As Marketplaces Evolve, Greylock Places Its Bets

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The idea of marketplaces as a business model for technology startups isn’t new. We saw some marketplaces go belly up in the bubble, and saw a few, like eBay, grow into massive businesses. However, the marketplace model has experienced a renaissance of sorts lately, with companies like Airbnb, Uber and others gaining serious traction and becoming billion-dollar-plus businesses.

Greylock Partners held a conference in mid-November devoted to talking about design, product development, the economics and more around marketplaces, spearheaded in part by the firm’s newest partner and former eBay Motors creator, Simon Rothman.

4363v3-max-250x250As part of its new $100 million commitment to investing in marketplaces, Greylock assembled Reid Hoffman, Airbnb co-founder and CEO Brian Chesky, eBay CEO John Donahoe, Nobel Prize Laureate and marketplace expert Alvin Roth, and many others to discuss the rise of marketplaces and much more. I was able to sit down with some of the speakers to talk about their thoughts on why marketplaces are hot right now.

Hoffman, who founded LinkedIn and was an early investor in Facebook, sees many parallels between networks and marketplaces. On the similarities in both models, he says: “There’s a question of how do you identify people? What reputational systems underlie it? What kinds of information and signaling? What kind of transactions go public? There’s some differences, too, but it’s essentially a similar brain activity.”

As for why marketplaces are getting more attention now, Hoffman believes that it’s in part due to mobile and the progression in human behavior. “Now everyone is comfortable with the notion of, ‘Oh, I could actually find someone I don’t know and transact with them, either as travelers, hosts, sellers, buyer.’ Those that can actually work mean that I have some trust in these mechanisms,” he explains further.

Rothman agrees with Hoffman, and told me that trust is a huge element of why marketplaces have evolved, as well as the biggest challenge for these marketplaces. “They’re really selling trust. And until the web adds social identity, I think creating trust at scale is really hard. As we’ve heard, marketplace is about influence, and if you can’t control the experience, if you can’t control the product, you can’t control the fulfillment. All you can control is trust and you need to have that. And then mobile is an accelerant to that. If you are a local market, or a local business, you have to have mobile. There’s just no way Uber works without mobile,” he says.

Reid Hoffman

Reid Hoffman

So how do marketplaces add trust? Hoffman advises to look at mechanisms by which you can essentially borrow some trust and add it to the product, such as using social networks or identities. He recalled a product development from his PayPal days, where an engineer developed a better way to authenticate bank accounts.

For years, in order to authenticate a bank account you had to send in a voided check, and a copy of your drivers license. PayPal realized that if they wanted to get to scale, the company would have to make it easier to create accounts. “If we can’t solve this problem, we basically don’t have an interesting business model,” he said. One of the early engineers developed a way to send two sub-dollar transactions to the account, to create a PIN of sorts for instant verification.

While friction is something most marketplaces want to remove, Rothman argues that some should consider “the concept of strategic friction” when it comes to trust and safety. He thinks it’s one of the only places where friction is not only tolerable but kind of desirable.

Of course, one of the marketplaces where trust and safety have been of the utmost importance is Airbnb. Hoffman recalled when he heard Airbnb’s pitch, he was in immediately. “When Brian and his cofounders pitched me, I stopped them a couple of minutes in, I said look I’m interested in investing. I want to hear the rest of the pitch and talk about it, but I get this already.”

Hoffman says that Airbnb was creating liquidity out of space. Even if the hosts didn’t own their real estate, the liquidity involved is “hugely valuable and motivating to them.” So, they’ll adopt mobile products, and go through hoops to make that happen. “There was no question that this is going to work,” he says.

But Hoffman recognized that there have been bumps in the road when it came to trust and safety–but he said that what made the difference was Chesky and his team’s hard work is setting things right. “Brian motivated the entire company within six weeks, and said We are revamping trust and safety, in the same kind of pattern he was talking about in terms of developing for mobile,” Hoffman recalls.

Separately at the conference, Chesky talked a bit about design, and how he approaches designs at the company. Airbnb launched a complete redesign of its mobile app in November, and Chesky was involved in every part of the three months it took to implement and create the new design, even forgoing hiring efforts. While it took three months end to end to launch a new version of the app, the actual design took place in a matter of three weeks.

Brian Chesky

Brian Chesky

When doing the design, the company put up a huge wall where they printed every single screen in the app and placed it on the wall. It amounted to around three hundred separate pages. Chesky learned at art school that you need to draw the whole canvas before rendering because you lose perspective. People tend to get stuck on one page in a design or redesign, and I didn’t want that to happen.

And because the design has to cater to two groups, the host and the guest, one team would design the pages from the guest point of view and another from the host point of view. Chesky also met with the designers every couple of days or even every day and that was really, really critical to the speed of design and overall success of the project, in his opinion.

One speed bump that many of these marketplaces hit is regulatory pushback. Every large marketplace of late, including Uber and Airbnb, have had challenges dealing with local regulatory agencies. In fact, Rothman says that “any interesting marketplace will hit regulatory issues…largely, if you’re not hitting a regulation issue, the likelihood that the marketplace is interesting is very low. Not zero, but very low.”

Hoffman is familiar with this, as even networks hit regulatory challenges. He explains:

“I think the simplest way to understand regulation is, there’s a bomb, there’s a fuse, you’ve lit the fuse. And you have to figure out how long the fuse is and how fast it’s burning. And you have to pay attention to that. And then depending on what you think the dynamics are, and there’s certain things you think that can accelerate this fuse or not.”

He advises that in the early stages of any marketplace that may hit regulatory snags, founders should figure out what their engagement strategy is. “You don’t want to pre-sell [regulators] on the benefits. You want to get to where they just look around at host sipping coffee and say, “Oh, how was it being a host? How was it being a traveler. Oh, great.” He says you shouldn’t stick your head in the sand, and ignore regulators but also going to them early may be futile as most regulators don’t want change.

“So you want to keep that in play to the point where you can build it out and make them go, “Oh, I get this.” And by the way, then, at that point you have a large constituency, if you’re being successful, that also is arguing in your favor and then that allows for regulation change. The regulators, legislators, other people need to figure out what the thing should be.”

Now that Greylock is allocating some of its new $1 billion in funding toward the marketplace model, we’ll be looking to see where the firm will be placing its bets. Rothman thinks that in the next five years there will be more $1 billion dollar marketplaces than there were in the past 20 years, and we already have quite a few that are rising fast. Stay tuned.

[Photo modified from Shutterstock]