A Crowded Space

Hybrid W2 / 1099 Models

Wed, 24 Feb 2021 13:19:02 -0800

There’s obviously been a ton of news about new legislation around worker classification. I’m not going to discuss those issues here. Let’s just say I think government tends to be wildly incompetent, demonstrates a complete disregard for second order effects and unintended consequences, and generally lags the markets by at least a decade. The old saying of the “path to hell is paved with good intentions” fits very well.

But I’m not going to go into any more detail on those issues for now.

Instead, I want to discuss an emerging trend of hybrid worker models. Marketplaces that incorporate human labor in an offering have historically focused mostly on 1099 models to keep things asset light and highly flexible.

Nowadays, marketplaces can gain an advantage by being more forward-thinking and taking advantage of some of the best of both worlds.

Unfortunately, not many marketplaces have taken advantage of the pros of both options yet. It does add some complexity, but ideally can get you all of the pros and none of the cons.

You’ll notice that the cons of the W2 model are almost all addressed by 1099s and vice versa.

Let’s look at a hypothetical example of a marketplace for QA testing as a service. It’s easy to imagine how they might have a roster of W2 employees that function as the core testing unit and augment that team with 1099s as demand spikes or new devices and platforms need to be tested in different languages, times, regions, devices, etc.

I’d also like to share the strategy of two marketplaces employing hybrid models today.

1) Faber Connect – Faber is a construction staffing marketplace based in Vancouver. (disclosure: I was on the board for several years). They work primarily with 1099 contractors, but they have a smaller number of W2s on the roster in order to guarantee better reliability to their buyers. If a general contractor is looking to Faber to provide 5 construction workers on a Tuesday and 1 of them doesn’t show up in the morning, the W2 worker is dispatched to the job site to fill in for the no-show. It creates a much more reliable service and greatly increases customer satisfaction. In addition, since there is more control over the actual work of the W2 worker and they are better trained on the platform, they can perform additional value-add functions like contractor onboarding and general customer support.

“For Faber, supply quality is everything. That is why we ensure the 1099 workers who work their way up the ranks on the platform and showcase very positive metrics are eligible to transition to the W2 side if that is something they would like. This allows us to offset the sometimes inconsistent quality of 1099’s, while also rewarding our top performers at the same time.” – Sebastian Jacob, Founder and CEO at Faber Connect

2) soona – soona is a great marketplace serving the needs of the growing long tail of eCommerce companies. All of these companies need high-quality product photography for their listings on Shopify, Amazon, and all of the other platforms online. But, it’s expensive and time consuming to get all these digital assets. Soona offers a virtual photo studio where customers can send their products in to the studio and Soona photographers will take care of producing the assets.

soona has a network of professional photographers that often start as 1099 contractors. The high performers are moved to W2 “studio and pro" creatives and receive a salary and benefits. The biggest driver for soona to do this is photographer retention. It is devastating to a marketplace to churn some of the best suppliers, so soona takes action by giving them a path toward a successful full-time career as a creative. Liz, the founder, is also adamant that platform businesses should offer jobs to workers that the founders would be happy performing as well. She has harsh words for founders that aim to build large platforms on the backs of “minimal” wage workers. The goal should be to increase efficiency enough that you can offer both lower costs to buyers andhigher earnings and W2 insurance benefits to sellers.

My hats off to Sebastian Jacob at Faber Connect and Liz Giorgi at Soona for driving marketplace innovation forward.

Winner Take All or Not

Tue, 09 Feb 2021 10:14:03 -0800

I’m talking to a lot of LPs these days. :)

Some of the common questions I get when people are not that familiar with marketplaces is “Won’t Amazon just do this?” or “Is this a winner take all market?”

It’s a fair question because us marketplace aficionados have been preaching for years the benefits of network effects and flywheels. Once you get that thing spinning, it’s game over and a powerful winner take all effect kicks in. But, that is only partially true.

In many categories, there will be some very, very big winners like Amazon, but there will be many other smaller winners because there is truth in the old adage that you can’t be all things to all people.

I believe the landscape of things like eCommerce and food delivery will gradually take the shape of the more traditional brick and mortar predecessors to marketplaces and eCommerce.

Let’s take a look at the National Retail Federation’s top 100 retailers from their 2019 report. I didn’t use 2020… because … 2020.

See above. Walmart and Amazon compete for the broad category of commodity stuff. But notice how many other retailers do north of $30B annually. Each of these serves a different customer with a little different expectations. For one simple example, Walgreens and CVS are being disrupted by the likes of Alto Pharmacy.

Going a little further down the list you’ll notice two retailers that serve the deep discount market.

Dollar General and Dollar Tree are both likely being disrupted by marketplaces like Wish.

Or keep going down the list and get to a paint retailer.

Sherwin Williams along does 8.7B per year! So, is there an opportunity for a paint marketplace. Probably yes (although there might be too little fragmentation of suppliers).

The point is that there are lots of opportunities for marketplaces in many different customer segments and products.

Walmart –> Amazon

Foot Locker –> GOAT

Walgreens –> Alto Pharmacy

Dollar Tree –> Wish

Nordstrom –> Farfetch

and many many more.

The same dynamic will play out in food delivery. It is not winner take all for DoorDash and UberEats. There will be many winners that serve specific customer segments and preferences.

Top 100 Retail Stores

Top 250 Restaurant Chains

I’m back.

Tue, 02 Feb 2021 12:31:20 -0800

I’ve been pretty quiet online for the last several months. Not anymore.

2020 was a gigantic transitional year for individuals and companies.

I’ve also transitioned. I stepped down from Jackson Square Ventures in 2020, took a little time off, and am now launching Turtle Ventures. I’m very excited for 2021 and beyond.

You can see all about the new firm here – www.turtlevc.co. I’m joining the growing ranks of solo capitalists and will continue my laser focus on marketplaces because I’ve simply fallen in love with them.

Will be writing more about my new theories on marketplaces and all about my new investments.

See you soon.

Marketplace Quality Tactics

Thu, 28 May 2020 11:55:32 -0700

I talked about the marketplace quality flywheel today with mini case studies from Rev, MasterClass, Faber Connect, and others.

This is the link to presentation and slides from the Marketplace Conference 2020 (COVID virtual edition).

Hope you enjoy.

Big thank you to Autotech Ventures, SpeedInvest, and Battery Ventures for organizing and sponsoring my favorite event every year.

https://www.slideshare.net/jbreinlinger/marketplace-quality-tactics

Are you a cost or convenience innovator?

Wed, 30 Oct 2019 10:51:43 -0700

I like making up new frameworks to try to clarify my thoughts and try to explain observations in the startup ecosystem.

While I was taking a shower this morning before my kids woke up (prime thinking time), I started thinking about convenience and cost. Cost is pretty obvious. Convenience is all about customer effort to achieve the desired outcome or receive the desired good. It can include reliability, turnaround time, and delivery vs pick-up.

