225. Crisis Coverage w/ Sarah Tavel – Consumer Marketplace Investing; Why Aggregate GMV is a Red Herring; and Minimum Viable Happiness as the Key to Market Leadership

225. Crisis Coverage w/ Sarah Tavel - Consumer Marketplace Investing; Why Aggregate GMV is a Red Herring; and Minimum Viable Happiness as the Key to Market Leadership
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Sarah Tavel of Benchmark joins Nick on a special Crisis Coverage installment to discuss Consumer Marketplace Investing; Why Aggregate GMV is a Red Herring; and Minimum Viable Happiness as the Key to Market Leadership. In this episode, we cover:

  • Background and path to venture?
  • Quick overview of the thesis and your focus at Benchmark
  • What are your thoughts on platform VC?
  • What tactics or approaches do you use in the process of “scaling your founder”?
  • You sit on the board of some companies, such as HipCamp, that have been greatly affected by the pandemic — What are some of the creative responses you’ve seen from portfolio companies?
  • Is there anything fundamental to Marketplace businesses that you think will shift as a result of the crisis and changes in consumer behavior?
  • In the food delivery space, we recently witnessed DoorDash unseating the larger incumbent: GrubHub, with the greatest market share. DoorDash started after PostMates and years after Grubhub… how’d they do it?
  • Do you currently see or do you predict more situations where a startup capturing more supply will lead to displacement of a large tech company as market share leader?… if so, in what markets?
  • Recently, you published a series of newsletters talking about the hierarchy of marketplaces… first off, what are the three phases that you’ve outlined here?
  • Why is a push to aggregate GMV across many markets, less important than dominance in one market?
  • What is Minimum Viable Liquidity?
  • How do you define/measure happiness?
  • At what levels do you know you’ve reached MVL or MVH?
  • Level 2 of your Marketplace framework… Can you talk about what it means for a marketplace to “tip” and how do marketplace based businesses achieve this?
  • Is there something specific that happens w/ the metrics of a businesses that show that the marketplace is tipping?
  • Do different stages of fundraising map to these phases?
  • The third phase you refer to is the ‘Outrun’ phase… walk us through the main focus areas in this phase.
  • Homogeneity of the buy-side as a negative… can you expand on this?
  • How does your evaluation of a marketplace based business differ whether it’s a b2b company or a b2c company, if at all?
  • Let’s say you are approached to invest in a Consumer Marketplace company with $10M in GMV, a 25% take rate, and 20% MoM growth for the last 6 months.
    • Catch is you can only ask for 3 data points to make your decision.
    • What 3 questions do you ask for?

Guest Links:

Transcribed with AI:

Intro 0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet.

Nick Moran 0:23
Sarah Tavel joins us today from San Francisco. Sarah is a general partner at benchmark where she invests in consumer businesses with a focus on marketplaces and social. Prior to joining benchmark in 2017. Sarah was a GP at Greylock, one of the first 35 employees at Pinterest, and a vice president at Bessemer. Sir, very warm welcome to the show.

Unknown Speaker 0:44
Thanks so much.

Nick Moran 0:45
Yeah, I’m so happy that we found time to do this. So, you know, I gave a very brief kind of overview of your path to or your path since you started in venture, can you give us your path to venture?

