Disruption vs. Enablement: Managed Marketplaces & Tech-Enabled Middlemen
“The less liquid and slower the market is, the more people who are selling will value this process.”
This is part 4 of a 7 part series. If you haven’t done so already, you can read the first three posts here, here and here.
Managed Marketplaces and Tech-Enabled Middlemen aren’t exactly the same thing, but for the purpose of this series I combined them together in one post due to the analogous characteristics of both models and the similarity in the markets best suited for them.
Both Managed Marketplaces and Tech-Enabled Middlemen include an additional component where the companies leverage either scale or technology to “empower” some sort of intermediary. This intermediary can be an actual person providing a service to the end customer or a service provided by the platform that enables a frictionless transaction for a single or both parties. For this reason, both models don’t benefit from the zero marginal distribution cost associated that we frequently hear discussed with traditional marketplaces and SaaS companies.
Managed Marketplaces
Managed Marketplaces are, as defined by my friends at Version One Ventures in their excellent Marketplace Handbook, “…marketplaces that don’t just connect buyers and sellers, but take on additional parts of the value chain to offer a better experience.”
For example, at Compound, we’re investors in Rebagg which purchases high end handbags upfront from customers and then sells them on a variety of channels including their own, Trendlee. By paying cash up front to obtain the supply, Rebagg can make, high end handbags, which were, previously thought of as an illiquid asset, liquid enough to be offered in a marketplace. These handbags were traditionally illiquid due to the difficulty in finding a buyer willing to overcome trust issues associated with selling a high-priced item in a market full of counterfeits (and very good ones at that). Opendoor is another good example which made headlines recently when they announced a $210M Series D round. Opendoor buys homes directly from sellers, providing them upfront with cash and the certainty of a sale in exchange for a discount on what the company believes the property could fetch on the open market using a broker (but without the hassle and time spent) and then allows said brokers to show the house to buyers who buy it directly from Opendoor.
Managed Marketplaces unlock new supply and reduce the pain of selling certain items by providing an added benefit or service that makes the transaction [more] seamless. Usually this involves making the life of one side of the marketplace better because there is enough margin after the sale to cover those costs and still alleviate the pain and/or add value to that side of the marketplace.
Tech-enabled Middlemen
As for Tech-enabled Middlemen, investor Eric Peckham defines these businesses in his great overview of the category as, “startups target ways of helping people that could traditionally only be done on an agency model, but they leverage new technology to create a scalable approach that is a hybrid of algorithms and human customer service.”
One of the more well-known examples is Compass, a real estate brokerage which gives its brokers access to data and tools previously unavailable at other brokerages in order to close deals faster, gather more leads and provide a better all-around service.
By consolidating many brokers with books of business and layering on considerable technical resources, Compass can understand all sorts of specific information with a high degree of certainty of each individual property, buyer, seller or renter.
When one company has access to this type of data set, the middleman they employ can be empowered with “superpowers”, essentially augmenting their skills and improving their efficiency by providing them with a superior dataset and resulting data-coop from consolidating the market which improves their performance over time.
To identify markets that are best suited for these models, the most important thing is to determine whether or not there is additional underlying profit to be had by consolidating a previously fragmented market. By aggregating individual agents participating in the market, can a startup produce a data set or economy of scale that makes for better pricing, additional negotiating power, or better all-around value for a side of the market?
If this is possible in a given market, the consolidator (the company) can produce better margins than the industry standard and therefore will have a great opportunity because there is enough margin to go around and a sustainable competitive advantage that increases as the company scales. Another thing to watch out for is how long the transactions take to close. If the startup can’t streamline the process, they may not become valuable to enough customers and even if they are, they may struggle to become more than lead generation.
This is essential to success in both models because it will be very difficult to generate a profit if there isn’t a superior data set that can be used to augment the experience or empower the middleman themselves. As I highlight below in the Beepi case study, not only does this invite all sorts of competition that will eat away at profits but without a superior data set a startup may be operating a similar model to incumbents with venture capital money subsidizing the value being given away without any hope that it will be made up in the future.
Per the above, Compass is an example of a company that has access to such a dataset, which includes the potential time on the market, price they can sell an apartment for, and the optimal deal for the buyer. The other company I mentioned, OpenDoor, has access to similar data and can use it to purchase the homes at a discount to what they know with a high degree of confidence they’ll be able to sell them for on the open market.