Of course these aren’t the only 2 factors that go into purchasing decisions, but they are two of the most important. Depending on the consumer, one will typically optimize for one or the other. Wealthy people tend to optimize for convenience. Less wealthy people tend to optimize for cost.

I started thinking about the successful startups (mostly e-commerce and marketplaces) and thinking about where they would fit on a handy 2x2.

Let’s look at a few examples.

Amazon - increased convenience vs millions of small retailers (or Walmart)
Wish - increased convenience vs dollar store or going to China
Airbnb - increased convenience vs VRBO
Uber - increased convenience vs taxis
OfferUp - increased convenience vs Craigslist
Netflix - increased convenience vs Blockbuster
Ever lane - lowered cost vs Gap
Casper - lowered cost vs Tempurpedic
Lyte - increased convenience vs Stubhub
Bus.com - increased convenience vs thousands of carriers

I believe there is always (and always will be) opportunities for companies that can either lower cost or increase convenience in large markets. It is a proven formula. The important thing for a company to determine is if they are a cost-innovator or a convenience-innovator. I can’t think of many examples that do both extremely well.

I think this can be powerful in simplifying a vision for a company. Pick one, execute well. Stay true to the brand promise. Ultimately, you’ll get an opportunity to do a little bit of both cost and convenience, but one of them is likely the primary driving force. The other one reinforces it and builds a bigger moat.

Sell it Now

Tue, 09 Jul 2019 10:53:44 -0700

eBay is one of the most famous marketplace success stories. It started as a simple auction site with listings and users bidding on the items. This was great for easy price setting and unique items, but it was inconvenient for more mainstream items with multiple units available. Then came the introduction of the “Buy it Now” button, which at the time was a big change and strong innovation. The Buy it Now button dramatically accelerated growth. Part of this is simply because it lowered the customer effort to buy something. It went from guessing on an appropriate bid and monitoring the item and auction, to simply clicking a button.

Ecommerce companies have long known the power of the “buy now” button. Amazon even patented the “1-click buy” button.

I’m a big believer in lowering customer effort. It pretty much always works to drive more demand and expand the market. The convenience factor is something that traditional economic theory has never fully understood. Economic theory would suggest that sellers will go to the platform that offers the highest price for their goods. As it turns out, that’s not really true.

Take a look at a StockX – just one of the current high-flying secondary sneaker marketplaces. If I own a pair of sneakers that is listed on the platform, I have this handy Sell Now button.

This is an awesome button to enable. I did an eBay search and there are plenty of people looking to sell these at $199 or more, but they will certainly have to do more work and more waiting in order to get that amount. Is it really worth it? Where would you sell your stuff?

1) The brightly lit, reputable store that guarantees payment, guarantees it quickly, and is always willing to make an offer. May make less $, but will be safe and convenient.

2) The shady bazaar where you must beware of scams, must haggle with buyers, and have no guarantee of any sales. May make more $, but will be shady and inconvenient.

The notion of Sell it Now is not entirely new. Priceline was one of the first innovators here – let me name my price for travel (a bid) and any airline or hotel can sell their inventory immediately if they hit the bid. It’s also been a big driver in some labor marketplaces. Lyft and Uber are effectively Sell Now labor marketplaces, any driver can hop on and get work right away.

The interesting thing to me is that we’re now seeing more of these Sell Now marketplaces for goods. Outside of the good ol’ fashioned pawn shops, there aren’t that many opportunities for consumers to sell their goods instantly and conveniently. Now we’re seeing some excellent online marketplaces enter this space at two opposite ends of the spectrum.

1) Sneakers – GOAT + StockX

2) Houses – OpenDoor + Zillow (the Rich Barton Returns edition)

Stay tuned… there will be more success stories with this Sell it Now model.

Response Rate is a Quality Signal

Tue, 02 Jul 2019 10:14:55 -0700

I’m sure everyone here has received several hundred of these emails: “How would you rate this book / freelancer / coffee maker /_etc_, on a scale of 1 through 5 stars?”

If you know me, you know that I’ve ranted about how these questions don’t get to a true understanding of high quality. They might help identify some bad actors, but they are terrible at identifying the highest quality in a marketplace.

However, I recently learned that some marketplaces are using the quantitative score in addition to the response rate to get a more interesting signal of quality. See this excellent paper by Chris Nosko and Steven Tadelis for a thorough academic perspective. (hat tip to Andrei Hagiu for pointing this out to me)

I was excited to learn about this – it makes a ton of sense. The mental reaction when I get one of those “how would you rate xyz?” emails is to almost always immediately ignore it. The only time I will take the time to respond is if I had a truly terrible or a truly wonderful experience.

It’s no surprise that many marketplaces have a response rate to that feedback question in the single digit percentages. I’d guess that a typical response rate is between 5-20% for email questions. Marketplaces get much higher response rates if the question is asked via SMS or in-app. What I did not appreciate until recently is that the response rate will vary widely based on the quality of the good or service.

Consider this scenario:

“How would you rate Game of Thrones?” – result: 4.9 stars, 500 ratings out of 1,000 possible responses.

“How would you rate Lord of the Rings?” – result: 4.9 stars, 500 ratings out of 5,000 possible responses.

Which one is better?

Most platforms would probably say that they are the same. However, I think it’s reasonable to say that Game of Thrones is much “higher quality” based on the response rate. If 50% of people that watched thought it was worth spending a minute to rate the show, that is an incredibly strong indication that it’s a well-loved show. It is creating that exceptionally wonderful experience that causes people to invest additional time to provide a high rating.

On the other hand, a very low response rate is likely an indicator that there are actually a lot more silent people that would rate things somewhere in the middle, perhaps a 3 or 4 star rating, but didn’t think it was worth the time to enter a rating. 3 stars, just ok, not worth a single click.

Consider this scenario:

4.9 stars, 100 ratings, 20% response rate

5.0 stars, 100 ratings, 10% response rate

This is where I think things really start to get interesting. I could easily see the higher response rate being a more important indicator of quality than the actual star rating itself.

As usual, these platforms are all special snowflakes and everyone will need to decide if and how to implement a measure of response rate into your overall quality and matching algorithms.

I put together this trusty 2x2 to help think about the categories.

Please reach out if you have any more experience using response rate for quality. Would love to hear from you.

Marketplace Feedback and Pricing Systems

Tue, 21 May 2019 14:38:33 -0700

A number of people have asked to see the presentation I gave a couple months ago at the Marketplace Conference in San Francisco.

Here are the slides:

Marketplace pricing and feedback

Enjoy. And let me know any feedback.

PS – The Marketplace Conference is truly fantastic. Anybody in the startup marketplace world should attend. It’s the single best event for like-minded marketplace geeks.

Elizabeth Warren Doesn’t Understand Marketplaces

Tue, 12 Mar 2019 14:25:49 -0700

As everyone with access to the internet knows, Elizabeth Warren recently shared her hopes for breaking up some of the monopolistic power of so-called “platform utilities” or, as we call them, marketplaces.

