Why breaking away from the marketplace mindset is important?

According to CB Insights, the 15 most well funded venture backed startups in the world are as follows (marketplaces highlighted in yellow):

Of these 15, a third are online marketplaces. Marketplaces are essentially brokers between buyers and suppliers of services and/or goods. Their monetization model is primarily based on commission fees charged on transactions that they enable. The global 5 most well funded marketplaces are Didi Chuxing, Uber, AirBnB, Meituan-Dianping and Ele.me. However the balance 15 are across various other sectors including hosting, hardware, fintech, content, real estate, big data and SaaS. In fact 6 of them are not even modelled around providing services over the internet.

However lets look at the Indian startup landscape. According to Tech in Asia, India’s most well funded tech start ups are as follows (marketplaces highlighted in yellow):

In India, an astounding 75% of the most well funded startups are online marketplaces. You are 2.5x more likely to come across online marketplaces in India than the rest of the world. This raises two questions:

1) Why do online marketplaces disproportionately make it to the top of the funding league tables in India?

2) Does this have a bearing on innovation in India?

But before we tackle these first two questions, we would have to deal with a more fundamental question: what makes a marketplace a “marketplace”?

Marketplaces evolved from classifieds. Before internet took off in India, the dominant way to find real estate, used cars, service providers, jobs and even brides/grooms were newspapers. While phone directories did exist, their use and penetration remain limited. During the 90s, telephone penetration remained very low. For most Indians, even after having found the number of a provider, this would have meant calling from a PCO booth or showing up in person at the physical address of the service provider / vendor.

Just Dial changed the way people in India found service providers. It allowed people the convenience of calling in and being helped by an agent who would provide the required numbers. With growing internet penetration even Just Dial’s voice call based approach came under threat. However by the time this took hold, the investors in Just Dial had already made a decent return on its IPO and later exits via the secondary market. VC Circle had reported in 2014 that Sequoia by then had already made its second part exit from the company, and made 30x return on its investment. Not bad for an investment into a phone directory service. Just Dial until today remains only one of the three prominent public online companies. The other two are MakeMyTrip and Infoedge. The latter again is a classifieds conglomerate.

The horizontal online classifieds OLX and Quikr challenged Just Dial’s old business model. Just Dial to its credit has continuously transformed itself and is now as much of an online player as any other. The rise of horizontal online classifieds in India was the death nail for newspaper classifieds. However the online classifieds industry suffers from one acute problem — monetization. Online classifieds primarily charge vendors for either leads or listings. Usually standard listings are free. However there is a catch — since there are so many listings, by default an unpaid listing does not get noticed. In order to get noticed by potential buyers, classified businesses ask for a subscription or listing fee. The money guarantees “premium” status to the vendor’s listing. The platform may or may not guarantee a certain number of leads. Some online classifieds businesses even charge per lead. However this is a dying model (if not already dead) and it has become extremely challenging to get paid per lead. Often the leads don’t convert and merchants starts worrying a bit too much about what they are paying for customer acquisition. Definitely not the sentiment you want to see in your vendors, if you are an online classifieds business.

Horizontal online classifieds gave way to hyper-verticalization. Very soon, we saw multiple online classifieds for practically every consumer vertical including:

· Real estate: MagicBricks, Common Floor, Housing and 99 Acres

· Jobs: Naukri.com, IIM Jobs, Hiree, Babajobs and Saral Rozgar

· Cars: CarTrade, CarWale, CarDekho and Droom

· Food: Zomato

· Matrimonials: Shaadi, BharatMatrimony and JeevanSaathi

· Dating: TrulyMadly, Vee, Woo, iCrush and Frivil

· Doctors: Practo

For online classified businesses, the monetization challenge remained. It was hard to get merchants or other posters (sometimes consumers) to pay recurring listing or subscription fees. While at the same time getting paid for leads remained difficult. At the same time, the traditional classifieds model of connecting people or businesses did not solve a lot of the pain points such as lack of trust and convenience, difficulty consummating transactions and making payments, and other problems including fake or duplicate listings. This led to the rise of “marketplaces” that were more than just classifieds. They were there to help you complete your “transaction” whether it is buying a house, or getting a job or getting food delivered in the best possible manner. “Managed marketplace” became the new buzzword for such online businesses. For a housing classifieds business, this meant getting wonderful 360 degrees pictures taken of the apartment in question, mapping out the exact location, verifying that the broker / owner are genuine, helping setup the appointment and even providing assistance with the paperwork. For an auto classifieds business, this entailed getting the car checked by a mechanic and providing a certificate which allowed consumers to believe the car is good to buy. It also meant bundling in insurance and financing for the consumer. And even providing warranty. However, one problem remained: monetization. Merchants, dealers and brokers remained prone to not reporting transactions and any transaction based revenue models failed. Subscription fees never picked up.

