Double Clicking Arteen's Marketplace Calculator
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Earlier this week, Arteen Arabshahi at Fika Ventures released his Marketplace Calculator, which is a framework his firm uses to assess two/three sided businesses, with network effects. In general, I think these frameworks can be dangerous in that they commoditize a nuanced process, but I actually thought Arteen’s was nicely done, simple, and appropriately weighted many interconnected variables.
If there was anything that I felt was missing, it was the WHY. While I agree that for founders, it’s important to know how the dynamics of your business stack up for prospective investment purposes, it’s equally imperative to understand why that feature is important so one can better strategize about their business. None of the following musings are novel, but they’re important to review in light of Arteen’s calculator:
On Pricing
Most operators understand that price is important, but Arteen frames the question in an interesting way: “Is there an opportunity to make the service much cheaper for the customer (demand side) while still make more money for the seller (supply side)?” And the scale starts at >50% cheaper.
We live in an entrepreneurial generation where founders (correctly) start by reimagining experiences and asking “What If?” The consequence of those “ifs” is that they can be expensive. Sarah Tavel wrote a formative piece two years ago, Taking the Wrong Lesson From Uber, where she emphasizes that venture scale businesses must be both better and cheaper. Why? Because convenience plays – those that are “an arbitrage of the cost of wealthy people’s time” – are inherently market size constraining.
Premium services can be an interesting angle to approach a venture scale market, but only on the condition that there’s an opportunity to service less affluent participants at a substantial discount down the road. It’s not sufficient to merely be better – a product also has to be cheaper. As Clay Christenson routinely notes, “non consumption is your fiercest competitor;” it is complex to move buyers from non-consumers to consumers, but market expanding pricing is a great way to do that.
On Linear Growth
Arteen asks what market expansion looks like – is it a city by city geo scaling marketplace such as Uber/Lyft, or is it a software focused marketplace that isn’t region specific such as Upwork/Gigster. There’s also a third option – a virtual marketplace that expands on a category by category basis – and may require a systematic expansion strategy but doesn’t require boots on the ground.
This is a hard marketplace attribute to hack. If your business is geo-scaling, it’s difficult to change that. But there are some efficiencies to be gleaned. In The Pursit of Non-Linear Growth, I emphasized looking for partners (or data partners) on either side of the marketplace (although more frequently on the supply side) who can scale across multiple cities or categories seamlessly. Regarding Spothero, I noted:
“Spothero is able to turn on new cities effectively overnight because of its enterprise partnerships with the largest parking operators in the country. While new entrants might have to put boots on the street in each new city to try and sign independent lot operators, Spothero can aggregate a large supply of inventory from its existing partners in the top cities in the country.” That is a valuable asset and can transform “slow and steady,” to “quickly.”
The reason Arteen focuses on this question is because it affects the velocity of marketplace growth. Venture is a game of velocity and of value creation and it is a tough hurdle to cross if growth is inherently incremental.
Beyond the Transaction
Arteen asks “Is there an opportunity to build tools to make your supply side even more efficient?”
I think this is a wonderful question, and I touched on it in Unpacking Etsy’s S1 in the section titled “The Strength of the Network.” What he is fundamentally asking here is: what can you do to facilitate power users on your platform?
When one is operating in the depths of their business, and focused on growing the demand side base, it’s easy to forget how absolutely critical power users are to the health of any marketplace. Arteen’s question will likely be read as technology tools that can be built to facilitate supply side efficiency, but in truth these tools could also be business model enhancements: financing, factoring, even expert advisory services. Uber famously offered car financing to enable more drivers to get on the roads (the program was ultimately ceased), while other marketplaces may offer in-house factoring services to enable suppliers to recycle their capital quickly and list more inventory on the supply side.
Of course, traditional technology tools matter too. Etsy, for example, offers a direct shipping label product which makes sellers far more efficient and also produces substantial revenue to the Company. They also recently released Pattern which improves seller storefronts, order flows, and ideally produces more sales.
Overall, Arteen’s marketplace calculator is a wonderful tool for investors and entrepreneurs alike, and I hope that this blog serves as a reminder to think deeply about each of the variables factored into his calculation as well as ask WHY it’s fundamentally important to a marketplace’s success.