On one hand, I respect that Washington now realizes what Silicon Valley has known for decades: marketplaces and platforms have powerful and influential network effects. But I think Warren misunderstands these marketplaces. They can only thrive and grow and be unassailable IF they continue to serve the customer.

Marketplaces and platforms exist to increase efficiency in the world. They are successful only if they improve productivity—saving people time and precious resources. As they get bigger, they can start to have true positive impact on global GDP as they allocate resources more effectively than the status quo. So let’s be clear: crippling their ability to execute would only be negative for the global economy.

Warren’s proposal would negatively impact consumers. Here’s why:

Negative Impact to Consumers

Warren proposes restrictions on platforms participating as a vendor on their own platform. Basically, she wants to outlaw Amazon Basics. While people are coming up with arguments to support this, is is a terrible idea. Amazon’s goal is to lower prices, decrease shipping time, and increase selection—value propositions that consumers benefit from tremendously. Amazon Basics primarily looks to lower prices for common consumer goods, something I admire and enjoy as a consumer. But Amazon—and any other marketplace—will only launch their own product when they identify a gap in the market (not enough selection) or an opportunity to lower prices for consumers or to improve quality. Every one of these initiatives benefits consumers.

While I don’t believe any legislation is necessary, if you insist, any theoretical legislation should be focused only on allowing for fair competition of Amazon-built products vs other vendors on the marketplace. Amazon does have a bit of an advantage vs others just because of the buyer data that they have and vendors do not. And they may give themselves “unfair” placement in their own search results. Some say you could enforce more transparency in the algorithm. But, this is another bad idea. It would be counterproductive and again, ultimately hurt consumers. There is a good reason Google keeps the details of their search algorithm a very closely guarded secret. They do not want to open themselves up to fraudulent attempts to game the system. Those attempts will always end up hurting consumers. Are you noticing a trend yet?

Also, smartly run marketplaces already enforce fair competition for their own products vs the various vendors. That is the smartest way to run the business. If your own products can not compete on their own, you shouldn’t be building them in the first place. It’s more efficient to just let the vendors handle it if they can handle it better.

Monopolies and Competition

As for monopolies creating an unfair playing field and discouraging competition, I for one am not concerned about this issue. I’ve been in the venture capital business for about 8 years now and have only seen an increasing number of startups going after every imaginable industry. Venture capital dollars have never been higher. VCs invest in promising startups that have a chance to disrupt incumbents on new platforms or utilizing new technology or simply improved customer experiences. Disruptors will be successful if they can dramatically improve the customer experience. If they can’t do that, they will fail.

The ecosystem thrives on constant disruption and government does not need to intervene. If the tech giants lose focus and have their customer experience deteriorate, I can guarantee that competitors will emerge and venture capital will be there to back them.

———-

Disclaimer: While I am a managing director at Jackson Square Ventures, these opinions are my own and do not necessarily represent the views or opinions of JSV or its related entities.

The Wheat from the Chaff

Thu, 17 Jan 2019 16:07:03 -0800

If you’ve read any of my blog posts before, you may know that I hate the traditional 5-star feedback systems. I think they are missing so much opportunity and often present a false signal of quality.

I was chatting with the founder of interviewing.io recently and was pleasantly surprised that they are taking a big step forward in a feedback system that’s really designed to separate the proverbial wheat from the chaff.

It made me realize that we’ve all been making a big mistake with feedback systems. In most marketplaces, we’ve been operating in a one size fits all mode. Everyone from eBay to Uber to Upwork to Amazon uses a 5-star feedback system on competed transactions to accomplish two very distinct goals.

Marketplaces have been misusing the 5 stars to poorly accomplish both of these goals.

Goal 1) prevent bad transactions from happening in the future. (Expel bad)

Goal 2) identify the highest quality good or service. (Retain & Optimize great)

The standard 5-star system has unwittingly accomplished the first goal of preventing bad transactions, although you really only need a 2 or 3 point scale to accomplish the same thing. However, due to a variety of reasons —> the 5-star system does a terrible job at identifying the highest quality good or service. I believe it’s naive to think that the same approach can both identify the worst and the best in a marketplace. Note that for some marketplaces the goal may be only to prevent bad transactions (Uber / Lyft) while in some other marketplaces (Farfetch / Toptal), the goal should really just be about identifying the best. Depends if you’re a commodity or master marketplace.

I’d like to use this post to explore how to do a better job of identifying the best. Let’s proceed.

Why don’t 5 star feedback systems work to identify the best services or goods?

I’ve blogged about this topic, see here. There are multiple issues:

There is massive grade inflation - I adequate.
There is an apathy problem - I don’t care to take the energy to rate a middling service.
I want reciprocity - if I rate something 3 stars, will I be punished by the other user?
I have misaligned incentives - do I really care about the future users of a marketplace or do I mostly care about myself?

The result of all these things is that you end up with tons of “5-star” rated users or products and can’t tell the difference between them.

I’m not going in depth on this one since you can read all about it here.

Let’s talk about what elements could truly improve the ability of feedback systems to identify the best?

To Chess:

ELO ratings have been around since about 1960 and do a remarkably good and accurate force ranking of worldwide chess players. (My ELO ranking on chess master pro is a wimpy 1150 - a bright beginner). There are millions of chess players in the world, and I believe the vast majority of serious players know their ELO ranking and also know exactly what it means to be 1000, 1500, or 2000. It’s also remarkably accurate and a very good predictor of the outcome of a match.

As a thought experiment, could we rank all of the CEOs in the world in the same way? Could we rank all of the sales people in the same way? The answer is probably not - but there’s still a lot to be learned. ELO ratings work so well because chess is purely a game of skill (no chance or external factors involved) and every game is a pairwise competition involving 2 and only 2 players. So we’ll never get to be as clean and accurate as chess, but shouldn’t we try? How valuable would it be if we knew a forced ranking of every software developer in the world? We don’t even need to be that accurate. If we could merely separate the top quartile, we would have ridiculously valuable data for recruiting and hiring. We actually invested in a company that was using pairwise (1 vs 1) competition style rankings of people to generate this exact data. It didn’t work out for external factors, but I still believe the data would have been highly accurate and incredibly valuable.

The lesson we should take from ELO ratings is really the same lesson all of us learned in college. People should be graded on a curve. In marketplace 5-star lingo, someone who gets 4.8 stars might actually be 10 times better than a 4.7 person. Or they might be the same. Just need to graph out the distribution curve of feedback and grade people according to a standard deviation. In ELO rankings, this happens naturally by bumping people up or down the scale based in their wins or losses versus other users. This can be accomplished easily in a marketplace if the same user has ranked 10 different things.

And now, off to Dribbble:

Who’s the best graphic designer in the world? It’s a very tough question to answer, but Dribbble provides some answers. You can go to their site and sort descending by number of likes. Pretty damn good designers at the top. This user-generated data based on likes (and not on feedback) is way more meaningful to separate the wheat from the chaff.

