the top 10? I would pick masterclass. I think the secret about them is they're an entertainment company which feels like an education company. You're consuming content, but you don't feel bad about it. You don't feel guilty about it.

It doesn't feel like carbs. It feels like protein at the end of it. And in terms of social prestige, it's one of the few places where I see everyone from a CEO to a sports celebrity go, which I think rivals being on Netflix in terms of social status and currencies. Over the course of 2020, some of the companies were able to pull off both high levels of growth and high levels of GMV, which is rare and rare still in the midst of a pandemic.

And it's kind of interesting because it's across various categories. Is there something that entrepreneurs can take away from those companies that did achieve some success over the past year? I mean, typically they are inversely correlated. It gets harder and harder to grow, the bigger you get, just because the incremental growth you have to generate just gets so incredibly. incredibly large. And so the companies who are at scale and can achieve strong growth, that's pretty special performance. And if they can persist for a while, they then become the next Airbnb's and door dashes. The company that moved the most from last year to this year was outschool. It jumped 59 spots from last year's ranking to this year's ranking. Some of that

is obviously due to our kids all home out of school during COVID. But how do you assess which online education companies are worth watching? What are you looking for here? When we look at online ed tech, we look for things that either make the quality of education dramatically better than what you could afford in real life or things that make the type of education you can access dramatically cheaper than what you could get in real life. Because as you know, COVID has dramatically accelerated online ed tech, but we're looking for things that are going to persist in behavior post-pandemic. And marketplaces work great in online ed tech because basically you are opening the supply of tutors beyond your small five, ten-mile radius. So maybe I can't get a great

chess coach where I live, but I can probably find one online that can teach my kids when they grow up one day. Or maybe if I live outside of Silicon Valley, it's hard for me to find a computer science tutor. And so I can go to Jimmy Learning and find a CS tutor there versus having to rely on someone who lives close by. One company which fits this pattern in India is a company called Baiju, B-Y-J-U. India has a huge focus culturally on education and a lot of teachers in smaller towns. And Baiji's been able to get them access to people who need coaching. And one of the things which really surprised me was a lot of the customers are actually here in the United States.

So you basically have somebody in the U.S. who wants like a math tutor and you're being taught by somebody in a small town in India, which just happens to have like a large focus on STEM education and you have like a huge supply of trained teachers. So it's just like a really fascinating phenomenon. And in that example, it would be so much cheaper too. So we noticed some interesting shifts in consumer spending over the course of 2020. And that meant some companies would see no demand in one quarter and then an explosion in the next quarter as the disease ebbed and flowed and restrictions changed. For example, Zola, the wedding.

marketplace saw a big Q3. I think as people started to look ahead. Wholesale at the end of the year was huge after having a meager first quarter. Furniture saw a spike in growth in the second half of the year. Same with moving services. Whereas normally we'd probably expect to see growth that was fairly steady. There was a lot of up and downs this year for various categories and companies. Where does that leave these companies going forward? The key thing from the marketplace's perspective is, one, can they insulate themselves from that changing consumer behavior? Or can they tailor their concept enough to be agnostic to whether people are locked down or not? I've lived it through Airbnb, for example. Immediately early in the pandemic, the business just came to a stop

because international travel came to a stop and cross-country travel came to a stop. And then consumers adjusted and the platform was flexible enough to adjust it. So instead of long distance, international trips. People were taking long duration near-term trips. So a lot of these companies are going to be sensitive to what's happening at the macro. And some companies made progress in doing that, responding to, okay, if we got dealt a bad hand, what do we do with it? I think a lot of building a marketplace is hitting that tipping point where you have enough liquidity. You have enough supply. You have enough demand to actually make the marketplace work, to make the union economics work. And oftentimes it's about getting to enough scale in whatever

market you exist in. And so I think to a certain extent, what 2020 did is that let a bunch of companies get to that tipping point and get to that level of marketplace liquidity, that even if demand ebbs and flows going forward, even if it's not at the place it is today, they've still crossed the threshold. And so I wouldn't say they're safe, but they're in a much more advantageous position than they were in 2019. What do you see as persistent trends when it comes to consumer behavior over the past year, in your opinion? Do you think the past, the past year has been a catalyst for any long-term changes in consumer spending behavior? Or do you think we'll see a whole other reset? I think a lot of the new habits will actually process. Maybe groceries

and food delivery won't be at the same level. But I think a lot of people built that habit now up for multiple months. And as you know, if you can continue a habit for a few weeks consecutively, it's hard to completely revert back. I do think also a lot of online ed tech was accelerated and pulled forward. Same thing with secondhand clothing. I think one, two, we've seen over the last year is people investing in things because it seems fun and there is a entertainment factor it could be a game retailer because it seems fun to do so or it could be you know fractional shares of an old trading card or it could be a piece of digital art that you know you're like one of 50 to own but i think the aperture of things that you want to invest in has just

expanded dramatically in the last year from just say stocks and bonds and real estate then what what it used to be before. I think we have the kind of the start of people having fun in investing in some of these new categories again. And I think that trend is probably going to persist a while. That's something you've talked a lot about, Connie, especially in the shopping category. Has that been underestimated?

And do you think you'll see more growth? I think we'll see more growth in terms of fun shopping experience. Whether it's social, live, short video. I know it's maybe audio. I laugh because I haven't seen that yet. Pets too has been on the rise. Pets are one of those secular trends. Pets are the new kids for a lot of people.

