Below are some thoughts after attending the Marketplace Conference 2022 in Berlin.
tl;dr Fundraising is more difficult right now.
No sh*t, Sherlock. Let’s break that up a little.
Capital is not being deployed.
Jeroen Arts of SpeedInvest started the day off with some harsh truths. Because of the disappointing performance of recently IPO-ed tech stock over the last two years, valuations have gone down, and a lot of VC funds have had to downgrade the potential returns of their existing portfolio. In addition, because of the geopolitical situation and the tightening economy, the past three quarters have seen a lot less investment activity happening. Capital is not being deployed at the moment.
There likely is a lot of “dry powder”
Up until Q4 of last year, a lot of funds themselves were still raising money. This means that there is a pile of money out there, still waiting to be deployed, which is often referred to as “dry powder”. How and when this will be deployed is hard to say.
What is also hard to say, yet, is if the influx of money into VC as a category has decreased. The decrease in valuation & the reduced IPO value will significantly affect the ability of funds to return the 3-5x they might have promised their limited partners, which in turn can affect their ability to raise new funds.
Profitability is back in the picture
Not surprisingly, as a result of the above, VCs now want to see credible paths to profitability, at an earlier stage, combined with a much more efficient use of capital. We heard all of this discussed in the different panels.
Monetisation can no longer been an after-thought scheduled for somewhere in the future, and subsidising growth at all costs has become a no-go for most. Naturally, a low burn rate is a must, and a runway recommendations are between 18-24 months.
What does this mean for marketplaces?
Some categories will be more affected than others.
Especially highly competitive categories that were overcapitalised in the past years are already feeling this, such as quick-commerce and mobility.
For example, Gorillas, which raised $1B less than a year ago, might be taken over by competitor Getir. Tier recently laid off a lot of staff just two months ago citing funding issues.
Another type of marketplace that will likely be affected, and if I recall correctly, Jose Marin of FJ labs mentioned this specifically is the asset-heavy marketplace. These marketplaces, sometimes known as MINO’s, “marketplaces in name only”, coined by Sameer Singh, or as Casey Winters has called them: “Vertically Integrated” basically own or employ the inventory/supply. Think of marketplaces such as Clutter, Honor, but also the scooter companies.
After all, asset-heavy = capital-heavy. And that’s what’s lacking.
B2B remains the opportunity
During the conference, it became clear that many firms still believe strongly in the power of marketplaces, and it seems most confidence is in B2B. I thought it was most clearly laid out by Georgia Stevenson of Index Ventures when she explained what their team looks for in markets, which I found surprisingly “industry agnostic”:
- Massive Industry
- Low Digital Penetration
- High Fragmentation
- Relationship driven networks
- High Frequency Transactions
Industry agnostic, because with the same logic they’ve invested in Motorway, a UK marketplace connecting buyers & sellers of second hand cars, as well as in Rooser, a marketplace connecting fish processors to wholesalers.
This confidence in the B2B space was also echoed by Speedinvest and others.
Futher verticalization
A related shared confidence among VCs seemed to be about ongoing verticalization.
This was both reflected in Index’s thesis, or what Georgia called stage 4, where she finally hopes to see verticalization come to B2B,
as well as in the concluding presentation of Jose Marin of FJ Labs, who sees a lot of verticalization happening around discovery, convenience and trust.
An important thing that Jose also brought out, is that verticalization is not about just taking one vertical out of an existing horizontal and try to grab as much of that market as possible. Instead, in the best cases, the verticalization actually expands the market.
The example given was Reverb, a marketplace for musical gear, which was a market worth $900M when part of the horizontal eBay, but has now expanded the market to $1.6B.
So, in conclusion, there are still a lot of marketplace opportunities, and there are VCs willing to fund it. The profile is just different than a year ago.
VC-free marketplaces
Finally, and obviously something that was not discussed yesterday, it is important to remember that venture capital is willing to fund only a fraction of all the marketplace opportunities out there.
There are 10x more opportunities for the marketplace model in smaller industries, where they will never have a billion dollar valuation, but can still generate life changing financial outcomes.
These will likely not get VC-funded, but they don’t need to be, as the price of building a marketplace has signficantly decreased. We welcome those ideas at Sharetribe. (Although we do have VC funded companies as customers as well!)
Hope you enjoyed this read! Let me know what you think!
Thanks to SpeedInvest & FJ labs for organizing, and for the socks!
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