And to Google:

Google is truly the innovator here. SEO should serve as a very informative field since Google does a pretty good job of picking the top 1-10 webpages out of 30 trillion options for every search query. To oversimplify everything, Google started with the observation that website links were a great indicator of authority and importance. Over the past 20 years, they’ve added another 150+ behavioral factors to assess importance and relevance of any webpage to any search query. One of the great (and scary) parts of this whole Internet thing is that we can track and analyze pretty much everything that everyone does online. So, we know if people spend 5 seconds or 5 minutes looking at a profile. Or if they hit like at a 20% rate or a 2% rate. I believe that behavioral data — data about time on page, click-thru %, % like rate, etc will be one of the more meaningful opportunities to identify the best in any network of lots of people or goods.

Marketplaces are WAY behind - most have a single search relevance function based on some sort of keyword and a simple feedback score sort option. Over time, marketplaces will develop more advanced algorithms that incorporate more behavioral data - things like job approval rate %, message response time, on-time delivery %, etc.

Who’s the best chef in the world?

Easy. Just look at the 180 or so 3-star Michelin chefs. It’s probably one of those. Why doesn’t a similar ranking system exist for VCs, founders, sales reps, software developers, or admin assistants. Well, for one - the Michelin guide is a unique and amazing institution. Two - nobody has really tried. Could you survey and ask 10,000 people who is the best VC you’ve ever worked with directly? What would the results be? Would they be correlated with the VC performance? I started a habit several years ago that has been very helpful in my career. After most meetings, if there’s a good connection, the 2 parties ask, “how can I help?” I’ve tried several different asks but my favorite is to simply ask for, “please introduce me to the best entrepreneur you know.” Interestingly enough, most people have no problem identifying who that is and I get some fabulous intros this way. However, if I asked for, please introduce me to all the 5-star entrepreneurs you know, I think the results would be very different and I’d be left with all the filtering on my plate. I strongly believe that humans are exceptionally good at assessing relative quality and absolutely terrible at assessing absolute value. It’s easy to answer which hamburger was better - McDonalds or Roam Burger. It’s very hard to answer, how good was McDonalds.

Is my dad qualified as a VC?

I love my dad - he’s as unique as they come, a lifelong electrical engineer, and he’s grown an interest in startup and angel investing. He met a random startup entrepreneur and decided to invest. I checked out the profile and thought it was in the bottom 20% of founders I’ve met. So - the question is - who is more qualified to rank the founders? And should it matter? I believe it does, but every single marketplace I know treats all user feedback the same. A Yelp review from a Michelin food critic counts just as much as the Yelp review from an annoying teenager that got rude service on their Groupon date. How could that possibly be the right approach? User authority and relevance is still completely missing from marketplace feedback systems. Marketplaces will eventually follow in Google’s footsteps by introducing some notion of user authority.

————

We’re clearly still in the early days of marketplace science. We’re doing ok with our current systems to identify the negative users and products in a marketplace. But, we have a very long way to go to get great at separating the wheat from the chaff and identifying the absolute best people and products.

I believe the biggest opportunities are in the following themes:

1) Grading on a curve (ELO)

2) Analyzing user behavior

3) Asking for relative vs absolute value (who’s better / best)

4) Utilizing user authority (like PageRank)

5) Using more social signals (like Dribbble)

If you’re a marketplace entrepreneur out there doing interesting things to improve feedback science, please do reach out. Would love to hear from you.

Congratulations to Upwork

Wed, 03 Oct 2018 08:12:42 -0700

A huge congratulations to the entire Upwork team on a successful IPO! This exciting milestone for the freelance economy cements Upwork’s place as the dominant marketplace in the industry.

I was fortunate enough to be on the founding team of oDesk (now Upwork). When I joined, it was just 4 of us hacking away on crude systems with almost no budget. I remember when I made that first flight out to San Francisco from Boston to meet the team in 2004, the company was down to its last $20K in the bank. Since I was young and foolish, that didn’t deter me from joining full time.

Very shortly after I joined, Greg Gretsch (now my partner at Jackson Square Ventures) co-led oDesk’s Series A along with Venky Ganesan (partner at Menlo Ventures and lead investor in Rev.com). Since then, the company has gone through an amazing journey. To celebrate today’s public debut, I’d like to take a moment to reflect on the journey and share some of the lessons learned.

Discover Your Why

Simon Sinek is famous for his bestselling book, “Start with Why,” and the theory of acting with purpose. In my case, in the early days of oDesk, I didn’t start with why, but I quickly discovered it. My first role was in sales and the buyers on the platform absolutely loved the access to global freelancers, the low hourly rates, and the full transparency and flexibility in the system. But it wasn’t until a little later when I spent more time with the freelancer side that I discovered the true power and potential significance of the platform.

Early on, we would routinely get emails and chats from freelancers in Russia, Ukraine, India, Bangladesh, and the Philippines expressing tremendous thanks. Upwork had truly life-changing potential. These talented and diligent individuals were able to find work, increase their pay (sometimes by 5X), and gain the freedom and flexibility that comes with freelancing. That was the purpose, and still is to this day.

Upwork has built a global meritocracy, providing access to high-quality jobs and earning potential for the right people, anywhere in the world.

Simplify vs Complexify

I’m proud to have been a part of such an incredibly bright team. We would engage in some rigorous intellectual debates about the pros and cons of pretty much everything in the marketplace - many features or policies would benefit one side of the marketplace while potentially harming the other side. Sometimes this debate is good, but sometimes it is poisonous.

The catch 22 of working with very smart people is that they have an ability to understand a lot of complex information at once, which can translate into an overly complicated point of view. But you need simplicity to build a great enduring product and company. I remember one particularly heated debate over something as (seemingly) trivial as a default feedback rating for new freelancers on the platform. The argument was that a new “unproven” freelancer was actually better and should be ranked higher than a “proven” low-feedback freelancer. Therefore, the new freelancer should receive a default rating somewhere in the middle of the pack. Fortunately, we decided not to pursue this path as it would have provided misleading information. The correct answer is to closely manage the overall network – promote the good people and kick out the bad people. Simple.

Mistakes of Hiring

Like most founding employees, people tend to ask me what lessons I learned throughout my tenure at the company (hence, this post). While it may seem obvious, I can say that hiring mistakes are what taught me the most. When you are in hyper-growth mode, recruitment takes place at a breakneck speed. I hired a lot of people in a short amount of time and consequently made many mistakes.

The most acute mistakes were made when I felt a ton of pressure to move quickly, so I’d hire who I thought to be the best of a batch of candidates. In retrospect, it was really just hiring within a local maximum. It would have been so much more productive and beneficial to the greater company and team if we had slowed down. Waiting until you find a truly amazing candidate to bring on board is always worth the wait.

Realistically for entrepreneurs, no matter how hard you try, you’re going to make hiring mistakes. What’s important is to correct them quickly. As I grew to understand the careful and strategic practice of recruitment, I developed an ability to make tough decisions quickly. I remember when we had a candidate join the marketing team and even on the second day, it was clear the fit wasn’t right on either side. By the end of the week, we’d parted ways, and I was nervous how a hiring 180 would be received at the board level. To my surprise, I received praise for making the tough decision quickly, and it became a culturally-rooted practice at the organization.

