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 first interview, we spoke with Sameer Singh to learn more about how he evaluates early stage marketplaces as an investor, along with "red flags" that he sees with marketplaces.
Most will know you in the community from your Network Effects course and previous workshop that you led with us, but can you share your brief background as a marketplace investor with us?
The term "non-linear career path" applies here. I was an investor in India, then moved countries to work for a silicon valley startup (App Annie, now called Data.ai) that found me via my writing. After my journey there, I started writing about network effects at breadcrumb.vc, started my course, and joined the Atomico Angel Program in 2021. On the back of that, I began investing in startups with network effects, which includes social networks (Howbout, Smitten, Lapse) and marketplaces (Nuw, Homefans, Farmlend). To bring it full circle, Aisling Byrne from Nuw and Luke Verbeek from Homefans are here in the community.
What attracts you (and other investors) to marketplaces specifically?
For me, it stemmed from my interest in network effects. But if I were to answer the question more broadly, it's because they tend to be highly scalable and defensible (winner-take-all or winner-take-most outcomes). That's oversimplifying it, since there are lot of nuances to figuring out which marketplaces have those properties, which hold obvious appeal to investors.
What do you look for in marketplaces and how do you evaluate them at the earliest stages when investing in them?
There are a few things that I look for in marketplaces, which I could break down into:
- Team: Missionaries, not mercenaries. I like founding teams that have a history or some sort of relationship with the problem. Startups are a long journey, and even the best ones have a lot of lows. I want to understand what will keep them going during those lows.
- Interaction: The marketplace needs to be based on a unique and well-defined interaction (that solves a real problem) to form the basis of a network effect. If it's not unique, you're just competing against another network effect (may be viable, but only in some cases). And if it's not well-defined, the founder is just pitching a wooly market story (that VC's sometimes fall for), which rarely ever works in practice.
- Strong Network Effect: The interaction should fit the definition of a strong network effect, i.e. more likely to be cross-border (more scalable) and more likely to have differentiated supply (more defensible). There's a spectrum here, and things like SaaS can change the network math a bit.
- Metrics: Market size and growth, by themselves, are complete non-signals. The only thing that matters at pre-seed and seed is early signs of liquidity (i.e. engagement should outpace adoption). Depending on the marketplace, there are a few metrics that could point to this. In a low frequency, high touch marketplace (like Homefans), I want to see the utilization rate and search-to-fill rapidly increasing. In addition, for high frequency marketplace, I want to see increasing frequency as adoption increases.
What are "red flags" or things that you watch out for in marketplaces at the earliest stages?
Some obvious red flags that I watch out for are:
- Fragmentation: I steer clear of marketplaces where the market only has a handful of suppliers, or if the marketplace only needs a handful of suppliers to be viable. The best case scenario for this is a recipe for intense competition and poor unit economics.
- Disintermediation: I also avoid marketplaces where the need for ongoing discovery is unclear.
- Charismatic founder + big market + lack of data savviness + unclear interaction: This is the obvious VC trap. And it's surprising how often these traits seem to co-occur. Any founder with strong sales ability that's building in a large market tends to attract VC attention. But building a marketplace requires a certain level of data savviness (user behavior is the product) and clarity (desired user behavior requires a clear interaction). Without these, there's no marketplace to be built.
What are specific markets, industries, or even request for marketplaces that founders should reach out to you about if they’re building?
Not really any specifically. I'm a horizontal expert, so I see the specific problem set as the domain of the founders. I don't think investors are particularly good at identifying the right problem set because they aren't close enough to it. Founders are and I've seen this play out in my investments as well. Most of my portfolio companies set out to solve problems that I would never have thought of, irrespective of how much research I did. My message to founders is this this - if you're building a marketplace, feel free to reach out; I can evaluate the interaction and network effects once I understand what you're trying to do.
A big thanks to Sameer for always taking the time to share his experience, insights, and helping founders in the community. Be sure to also check out the recording from our previous workshop on network effects with Sameer here. You can also connect with Sameer in the Everything Marketplaces community.