Leveraging these data sets tends to work best in markets where purchase frequency is quite low and the stakes are very high (e.g., buying or selling a home in both these examples). These purchases tend to be complex and happen in markets that aren’t typically liquid. Because these transactions are not processes people are used to or comfortable with, often the value comes in having a human assist the customer to provide them with a high degree of confidence that they’re getting the best possible deal.
Therefore markets best suited for these models are ones where the transaction is of high value because there is enough margin to warrant a middleman and also pay the company facilitating the transaction (enough to account for their own costs while still earning a profit) but leave the end customer will still be content with the value they’re receiving.
If stakes are lower, an opportunity can only exist due to previous market illiquidity or complexity such that the customer is willing to be the loss leader in exchange for removing the historically painful experience associated with the transaction.
Worked: Opendoor
Funding: $320M
Outcome: Opendoor recently closed a $210M series D round at a valuation reported at $1.1B.
- Is the industry fragmented? Yes, there are over 85,000 real estate brokerages in the US, over 2 million active brokers and roughly ~5M homes sold a year in the US.
- Is there underlying profit to be had by aggregating suppliers? Yes, by accessing the data on how fast certain homes sell and subsequently, why OpenDoor can pick and choose which homes to buy and at what price at a discount to what they know they’ll be able to sell them for.
- Is the purchase/sale one of low frequency? Yes.
- Is each transaction cost high? Yes, the average home sold in the US is over $350,000 as of the most recent census data.
- Is the sale dependent on a complex task? Yes, selling a home takes time and a lot of work as sellers talk to different brokers, host open houses and wait for an offer that they feel is suitable (not to mention the time that it takes from accepted offer to closing and all that’s involved with it). Home buying also comes with all sorts of legal documents that are sent back and forth between all parties. By buying the home outright, Opendoor makes selling your home a breeze and therefore sellers are willing to sell it at what might be a discount to get the money quickly and not have to worry about all of the other factors involved with selling their home.
Takeaway: Opendoor fits well into this framework because the home selling experience is painful, involves a lot of back and forth and takes time when the seller often would just like to move as soon as possible. Home prices are also easily accessible so Opendoor can provide money upfront to the seller at a discount to what they perceive the home to be worth. As Ben Thompson writes in his excellent piece, “Opendoor: A Startup Worth Emulating”, what Opendoor is doing is:
“taking advantage of a theoretical arbitrage opportunity (earning fees on houses sold at a slight mark-up) by leveraging technology in pursuit of previously impossible scale that should, in theory, ameliorate risk.
Didn’t Work: Beepi
Funding: $149M
Outcome: After laying off 180 employees and shutting down its business operations outside of California due to lack of profitability in other cities, Beepi was acquired by Fair.com.
- Is the industry fragmented? Yes. Beepi is a managed marketplace, allowing users to buy and sell used cars. Beepi handles much of the transaction by handling all inspection of the used cars and delivers it to the buyer. There are more than 250M used cars on the road in the US and over 45,000 used car dealerships around the country. It’s a highly fragmented and regional industry.
- Is there underlying profit to be had by aggregating suppliers? This one is difficult to say definitively. While Beepi and their competitors might be able to use data to understand which cars will sell faster at what price points, used-car prices have been in decline and therefore the lack of predictability could’ve caused some of the trouble faced by the company.
- Is the purchase/sale one of low frequency? Yes.
- Is each transaction cost high? Yes.
- Is the sale dependent on a complex task? Another difficult one to answer. Used car dealerships allow test drives and in lieu of this Beepi inspected the cars themselves and handled all DMV paperwork and delivery. On the other hand, while these tasks are time-consuming, they’re not necessarily complex and therefore consolidating used cars doesn’t necessarily provide Beepi with the kind of value that can be leveraged for better operating margins.
Takeaway: The reason for Beepi’s struggles isn’t publicly available but I suspect that there are multiple issues that Beepi faced. For buyers, used car dealers negotiate on price and therefore it’s difficult to know if they’re getting a good deal. Unlike Opendoor, there is no existing used car broker market to delegate to in navigating buyers buyers through the process so Beepi buyers have to believe that they’re getting the best value without any help. There is value on the seller side because they give better prices than most dealers and make the process seamless. However, it’s difficult to both provide value to the seller and the buyer without one being the loss leader. Otherwise you end up with an abundance of supply and the need to slash prices in order to get rid of excess inventory. If Beepi were to make the seller the loss leader, they would choose to go elsewhere to sell their car and vice versa for buyers.