Time for Banter

Jason Chicola and I were both on the founding team at oDesk. We lived together in a crappy apartment in San Francisco and commuted together from SF down to the peninsula every day. We were effectively together 24/7.

The interesting thing that developed was a separation of time to discuss short term goals and long term brainstorming. When we were in the office together, it was all business and we were relentlessly focused on hitting quarterly KPIs and OKRs (although back then we just called them “goals”). Anytime I would bring up a crazy idea during the day, Jason would typically throw something at me and tell me it was the dumbest idea ever. But then we would get in the car and begin our hour-long trek back to San Francisco, when we moved into “banter” mode. It became a dedicated time for far-out ideas, brainstorming, long-term vision discussions, and theoretical arguments. The whole branding of Upwork’s Hire, Manage, Pay came out of one of these banter sessions. It’s important to have time to talk about risky ideas, just as long as it doesn’t detract from the first priority of continuing to hit growth goals. Having an hour set aside per day helped us stick to that.

Getting Served

When I was running the sales and customer service team in the early days, like most services, we would have a variety of complaints come in from buyers, freelancers, and other disgruntled people. We would even get some “prank” phone calls – one local developer called up to tell me that we were worse than Saddam Hussein. A different disgruntled freelancer once got in a dispute with a buyer and then hijacked the DNS records to the website and put up some Islamic text on the homepage.

And one time, I personally got served with a claim that a freelancer had stolen IP and we were being sued for ~$60k. It turned out to be totally bogus, but it taught me an important lesson. At first all of these things bothered me to no end, but I gradually came to the realization that success in a marketplace will likely disrupt some incumbents, and there will be people that try to fight you along the way. Don’t let it disrupt your core vision and goals.There will be a much bigger majority of people that are cheering for your success, and a more vocal, but much smaller group hoping for your demise.

Full Circle

My time at oDesk / Upwork directly led to my current venture capital career. Greg Gretsch was and remains on the board and is my partner at Jackson Square Ventures. Back in 2004 - 2010, he would routinely send me early stage companies to check out as part of his diligence process. I would frequently sign up and test out the new services as one of a startup’s first customers. I’d then report my findings directly back to Greg. When I left in 2010, Greg invited me to lunch and said a) I can’t believe you left and b) since you did, I think you should join us in venture capital. That lunch began my career in venture and my focus on marketplace investments.

Congrats again to the Upwork team. It was an absolute honor working with such talented founders Odysseas Tsatalos and Stratis Karamanlakis and CEOs Gary Swart and Stephane Kasriel. I’m extremely proud of what Upwork has built and I’m thrilled for this milestone. .

Onward,

-Josh

No End to Marketplace Opportunities

Tue, 02 Oct 2018 09:54:39 -0700

I’ve been exclusively focused on marketplace and network effect business opportunities for the past several years. Sometimes people challenge me on the focus with something to the effect of “all the good marketplaces have already been built.” The theory is that the great big markets have been built and have strong network effects so any new startups will be stuck going after tiny markets or hopelessly competing for big ones.

They are wrong.

I obviously believe that there is no end in sight for great marketplace opportunities. I spend every day thinking about these things so I would focus on something else if I thought there were no good opportunities left.

I don’t believe anyone before Uber’s launch thought there could be a $50B taxi marketplace. I think the same people that say “no more good marketplaces” would have passed on Airbnb because VRBO had already won the market and passed on WeWork because Regus was already global.

There are 3 big buckets of opportunity and the following are reasons why there is no end in sight for great new startups.

Disrupting Big Incumbents

1) Innovator’s Dilemma – Every large incumbent suffers from some of the Innovator’s Dilemma. It’s a well known concept from Clayton Christianson. While a big incumbent is stuck working on their existing core business and platform, early stage startups can focus on new platforms or niche parts of the market to build up initial traction.

2) “Divinely Discontent” Customers – This is a Bezos quote from one of his annual letters. The divine discontent of customers is fantastic news for marketplace startups – they will grow tired of the existing incumbents if they’re not constantly upping their game and improving the customer experience faster than early stage startups. OfferUp and Craigslist presents a great example here. Many investors claimed that “you can’t compete with Craigslist” before OfferUp was born. They were right that it was exceptionally challenging and that Craigslist had an extremely strong network effect, but that doesn’t mean it’s impossible. Craigslist users had finally had enough after more than a decade of a user experience that simply was not improving. The constant discontent of customers means that they are ready and willing to switch. You just need to overcome the existing network effects, but since customer expectations are constantly improving and many network effects (without reinforcement) tend to plateau after a certain amount of scale, it’s only a matter of time before a big opportunity presents itself for the taking.

3) Niche Managed Marketplaces – Within many verticals, there are opportunities to significantly improve customer experience. Let’s take a look at GOAT. Ebay has been around forever, and GOAT comes along out of nowhere and destroys Ebay’s sneaker vertical – a surprisingly large segment of GMV. Now, by itself, that might not seem like it is a huge opportunity to just pick off 1 of 100 categories on a big marketplace, but when a managed marketplace attacks a vertical, they can typically take a much higher rake than a traditional horizontal marketplace and also have the opportunity to go much deeper in the industry. In the sneaker example, GOAT can take a much higher rake than Ebay, and then could continue to expand in the vertical by sharing trend data with manufacturers, taking pre-sales, launch their own line of “original content”, or even sell sneaker insurance

4) Mobile is Still the Next Big Thing – every time a new platform emerges, there will be opportunities to build new marketplaces if the incumbents don’t move fast enough. I’ve heard time and time again from large companies that collapsed some type of refrain like “we were slow to make the move to ______.” While many people are off focused on drones and crypto, I remain bullish on mobile opportunities, especially for B2B use cases. We’ve obviously seen some disruption on mobile already, but I think many industries are still waiting to be disrupted by the great mobile platform we have available now. And if AR/VR or something else becomes a ubiquitous new platform, all of these opportunities will start over again to disrupt the companies on the previous platforms.

Untapped Opportunities

5) B2B Marketplaces - I’m a big fan of B2B marketplaces. Early in my mechanical engineering career I got involved in a lot of procurement activities of everything from epoxy and lab supplies to custom-machined pistons out of a rare steel alloy. I used to flip open my gigantic McMaster Carr catalog and spend a few hours every day searching on Google and calling around to suppliers after I found their crappy website. Then I would fill in a paper form in triplicate and take it to my procurement office. Well guess what… that industry hasn’t changed much. And in case you were wondering, some of these industries are absolutely massive. The steel industry is about $900B per year. The commercial real estate industry is around a trillion dollars per year. The chemicals industry is $767 billion just in the US. Most of these industries have been ignored and underserved by tech startups, but change is coming.