Speaker 1 0:57
Sure. You know, it’s so I my path to venture I kind of joke that I got in through the backdoor. When I was an undergrad I was very far from the technology world, I was a philosophy major of all things studying Kantian ethics. And you know, at the same time, I’ll admit I wasn’t the best student ever, I kind of was more oriented in college to making money and playing rugby and those types of things. And and so what ended up happening is that when I graduated from college, I joined a strategy consulting firm that was a startup you know, and always been entrepreneurial in my own way. And so it wasn’t looking to join, you know, the McKinsey’s of the world, I probably wouldn’t have even gotten an interview, I didn’t, I didn’t even bother applying, but joined, you know, strategy consulting firm. And as kind of classic startup story went up, and then it went down. And as it was, you know, thrashing. I started to look for a new job, and start to get really interested in equity research jobs, just because my dad had been a public equity investor, and I grew up just being really interested in it always reading whatever I could and creating phantom portfolios. And so I decided that that was what I was going to do after this consulting firm. And then I had a lucky break, which is that I talked to a friend of mine, to trust good advice. A friend, her name’s Rosa, whoo. And she was like, Well, you know, Sarah, you did all these entrepreneurial things in college, and you’re interested in investing, like, you should look into venture capital. And I was like, What’s venture capital? And then what ended up happening is, you know, I went to a bookstore, which seems very old fashioned, I bought this vault guy to venture capital read about it. And I was just, you know, just reading about it got me so excited. It was a world that I didn’t know existed, but felt like the perfect intersection of kind of my two, my two interests. And so I then got just extremely lucky, which is that there was a job posting for an analyst role, which is like the pre MBA, you know, bang, you know, heart cold calling startups role at Bessemer Venture Partners. And so I I applied to the job. And the second lucky break, or third lucky break, I guess, you could say in a string of lucky breaks was that Jeremy Levine was the person that I ended up being hired by and working for, and he’s just an exceptional thinker, and person and mentor and, and that was, that was how I got started. And what was supposed to be a two year job, ended up being six. And that was, that was how I got started.

Nick Moran 3:49
That’s awesome. We actually just had fellow Bessemer investor Byron Dieter on the show, who is also a rugby enthusiast.

Speaker 1 3:56
Yes, yes, that was actually something that we both bonded over early days. He, he you know, his team, the Berkeley team was far better than our Harvard rugby team. But it’s still still still still an awesome commonality.

Nick Moran 4:10
So fun. So So what took you to benchmark?

Speaker 1 4:13
So when I you know, I was at Greylock. I had joined Greylock from Pinterest. And it was just getting to know the firm and ended up making the leap to Greylock and was, you know, was really, you know, like it’s an incredible group of people. But there was something that didn’t quite feel like the right fit for me and I hadn’t, I wasn’t really able to put my finger on it. Until, you know, through some some, you know, happenstance, I got to know the benchmark team. And the more and more I got to know the benchmark team, the more I realized that there was something here that I couldn’t unsee that there was a way of doing the job at benchmark that felt much more of a fit For me, I mean, you know, there’s no, as I’m sure you know, and your audience would know, because there’s so many VCs out there that like to pound their chest about how they do venture and how their firm is organized or structured, there really is no one way. And And oftentimes, it’s, it’s just a reflection of who the partner is, and the firm that they chose to be a part of what the cultural values, reflect about them. And then also, you know, it’s an opt in by the founder of those of those values. And for me, benchmark with its small partnership with its, with its, you know, equal partnership, and just the quality of the individuals there, made me realize that this was the way that I wanted to spend the rest of my career in venture, and the place that I thought I would be able to do, to do my best work both as an investor and as a board member. And so got to got to know the team, and then eventually, was lucky enough that they asked me to join. And so I’ve been here, as you said, for three years now. So

Nick Moran 6:05
great, I think many of the listeners understand benchmark, and your firm is one of the best in class firms in the business with many, many great successes. So it’s, you know, it’s a huge pleasure to have you on, but for those that maybe aren’t as familiar, can you give us a quick overview of of benchmark, the thesis and your focus there?

