Category Archives: Marketplaces

UberTREE

A theme of some recent posts (see here and here) is that Uber is Google and everyone else’s response to Amazon’s last mile plans (Amazon Fresh and same-day delivery).  So in a week of drone chatter and after Uber’s ultra-cute cats and ice cream delivery promotions, comes a more serious sounding, but still whimsical partnership to deliver Christmas trees from Home Depot in ten cities.

Instead of spending your weekend wrestling with a tree from the not-so-near farm or slushy street corner, kick back, pour yourself an extra glass of eggnog and watch your app as Uber takes care of the heavy lifting. With the help of The Home Depot and a bit of holiday magic, Uber will deliver a live tree to your doorstep with the touch of a button…

If your timing is right, you’ll have a tree, stand, and an Uber gift delivered to your front door within minutes

A national retail partner, a much shopped for product this week, and a competitive price ($135 compared to $149 and up otherwise as listed on the Home Depot price).  It is becoming clearer where Uber is going and why Google set the valuation for Uber so high.

One question that will be interesting is what vehicles Uber is using for the deliveries.   Given Uber is saying that customers might have the product within minutes, they might have trucks circling the city loaded with Trees rather than point to point deliveries using their regular cars.

The selectiveness with which Uber is doing its last mile tests is an interesting contrast to the “if we don’t do it all right now and fast, someone will beat us to it” mentality.

Fertile Gardens for Emergent Behaviors

Great new platforms strike the balance between being designed to support a well-understood use case, but being fertile soil for the imaginations of the user base to run wild and create new ones.

This is a theme inherent in the founding of Twitter in Nick Bilton’s telling of the story.  There was a large gulf between Jack and Ev’s ideal use cases for the platform, but the users both found a nearly infinite number of other uses in addition to other behavior such as the retweet or the hashtag.  Facebook becomes a Happy Birthday platform.  Soundcloud finds a use by public companies to transmit earnings calls.

You cannot think of every use case for your platform, nor should you.

Drafting

Content craves a network, not elitist isolation, which is why clever harnessing of content can drive the creation of a social network.  This is the Academia.edu example.

In academia, each field of study has a prestige journal–or two or three of them–and they guard their articles jealously. This is how they make money. Price worked around this. There are actually three stages an academic article goes through. The first is the precious baby produced by the authors. This is the pre-print version. Virtually all journals permit authors to do whatever they want with this. Then that baby is sent out for review and learned peers weigh in with comments and these are incorporated into the paper. Revisions can be minor or major. This is the author version and about half of all journals permit authors to publish it. Lastly, there is the final published version of the article in journal format. Journals guard this closely and do not permit easy dissemination.

Academia.edu encourages researchers to post their pre-print and author versions of papers. Most of the important information is in these and it becomes immediately accessible.

Drivers Before Passengers

Ryan Sarver – in today’s AVC comments — with another addition to examples of two-side marketplaces that required heroic measures to get spinning (to add to Yelp and AirBNB):

Uber is another fun example of a marketplace that I’ve enjoyed watching grow. In it’s earliest days in SF they paid a few drivers full time to drive around the city and wait for their few users to search for a ride. Once there was enough of a market on the user side, they could switch the drivers over to the model it is today where they get paid per ride. This strategy was a big factor in their early success. Imagine if you opened up the app the first few times and there weren’t any cars. You would never think to open it again.

I’ve watched too many engineering-driven startups think that by building a great product, both sides of the market will just magically appear and in the exact proportion needed. Sadly that is rarely the case and it takes some unnatural propping up on one side or the other until the flywheel gets going.

 

Narrowing Spreads: Clearinghouses and Derivatives

The song and dance around moving markets from opaqueness and the results, as seen through derivatives reforms.  The FT:

Faced with the reforms, banks warned that trading would become more expensive for companies and funds and excessive risks could become concentrated in the clearing houses. At stake was an estimated $50bn in annual global banking revenues from trading over-the-counter derivatives.

In recent months, clearing has become mandatory in the US and trading volumes have shifted to electronic platforms. The spread between bid and offer prices in relatively common instruments such as interest rate swaps has narrowed by as much as 60 per cent, according to some market participants.

 

A Yelp For Life

Underscoring that it takes a “manual breath of life to overcome a highly fragile situation at birth” in order to form a living network is Jeremy Stoppelman’s technique for entering a new market.

“When we turn on a country like Turkey and say we want to go to Istanbul, there is no content in the country. What we do is to seed the site. We do a bit of content through paid people, freelancers. The site is closed to the public until there is enough content. That is phase one,” he said.

“Phase two is community building. We are literally trying to get the first few users up on the site and meeting them and getting it to grow and growing that early base. Over time that turns into a much larger group, thousands or many thousands, in more mature markets. They are generating lots of content.

“During that phase the only ongoing expense is the community manager, so there is a marketing budget. One person for Istanbul — that sounds expensive if you are doing it for 100 different markets, but it is fundamentally pretty leveraged. The audience size for a large city could be several million people.”

Once there is some content on the site, Mr. Stoppelman said, there is a snowball effect as that content gets picked up by search engines and sends users to the site.

“Some of those will be natural-born Yelpers and they find it great that they can write reviews of local business and all sorts of things. They sign up for the site, experiment with it and get into it,” he said.