6) Still Low Existing Utilization - Despite a decade of talking about the sharing economy, collaborative consumption, on-demand economy, etc - the utilization rate of key assets is still very low. I just met with a couple marketplaces helping hotels sell day passes to their pools and spas. There are 5 million hotel rooms in the US across about 55,000 properties… and until now, apparently nobody ever thought to try to rent out their pools for the day. My office sits idle about 16 hours per day. My house is vacant for about 8 hours every day. Construction equipment sits idle in yards constantly. Millions of people around the world have skills and knowledge that are underutilized.

New Industries

7) New Industry Creation – New industries start as the Wild West and become organized by marketplaces over time. Consider the fracking industry in this country. It has absolutely exploded in size over the last several years, but the infrastructure behind the industry is lagging behind a bit. This has opened up a new opportunity for a marketplace in one of the most unusual ones that I’ve seen recently, SourceWater. Sourcewater is a marketplace for water. Anytime someone wants to frack a well, they need a few million gallons of water to start and then about half that amount of water comes back out of the well and they need to dispose of it. Turns out to be a challenging logistical problem that a vertical marketplace could solve very well. In a few more years, who knows, maybe there will be a marketplace for used drones and electric scooters.

Thinking in Bets -- A Book Review

Mon, 30 Jul 2018 12:41:57 -0700

I recently finished reading Annie Duke’s new book, Thinking in Bets.

If you’ve never heard of her, you should know that Annie Duke is a pro poker player and one of the world’s best female players. She’s fun to watch and has amassed over $4M in tournament winnings and has won a World Series of Poker bracelet.

Annie has turned her attention to the business consulting world. Interestingly enough, the best poker players have gained a specific set of skills that are highly applicable to the business world. The fast-paced decision making in poker games forces players to make, evaluate, and analyze thousands of decisions per session with incomplete information. Luckily for poker players - they have a very rapid closed-loop feedback system. They see the results of their decisions at the end of each hand every few minutes. Poker turns out to be an exceptional decision training ground.

Overall the book is good, not great. For people who have read a lot of behavioral economics or Kahneman or Ariely, the material will be a little basic. For a more academic review of some of these topics I’d suggest checking out Superforecasting. Regardless, the key messages of the book are good lessons for any business manager.

Here’s my summary:

1) Stop using words like never and always. Almost nothing in the real world can be described that way. Instead, speak with confidence levels, eg There is an 80% chance of success.

“It’s easy to win a bet against someone who takes extreme positions.” - Annie Duke

2) Putting skin in the game sharpens thinking. Once $$ is on the line in a bet, the bettors are forced to start thinking more clearly about the odds of each possible outcome and the various reasons each outcome might occur.

People are more willing to offer their opinion when the goal is to win a bet rather than get along with people in a room.
- Annie Duke

3) Be outcome-blind when evaluating decisions. It’s best to not know the outcome when evaluating your decision process. If you know that calling a gut-shot straight draw worked on the river, you’ll be inclined to think it was a great decision. It was not. Conversely, if an initiative did not work, it wasn’t necessarily a bad decision to try. This can be summarized w the term “resulting.”

Resulting, assuming that our decision-making is good or bad based on a small set of outcomes, is a pretty reasonable strategy for learning in chess. But not in poker—or life.
- Annie Duke

4) Utilize dissenters - groups with diverse beliefs make better decisions. In the absence of truly diverse opinions, you can hack this by appointing a dissenter or forcing people to argue the other sides.

Skepticism should be encouraged and, where possible, operationalized. The term “devil’s advocate” developed centuries ago from the Catholic Church’s practice, during the canonization process, of hiring someone to present arguments against sainthood.
- Annie Duke

5) Scenario mapping can be very useful. For any decision, you should be able to map out the different possible outcomes and the relative likelihood of each one. Obviously needs to add up to 100%. This process is good for decision making but also good for removing some hindsight bias and outcome bias. Eg, If it was unsuccessful, you always knew there was a 25% chance of that, so it could still be the right decision even if it didn’t work.

…military units and major corporations sometimes use an exercise called scenario planning. The idea is to consider a broad range of possibilities for how the future might unfold to help guide long-term planning and preparation.”

6) Work backwards. One helpful tactic for forming a coherent business strategy can be to start w a 10 year outcome in mind. Then just work backwards. What needs to happen for that vision to come true. Try doing this with both successful and unsuccessful outcomes. Eg, let’s imagine we go bankrupt in 3 years - what are the potential reasons this might have happened. It turns out, understanding the negative reasons and outcomes may be more impactful towards the ultimate success.

“A premortem is an investigation into something awful, but before it happens.”
- Annie Duke

—-

Those are my key takeaways. And the way I intend to practice these is to simply make more bets. I have a number of “long bets” with various friends about the number of drone deliveries in SF in 2025, the number of driverless cars, and Amazon’s stock price in 2026. I intend to keep making more of these bets - let me know what you want to bet on? :)

Leonardo da Vinci -- Book Review

Mon, 21 May 2018 11:57:58 -0700

I recently finished reading Leonardo da Vinci by Walter Isaacson. It’s easily one of the most engaging biographies I’ve ever read. Isaacson is a true master of his craft. 5 big hearty stars. Although I prefer the more signal-inducing metric, “would you read this book again?” or “would you recommend this book to a friend.” Yes and yes.

The book goes into an incredible amount of detail about Leonardo, his entourage, and all the various cast of characters at that time of the Renaissance. It also provides a thorough examination of every one of Leonardo’s major works of art – providing the reader with a course in art appreciation. For me, this was perhaps the most powerful part of the book. I finished with a better understanding of fine art and the ways to evaluate and appreciate the works.

This excerpt was one of my favorites, shedding light on the most famous smile in history.

There is other science involved in the smile. From his optics studies, Leonardo realized that light rays do not come to a single point in the eye but instead hit the whole area of the retina. The central area of the retina, known as the fovea, is best at seeing color and small details; the area surrounding the fovea is best at picking up shadows and shadings of black and white. When we look at an object straight on, it appears sharper. When we look at it peripherally, glimpsing it out of the corner of our eye, it is a bit blurred, as if it were farther away. With this knowledge, Leonardo was able to create an uncatchable smile, one that is elusive if we are too intent on seeing it. The very fine lines at the corner of Lisa’s mouth show a small downturn, just like the mouth floating atop the anatomy sheet. If you stare directly at the mouth, your retina catches these tiny details and delineations, making her appear not to be smiling. But if you move your gaze slightly away from the mouth, to look at her eyes or cheeks or some other part of the painting, you will catch sight of her mouth only peripherally. It will be a bit blurrier. The tiny delineations at the corners of the mouth become indistinct, but you still will see the shadows there. These shadows and the soft sfumato at the edge of her mouth make her lips seem to turn upward into a subtle smile. The result is a smile that flickers brighter the less you search for it.

The other major life lesson of the book and of the man Leonardo is to stay curious. Always pursue learning, sometimes just for the sake of learning.

By being around him, viewers are stimulated to observe the little details of nature, like the cause of a dilated pupil, and to regain our sense of wonder about them. Inspired by his desire to notice every detail, we try to do the same.