So while all online classifieds tried to make the jump to managed marketplaces, only a few succeeded. Online marketplaces that enabled an instant transaction with typically lower average transaction values succeeded in monetization. This is how Snapdeal went from a deals listing site to an online e-commerce marketplace, Zomato went from being a restaurants listing site to a food delivery and table reservation portal.

Other service marketplaces with “here and now” transactions such as BookMyShow also became successful and even displayed good unit economics. UrbanClap made a name for itself being a services marketplace because again the transactions were typically of low value and in the present. Although a very large part of its business still remains an old fashioned classified. Cabs are probably one of the best suited for the online marketplace model. However it is a heavily managed marketplace, given the potential liabilities associated with ferrying passengers. Jobs, matrimonials, auto and real estate remained as verticals best suited for online classifieds and did not see rise of marketplaces in the true sense, because the buying decision happens over a prolonged period of time, is typically of high value and/or requires direct interaction between the two, taking the online portal out of the equation.

Online e-commerce in India also capitalized on the marketplace model. It allowed the sector to avoid inventory while at the same time being able to leverage the millions of SME merchants coming on to their platforms to sell their wares. Flipkart, Snapdeal, PayTM and ShopClues along with vertical players such as PepperFry, UrbanLadder, Zivame and Lenskart all followed the marketplace model. While margins on private label products remained high and their own circuitously owned sellers contributed to large portions of revenue, the new e-commerce FDI guidelines introduced last year put a spanner in the works. Inventory led businesses can no longer have foreign investors. However forcing Indian e-commerce players to a marketplace model has been a great disservice to Indian innovation. More on this later.

As such there is nothing wrong with marketplace businesses. They aggregate largely fragmented supply side, add value via their platform and other services and provide to consumers a reasonable way to buy goods or services immediately. With local delivery based services even the traditional drawback of e-commerce — lack of instant gratification is no longer a hurdle. Online marketplaces have continued to receive large amounts of funding because a) globally similar models have been successful b) in India JustDial has set a good example of a “marketplace” that provided outsized returns c) they solve some of the key problems of a fragmented unorganized Indian market and d) they are relatively easier to understand. Online marketplaces are not really technology businesses. They are tech enabled. To understand the potential of an online marketplace, one has to really study the offline industry the online marketplace is trying to disrupt. It does not require taking a call on any pathbreaking new technology or a new business model. With people come transactions, and with transactions come revenue. Manage the costs and you can become profitable. Relatively easy model, high customer acquisition cost notwithstanding.

However, this leads to more tech oriented startups engaged in artificial intelligence, IoT, devices and wearables, tech infrastructure, enterprise SaaS, fintech and bio-tech being left in the cold. There ofcourse are exceptions –most interesting and prominent being Bangalore based space research company, TeamIndus (more on it in my next post). But they are very few. Zoho, one of the most successful enterprise SaaS companies that came out of India did not even get venture funding and is bootstrapped. Secondly, businesses that are trying to build a brand on the back of good designs, innovative products and disruptive technologies or business models don’t get the same attention. Marketplaces cannot fuel true innovation and disruption simply because they become brokers themselves in an existing offline system. Flipkart has not changed the products that people buy — just made it easy for people to buy them. But a truly innovative Amazon made the Kindle and even built up a separate business around cloud based hosting. Marketplace models lead to tunnel vision. Entrepreneurs and venture investors need to go beyond how to improve the existing situation and think about what can be.

Henry Ford had once famously said, “If I had asked people what they wanted, they would have said faster horses.” This is the trap online marketplaces fall into and end up stifling independent creative thought based innovation.

The author is a former investment banker and currently works as a strategy professional in the telecom industry. Views and ideas expressed are personal.