“It takes some time — maybe as long as a year or two — before you get the depth of content that the average person picks up the Yelp app and starts doing searches and finds all the things they are really looking for.”

The MarketPlace Creation Story

At its best, a marketplace has something self-sustaining and life-like to it, with buyers and sellers coming together and re-generating themselves.  In another great essay by Paul Graham, he explains that even those marketplaces that are most life-like today had a creation story that involved a manual breath of life to overcome a highly fragile situation at birth.

Manual:

One of the most common types of advice we give at Y Combinator is to do things that don’t scale. A lot of would-be founders believe that startups either take off or don’t. You build something, make it available, and if you’ve made a better mousetrap, people beat a path to your door as promised. Or they don’t, in which case the market must not exist.

Actually startups take off because the founders make them take off. There may be a handful that just grew by themselves, but usually it takes some sort of push to get them going. A good metaphor would be the cranks that car engines had before they got electric starters. Once the engine was going, it would keep going, but there was a separate and laborious process to get it going.The most common unscalable thing founders have to do at the start is to recruit users manually. Nearly all startups have to. You can’t wait for users to come to you. You have to go out and get them.You’ll be doing different things when you’re acquiring users a thousand at a time, and growth has to slow down eventually. But if the market exists you can usually start by recruiting users manually and then gradually switch to less manual methods.Airbnb is a classic example of this technique. Marketplaces are so hard to get rolling that you should expect to take heroic measures at first…

Fragile:

That initial fragility was not a unique feature of Airbnb. Almost all startups are fragile initially. And that’s one of the biggest things inexperienced founders and investors (and reporters and know-it-alls on forums) get wrong about them. They unconsciously judge larval startups by the standards of established ones. They’re like someone looking at a newborn baby and concluding “there’s no way this tiny creature could ever accomplish anything.”

It’s harmless if reporters and know-it-alls dismiss your startup. They always get things wrong. It’s even ok if investors dismiss your startup; they’ll change their minds when they see growth. The big danger is that you’ll dismiss your startup yourself. I’ve seen it happen. I often have to encourage founders who don’t see the full potential of what they’re building. Even Bill Gates made that mistake. He returned to Harvard for the fall semester after starting Microsoft. He didn’t stay long, but he wouldn’t have returned at all if he’d realized Microsoft was going to be even a fraction of the size it turned out to be.

Freelance Tagging

Netflix has a team of 40 freelancers who tag incoming TV shows and movies, so it’s a manual process but variable cost.  From the Wired article re: Netflix:

We have more than 40 people hand-tagging TV shows and movies for us. These are typically freelancers who do this to supplement their income. All of our analysts are TV and film buffs, and many have some experience working in the entertainment industry. They obviously have personal tastes, but their job as an analyst is to be objective, and we train them to work that way.

What You Are Really Watching

Sometimes the customer is right and sometimes she isn’t.

In designing search algorithms, it is important to determine when a stated preference is real or just aspirational.  Take Netflix’s experience, revealed in an interview with their algorithm gurus:

Why do I see so many three- or even two-star movies in my recommendations?

Gomez-Uribe: People rate movies like Schindler’s List high, as opposed to one of the silly comedies I watch, like Hot Tub Time Machine. If you give users recommendations that are all four- or five-star videos, that doesn’t mean they’ll actually want to watch that video on a Wednesday night after a long day at work. Viewing behavior is the most important data we have.

Amatriain: We know that many of the ratings are aspirational rather than reflecting your daily activity.

Gomez-Uribe: A lot of people tell us they often watch foreign movies or documentaries. But in practice, that doesn’t happen very much.

It’s important in getting a stated preference to know whether someone is telling you what they want or what they think they are expected to want.

Addressable Markets

One of the central topics that interests this blog is what factors create opportunities for disruptive marketplaces.  This blog post from a few months ago by David Haber of Spark Capital is a nice contribution to that thinking in listing some of these factors.  I quote:

As I look at this list as well as all marketplace companies that we get pitched at Spark, I keep coming back to a few salient points which I believe dictate the potential value of these companies:

  • Size of the Market  – Don’t be fooled by the incumbent market, think about the one that may be created or unlocked. While the initial focus might be small, what does the potentially broader market look like for this company (i.e. from couchsurfing to travel lodging industry in its entirety)?
  • Excess Capacity– Some call it an asymptotic market, but it’s simply the fact that a good portion of a given industry is sitting idle or under-monetized.  Why is that? Can it be changed by a new business?
  • Friction / Opacity– Are there middlemen in this market that shouldn’t exist?  The larger or more considered the transaction, the more likely there are intermediaries (i.e. buying a bike vs. buying a company).  Intermediaries benefit from (and often perpetuate) opaque markets.  They withhold information in order to make margin.  Value is created when these intermediaries can be dis-intermediated.
  • Fragmentation – Is this market highly fragmented, or are there a few dominant players?  There isn’t much opportunity in a market where there is concentration on one side or the other.
  • Customer Experience – Whether you become the transaction processor that eliminates an awkward in-person cash transaction or simply provide a more compelling user interface to a staid business (i.e. like Uber has done with the livery business), a better customer experience can be the differentiating factor for your success (and one that keeps transactions within your platform).