A few of my other favorite quotes:

Yes, he was a genius: wildly imaginative, passionately curious, and creative across multiple disciplines. But we should be wary of that word. Slapping the “genius” label on Leonardo oddly minimizes him by making it seem as if he were touched by lightning.

A nice reminder of the wonder of pen and paper and the incorrect tendency to dismiss old technologies.

Paper turns out to be a superb information-storage technology, still readable after five hundred years, which our own tweets likely won’t be.

The glory of being an artist, he realized, was that reality should inform but not constrain.

Another theme that comes out in Leonardo’s work is how nature tends to mirror human anatomy.

“The heart is the nut which generates the tree of the veins,”

And finally, Isaacson leaves the reader with a series of life lessons drawn from da Vinci. Here are a few of my highlights.

Seek knowledge for its own sake. Not all knowledge needs to be useful. Sometimes it should be pursued for pure pleasure.
Retain a childlike sense of wonder. At a certain point in life, most of us quit puzzling over everyday phenomena. We might savor the beauty of a blue sky, but we no longer bother to wonder why it is that color. Leonardo did.
Start with the details. In his notebook, Leonardo shared a trick for observing something carefully: Do it in steps, starting with each detail. A page of a book, he noted, cannot be absorbed in one stare; you need to go word by word. “If you wish to have a sound knowledge of the forms of objects, begin with the details of them, and do not go on to the second step until you have the first well fixed in memory.”
Make lists. And be sure to put odd things on them.

Struggling to Tell the Story

Fri, 04 May 2018 12:33:46 -0700

I have a couple portfolio companies that struggle with how to tell their story. Their businesses are doing great, growing like crazy, but the founders still find it difficult to concisely and clearly craft the message to other potential investors, employees, prospects, and customers.

Here are my quick thoughts on how to tell a better story.

1) Start with Why. Watch this Ted Talk by Simon Sinek. It’s a great outline for thinking about the messaging.

2) Keep it Simple. Founders have a tendency to talk about complexity, because they understand the complexity of their business very well. But the brilliant entrepreneurs make the complex become simple. The complexity of their business tends to stay internal – it is not outward facing. Tell a simple story and then be ready to dig into complexity wherever your audience would like to dig in.

3) Practice and Iterate. Explain it to people completely unfamiliar with your business and industry. Try it every day with random people that you meet. I did this in the early days of oDesk (now Upwork) every day. I made tons of calls to customers, told people at the bar, told people on the bus, and hardest of all, I told my mom. Each time I would try varying the message a bit and gauging the reaction. It’s a great way to quickly refine the message. Pay close attention to the questions people ask and iterate until people “get it” instantly. This practice must be done in-person, it cannot be done by A/B testing email messages.

4) Go Long, then Short. First you should be able to describe a master plan and a 20-year vision for the company in short concise statements. Tesla has one of the best master plans.

Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options

Once you’ve provided the long term vision, then you can explain the much shorter term go-to-market plan. You should also have a very clear 1 year plan that describes how you’re executing on the next simple step along your master plan. These 20 and 1 year plans need to be a key part of the narrative. Start with the long game to provide context, then describe the 1 year plan to build confidence.

And now… a few book recommendations to help you on your journey.

Masters of Doom -- JSV Book Club

Thu, 03 May 2018 09:50:23 -0700

Welcome to the next edition of the JSV Book Club. This time, we’ve selected “Masters of Doom,” the true story of id Software and the development of Castle Wolfenstein 3D, Doom, and Quake (among others). It features the two cofounders of the company, John Carmack and John Romero. Award-winning author and journalist David Kushner wrote the book in 2003, but the lessons and trends discussed are as timely now as ever.

Unbeknownst to me, id Software was a pioneer of two mega trends in the gaming industry: free-to-play and eSports. They were also at the center of the public conversation around game violence, game ratings, and even virtual reality – since they had developed by far the most sophisticated 3D graphics engine, many people saw their games as virtual reality. The following quote was about a game published in the early 90s.

“Virtual reality, now a buzzword in the mainstream press, was a term being applied to Wolfenstein. Shareware magazines were dubbing it a virtual reality game.”

As we frequently think about hype cycles and emerging trends in the broader tech industry, this book serves an instructive reminder to understand the innovations and the roots of trends that started long before the current hype. While eSports is garnering a ton of attention right now, “Masters of Doom” traces the origins of this trend back to the mid 90s and the dawn of games that attracted online competition and spectators. It’s also a reminder that these trends can go up and down the hype cycle multiple times. The public started talking about virtual reality and eSports back in the 90s.

“As the first game designed specifically for multiplayer team competition over the Internet, it allowed up to sixteen people to compete in paintball-like teams, hunting each other down in a wild panic to kill or be killed. “Football with guns,” as a player named Dr. Rigormortis put it.”

And if these trends aren’t enough – the story of id Software has all the drama, entertainment, and hero and underdog stories as a Lord of the Rings epic.

id Software embodied the hackers in garages startup lore.

“In the information age, the barriers just aren’t there,” he said. “The barriers are self-imposed. If you want to set off and go develop some grand new thing, you don’t need millions of dollars of capitalization. You need enough pizza and Diet Coke to stick in your refrigerator, a cheap PC to work on, and the dedication to go through with it. We slept on floors. We waded across rivers.”

We hope you enjoy the book as much as we did – and we hope you can learn some valuable lessons to apply to your business.

Please join the conversation at @JSVBookClub and share quotes at #JSVBookClub.

Ancora Imparo

——

PS – Update. Event is scheduled for June 14th. RSVP here – https://doom.splashthat.com

The JSV Book Club

Fri, 06 Apr 2018 10:28:54 -0700

My former boss at Upwork, Ed Schaffer, joined the company about a year after I started. On his first day there, he brought a few copies of “Winning” by Jack Welch and asked me to read it. It’s a great book - I read it quickly and I’m sure it made me a better manager - at the time I was just 25. Thank you Ed.

My good friend and cofounder, Jason Chicola, has bought several phenomenal books for me over the years, some because I clearly had a gap in my knowledge that he proactively sought to close, or because he just knew I would greatly enjoy David Halbertsham’s book on baseball, “Summer of ‘49.” Thank you Jason.

My first few years in venture capital, I would occasionally buy a copy of books like “The Goal” or “The Ultimate Question” and send them along to founders that I knew would benefit from the book.

Giving a book is among the best gifts you can give. You are imparting highly relevant knowledge - and it’s only $10 - $15. I can’t think of anything with better ROI.

Additionally, we have found that the firehose of tech news via Twitter, LinkedIn, etc - actually devolves our thinking and has a tendency to both waste time and cause consensus based thinking.

So, at Jackson Square Ventures, we started a book club.

The motto for the club is “Ancora Imparo,” which translates to “I am still learning.” This was humbly stated by Michaelangelo, at the age of 87. It’s not lost on me that this can be shortened to AI. AI usually refers to artificial intelligence in Silicon Valley, and in the field of AI, the more training data you have the better the algorithms become. AI in the realm of humans and the book club means the constant pursuit of learning, something all of us should strive for as investors, founders, humans, husbands, wives, and parents. The training data here is a curated set of exceptional books by exceptional authors.

