We're expanding on a recent post in the community with investors sharing how they evaluate marketplaces. We're interviewing some of the investors to help share their insights with founders. In this second interview, we spoke with Andrew Blachman to learn more about how he evaluates early stage marketplaces as an investor, along with specific marketplaces that he's interested in.
I’ve been a marketplace operator for nearly two decades, and a fan of marketplaces even longer. I previously had a successful exit with GET ME IN!, which was a ticketing marketplace that we sold to Ticketmaster in 2008. After this, I found myself sporadically investing in tech companies, and quickly noticed they were almost all marketplaces.
Over the years since, I’ve been lucky to invest my own capital in the earliest rounds of over a dozen marketplaces, including two that have become unicorns with SeatGeek and Outdoorsy. I've also invested in a bunch of others that are well on their way, including Bridebook, Nest, Fora Travel, Microacquire, and others, many of which are in the community. I also became a scout for Craft Ventures more recently, which is a fund that focuses on both B2B SaaS and marketplaces. I also just did both the On Deck and First Round angel programs to broaden my network of like-minded angel investors, which was really fun. I’m now focusing almost all of my time on finding and investing in the next generation of great marketplaces.
Marketplaces represent the quintessential internet business model, where simple software can connect market participants and expose information previously hidden, which yields enormous value. It’s really that simple, but I’ve seen it over and over in my career, which thankfully started at about the same time as the internet was being commercialized. I remember in the first month of my first job out of college, a colleague at Goldman Sachs describing this crazy IPO that he was working on for a business called eBay that allowed people to sell weird collectibles to each other. Few people took it seriously at the time, but the internet made those marketplaces possible.
If you stop and look around today at all the trade that happens between businesses, consumers, employees, and governments, the fact is that only a very small percentage of it is being done efficiently. We’re still in the early days of leveraging the internet to connect supply and demand through marketplaces.
Secondly, marketplaces create the largest winners in all of venture investing. While they can be incredibly difficult to scale, marketplaces can be nearly unstoppable once they have liquidity.
From a practical investing perspective, one of the reasons I love marketplaces is that despite the difficulty of scaling, founders can come into even early financing rounds with a lot more traction and validation compared to other sectors of technology startups and investing. I believe this is because marketplaces are often sparked by business model innovation, rather than product or technology innovation (though sometimes they can include those as well). Business model innovation is much easier to validate with an early product experience and an initial set of customers who rely on the platform. If you’re building something deeply technical, launching a consumer product, or building business software, it can often be impossible to bootstrap your way to any useful data before a seed round. As a consequence, the earliest investors end up focusing most on the founder(s) and size of market opportunity, because there’s often little other data to work off of. However, I believe that successful marketplaces often thrive despite a sub-par product experience, even as they scale. The true genius lies in a new insight into the market, aggregation of supply, distribution advantage, etc. Those are the kind of things I personally look for when investing. Thankfully you can often see them very early with marketplaces.
I’m primarily looking at everything through a business model lens, which I think is not as common with other early stage investors. For example, I want to understand why a new marketplace is going to be dramatically better than the alternatives for market participants and that some significant pain is being solved. If that pain is on one side of the marketplace, early teams can take shortcuts to control for the other side and get customer validation quickly. This often includes real transaction volumes, repeat usage, net promoter scores, etc. I am personally not afraid of solutions that don’t easily scale, provided the team has a credible plan to address scalability with funding.
Similarly, my assessment of founder(s) is often focused on their ability to articulate the unique insights that have enabled their business model innovation. Why now is the time, along with why they’re going to have a powerful network effect over time. What are the incentives at play in the marketplace and what are the second and third order impacts of your strategy? Since the success of marketplaces often hinges so much on the team’s ability to move quickly and iterate smartly, I look for early evidence of exceptional execution.
In summary, if there are five main criteria to any deal for an investor to evaluate (founder, product, market, business model, and terms), my ordering of importance for early stage marketplaces would be: tied for first and second the founder(s) and business model, third with the market, fourth the terms, and lastly the product. I typically rank each of these criteria before investing.
The flip side of being able to demonstrate quick validation with a marketplace is that I often find it a negative indicator when founders have been playing in a certain area for too long without real data or insight. It’s a bit counter-intuitive for me, since I personally value perseverance and grit so highly, but at a certain point wrestling with a problem or market for a long time with no traction becomes a liability and not an asset.
The second investment red flag I personally have is around what I’d call "overhyping", which can take many forms, ranging from vanity metrics that redefine GMV, to misleading traction around a financing round or even a lack of humility around the dynamics of the industry you’re targeting. I know there are advisors out there that teach founders how to fundraise at any cost, but for me personally, honesty in a founding team is an absolutely critical foundation.
Aside from that, I don’t like looking for "red flags" since, bluntly, they are so easy to find. There are a zillion reasons to say no to any investment, and in early stage investing you expect many of your investments not to work out anyways, where a few outperform. I find this power law dynamic even stronger in marketplaces, where winners can become enormous, but execution is exceptionally difficult. With this in mind, I look for a reason that a particular opportunity can be a dramatic winner.
I’m fairly industry and geography agnostic, but there are a few theses I have around marketplaces. I would love to see more opportunities in all of them. More specifically, here are the five categories I’m the most excited about:
A big thanks to Andrew for always taking the time to share his experience, insights, and helping founders in the community. Be sure to also check out the previous group chat that we had with Andrew, which you can see the recording of here. You can also connect with Andrew in the Everything Marketplaces community.