So I would expect to see pets continuing to rise. Pets had a ton of wind at their back before COVID. I mean, as youngens wait longer to get married and have kids, they have turned a pet. So pet ownership was already on a binge. And so throw in COVID on top of that. And then the willingness to spend on experiences for your pets is also very high and growing.

I remember when we were early investors and dogs, vacay. And it was a pretty hotly contested investment conversation because the people with pets kind of understood the, okay, you want to spoil your pet and do all this. And people had pets growing up but didn't have them now. We're like, no, we used to go on vacation and just leave the dog in the garage for two weeks with a whole bunch of water and a whole bunch of food. And you're like, oh, what did you come back to? Oh, my God. And so I think the pet category is definitely one poised for a continued strength. The other one I'd make a plug for, health and wellness, whether it's therapy, whether it's coaching, whether it's fitness, whatever it is. Everything in that category just seems to be moving

really quickly as something that people are pulling for. And then on the mental health standpoint, we have seen so much innovation coming in mental health. I think definitely accelerated by the pandemic and the challenges of dealing with it. But I think a lot of the stigma on talking about mental health has gone away pretty darned quickly. And I think that's a permanent change. the camping and the RV trend will continue. I think outdoor travel and marketplaces for outdoor experiences feels like one of those things that hit its moment during COVID and a big part of that will persist. Whether it's RVs, whether it's campgrounds, whatever it ends up being. I think there's some version of this

that we'll keep going and probably see the network effects on one or two of the platforms really take hold. I bet pro on outdoors and a con on RV. I think a bunch of RV was out of necessity, whereas I like to camp, and the reality in the United States is it's really hard to find a good campground on the public sector. And, you know, the good ones sell out immediately, their ration, things like that. So I think there's going to be a lot of opportunity for companies like that. So we talked about behaviors we think will persist that were accelerated through the pandemic. But the pandemic also upended a lot of categories like ticketing, for example, or childcare or office. space or traditional travel. Do we think that those categories will make a comeback? Certainly.

I mean, the demand for child care has only gone up. And maybe categories that as a whole decline, but where the marketplace version actually becomes more attractive and maybe office space is one of those examples, there will probably be a decline in the amount of office space in the United States that's actually kind of rented over the next 2021 versus 2019 kind of thing. But, you know, for the marketplaces that are offering more flexible office space or something like that, even though the top line number might come down, the marketplace might actually bounce back to heights that they're much higher than they were pre-pandemic. What do you think about the travel category, Jeff?

The tourist segment, I would imagine, should come back pretty fast. I am not as optimistic about business travel coming back. I think a lot of people just discovered that instead of going to a board meeting in New York, I can attend at 90%, 110% efficacy and only spend three hours. hours doing it instead of the two days it would have taken before. So I think it's going to be a tale of two worlds on that. I've read surveys saying business travel may not come back, if it comes back ever, may not come back for years at the levels it was before. I think there are two schools of thought on business travel in the future. One is we all learn that you don't need to get

on a flight to do one three-hour meeting, which is much more efficient to do from a bedroom over Zoom. The other school of thought is all it takes is one aggressive salesperson to go fly. in-person and close a hard deal, which then very quickly everybody else will wind up doing that. And of course, it's not one or the other. There are lots of kinds of business travel. But I'm just curious about the psychology of business travel and what you expect to see in next year. I think you're right. I think different parts of business travel will come back quicker.

That said, a lot of our enterprise companies in the portfolio were able to continue to close business, some at accelerating rates during COVID, which early in COVID, we were very skeptical. of their ability to do that. There are a lot of good online convention software out there right now that partially replace those use cases. So it'll be interesting disaggregating it into specific use cases, but a whole lot preceded way better than we all thought it would when shutdowns first happen. And it's also conditional on the company you're visiting if you're the sales agent going back to the office, right? If they've gone remote and if they don't have a headquarter anymore, and you have no place to visit. But they're all in Miami. So you just,

You just have to have to. What are some market list categories you think will be big in 2021? Are there sleeper categories? Collectible broadly expressed. The non-fungible token thing is taking off faster than like anything I've ever seen. Different artists are selling artwork. We had billions of dollars in minutes. And so there already was the trading card craze that was leading to a lot of analog

businesses kind of blowing up in a good way. And if you throw digital on top of that, I think that'll be a very interesting category to watch. I think you'll see stuff like tickets. I mean, obviously, that's been decimated with COVID, and you'll see that come back pretty aggressively next year as well. See, if you look at historical patterns, right after the Spanish flu, you had the roaring 20s, which had, to put it mildly, a lot of consumer spend in activity out in the real world. So I suspect there's just probably going to be the spent up energy, which is going to explode out into people wanting to go to a concert again or go experience a football game again. I would do anything to experience a Marvel movie on opening night and just be swept up in the moment. I would pay a lot of money to be able to go experience that.

So I think you're just going to see an explosion in consumer behavior. So be it in a club and the DJ drops a beat or be it cheering a touchdown or a dunk, I think people want to feel that connection again. All right. Well, thanks, y'all. Thank you for joining us on the A16D podcast. Thank you. Thank you for having it.

Thank you. Thanks all. Thanks, guys.