In the first book we sent out, “The Medici Effect”, one of the key lessons is that innovation happens at the Intersection - the place where diverse sets of experience and expertise combine. Combining fields like science, music, sports, art, and more yield incredible results. We aim to embody the Medici Effect with the JSV book club.

We send out a book every month or two that we think is a phenomenal book, has relevance to the startup ecosystem, represents a wide variety of subjects, and is not just the top book on the bestseller list. We send the books to founders, executives, LPs, and other friends and colleagues. These are gifts that are intended to broaden the mind, train the brain, and foster an ecosystem of founders, investors, and great people. The books are generously provided by JSV and our wonderful sponsor, McKool Smith.

Then, we invite the author of the book or a relevant person from the story to join us at JSV for a special evening event and fireside chat. We’ve held 3 events so far, with Frans Johansson, author of “The Medici Effect”, Dr. Bob Wachter, author of “The Digital Doctor”, and Joe Montana, quarterback for Bill Walsh, “The Score Takes Care of Itself.”

A couple nights ago, we were thrilled to be joined by Joe Montana and Matt Maiocco in a fireside chat discussing the great book, “The Score Takes Care of Itself.” Stay tuned for an update coming soon w video and highlights from the evening.

The next book club event is coming soon, April 19th, with featured guest Dan Ariely, and his new book, “Dollars and Sense."

If you’d like to join the book club, sign up for our newsletter to stay in the loop.

Ancora Imparo.

Marketplace Rake Factors

Thu, 29 Mar 2018 11:07:45 -0700

We all know that rake varies greatly in marketplace businesses. For an overview of some different rakes, check out Bill Gurley’s work here.

I’ve been thinking about some new businesses that are not yet monetizing and trying to figure out what the potential take rate will be in the future. In order to do this, I mapped out a variety of factors that determine the rough rake that a marketplace can capture. The map is far from scientific… it’s based on my observations of well-known marketplace businesses and estimates of the critical factors that drive rake up or down. Note that these factors are also not mutually exclusive, a platform could have some things driving up the rake and other factors decreasing it.

The average rake I see in marketplaces is around 20%. The various factors above can drive it up or down. For example, let’s look at Ebay. If you start from 20%, then deduct 5% for transparent fees and 5% more for buyer beware – you arrive at 10%. Actual rake is about 9%. However, for categories like cars and trucks, the rake is substantially lower since they are high price items.

An analysis of Airbnb would be 20% + 5% for insurance + 3% for scheduling - 5% for high price items - 5% for transparent fees and - 10% for users meet in person = 8% total. Actual is 9-15% depending on overall price.

iOS would very simply be 20% + 10% for a monopoly platform - 5% for transparent fees = 25% with an actual of 30%.

Again – these are far from perfect, only to be used as rough guidelines. Let me know if I missed any critical factors or comment below with your marketplace rake and an analysis based on these factors. I’d be happy to tune the numbers if I get a lot more data.

Marketplace Theory and Dynamics

Tue, 27 Mar 2018 15:22:46 -0700

I recently attended the Marketplace Conference and SDVG and gave this presentation about marketplace theory. It’s a collection of my thoughts and frameworks that I’ve developed over the last 13 years as an operator and investor in various marketplace businesses.

Link here: https://www.slideshare.net/jbreinlinger/marketplace-theory-and-dynamics

Marketplace theory and dynamics

from

Josh Breinlinger

Respect for the Michelin Guide

Tue, 27 Feb 2018 14:32:49 -0800

I was recently on a long flight and was watching a documentary called 42 Grams. I captured this image towards the end of the movie when the chef got a call from the Michelin guide informing him that he was just awarded 2 Michelin stars for his new restaurant. The chef was so overwhelmed with emotion that he collapsed his head in his hands and was brought to tears.

Chef Jake Bickelhaupt immediately after hearing that he received 2 Michelin stars.

Most star rating systems don’t have this kind of impact. Do you think an Uber driver is driven to tears when they receive a 5 star rating?

Here are a few observations of what makes Michelin so great.

* Frequency of Change – the ratings are updated once, and only once, per year. This solves two interesting challenges – one is recency and the other is frequency of change. It is important for users of a rating system to know that the ratings are current, and that is always the case since it’s updated yearly. The more interesting challenge it addresses is the notion of investment in the rating. Users that are being ranked need to value the rating system for it to have the desired impact. When a system is updated daily, I think users lose interest – it’s too much to think about on a daily basis. But when it’s updated yearly, it becomes an annual event and people strive to either maintain or improve their rating.

* Tenure – The Michelin guide has been published for over 100 years! That is simply incredible. Very few institutions last 100 years – this is a good testament to the power of network effects. Not much to learn here, except that this an incredible feat.

* Granularity – ultra simple to understand. A restaurant either has no rating or 1-3 stars. Anything with a rating is good. There are no rankings of bad things. Why would a ranking be necessary for something I don’t want to use. This has always bothered me a bit – if a rating system knows that someplace is “bad” – why even include it? A Yelp rating of 2 stars means you should never set foot in that place and users would be better served by a different indicator in the rating system. Also, the standard 5-star rating system of today is too much, especially when it includes half star points like 4.5 stars. Humans think more in terms of “good or bad”, or “good, better, best.” Rating systems should reflect this.

* World-class – Michelin guide is a great example of what I’ve previously described as Master Marketplaces. They selectively cover the best restaurants in the world and, as a result, have created an incredibly strong drive by chefs to be included in the guide. This is the power of a master marketplace, the best in the world want to participate.

* Anonymity – I’m increasingly a believer that the best rating systems are anonymous. This drives more accurate ratings as it eliminates the fear of retaliation and the more human element of kindness or grade inflation.

* High signal – the goal of many rating systems, especially those in master-level marketplaces, is to separate the wheat from the chaff. The Michelin guide has ~150 3-star restaurants. There are a total of about 15 million full-service restaurants in the world. This means that 0.0001% of restaurants are rated 3-stars. In contrast, many rating systems today end up with 20 - 80% of all items in the top feedback category of 5 stars. The relatively small and digestible number of 3-star restaurants also makes it possible for every foodie in a city to memorize the list. There are just 6 in all of the bay area.

All of this analysis leads me to an interesting conclusion. There are 2 basic types of rating systems that perform two completely opposite functions.

1) Identifying the bad stuff - pretty much all standard 5-star feedback systems today at Uber, Yelp, Upwork, etc - really serve to identify the bad stuff and get them out of the system. They don’t provide meaningful differentiation at the high end.

2) Identifying the excellent stuff - this is what the Michelin guide does so well. They identify the truly exceptional and indicate and separate the best of the best.

I cannot think of any examples of rating systems that do both of these functions extremely well. You need to decide what function your rating system is trying to perform and build accordingly. If your goal is to identify the best of the best, you’d do well to study the Michelin Guide.