Speaker 1 6:27
Yeah, so, you know, benchmark, we were started, call it 25 years ago, by a group of founders, who had the insight that a lot of you know, in a lot of firms, you have a collection of individuals who have been there for a long time. And it’s really usually the young people who are doing all the work and making all the investments. And so they wanted to create a structure that was evergreen in nature, and really incentivize, you know, the team, all the partners to, to work as a team, which is, you know, something that everybody, you know, all firms pay lip service to, but I’ve you know, I’ve been on the inside of a three now, and I can tell you that it’s, it’s a very different thing, when you have a compensation structure and organizational structure, a cultural tenant of a quality, that, that really orient everybody towards towards working as a team. And we’re focused, kind of we use that team orientation towards investing in series A companies and some series B’s, you know, the first that first board member, and that’s what we wake up every morning. And think of as our job is finding companies at those very, very early stages, and then being really their first their first board member, I would say that’s about 80% of the companies that we invest in. And sometimes that means that we’re actually the first check into a company. Or sometimes it means it’s kind of the classic series A, and then we’ll do some series B’s as well, it’s kind of I always joke that when we mess up and miss the A, we, we don’t have an ego about it. And we do our best to then when that be and and we focus really on software businesses, I think that one of the things that really defines benchmark is, you know, we haven’t grown our fund, we haven’t grown our team, like we’ll never be more than six GPS, because we just think we can’t work as a team. If we’re if we’re bigger than six GPS, and we haven’t, you know, our focus on software, businesses, companies that can really scale and get incredible operating leverage, we also haven’t lost that focus. And so I would say that’s probably the best the best summer. I mean, maybe the one other thing that I’ll say about it is, you know, in some ways, we we just have a different, you know, we we have a very different philosophy to many other firms now in the valley, which is that we, you know, we’re just general partners, and there’s no junior people, there’s no Talent Team, there’s no marketing team, we have terrible PR because we have no PR person. We you know, I joke that people often will ask us, like, dude, who’s your PR person who’s doing your podcasts or your, you know, your, like, whatever articles that say, Well, I build garlis Or no, actually now it’s a thin shaytans our social media manager, Eric’s our PR person, like we just have, we have nothing and and and we do that because we don’t think that we can delegate any part of our job that at the Series A, there’s just so much nuance to getting that, you know, incremental hire right, or getting the strategy right making a decision, right and at a critical moment, that if we were to delegate any part of our job, we wouldn’t be able to do to provide the best advice to the founders that we work with, you know, there’s just such nuance at the super early stages that as a company matures, it becomes a lot easier to delegate and outsource those types of responsibilities because it becomes a little bit easier to make those decisions. But the super early stages of just, you know, the wrong hire can make such a big difference on a company’s trajectory that we think that we have to be as as much mind melded with a founder as possible. And, and, and so that means, you know, I’m probably doing eight, eight recruiting calls a week right now, you know, because that’s, that’s just the way the business that’s the way we we do the business. Yeah.

Nick Moran 10:46
I’m curious how that dynamic is and how the culture is right? When you have so many people in the GPC whether they’re Alpha personalities or not. I’m sure the selection process and the cultural process of adding to that GP group is very careful. And in its, those decisions aren’t quickly made. But nevertheless, you know, there’s got to be some interesting dynamics culturally to leadership, and then also keeping everyone honest, right, everyone’s got to kind of pull their weight.

Speaker 1 11:17
Yeah, for sure. And look like it is, you know, you allude to something that is really important to us, like I always, you know, I, we’re definitely a partnership where we feel like the sum is more than the parts. And it’s, it’s a special team, you know, that comes together where we all we all realize that we’re imperfect in our own ways. And so the ways that we make each other better is not by thinking that one person has to make the decision on an investment or help kind of close the investment all by themselves, but that we actually are better when we bring all these different diverse perspectives to the table to make the best decision possible. And in order to do that, you have to have people that not just you respect as investors, but that you actually feel affection for. And you’re really like, being with and, and, and we spent a lot of time together. Every Monday we were together from well, I should say, pretty COVID We’re together, you know, breakfast to dinner. And we love we love that time together we have we have fun together. And so because of that, when we are, you know, meeting people who are potential GPS for us, it’s not just a question of, are they going to be a great investor? It’s a question of, are they going to make us as a team better? And do we really like spending time together, and that’s, you know, that, as you know, is not something that you can just go through a series of interviews, and check the boxes on it’s, it’s a real process of getting to know each other, and not a process that we can really rush.

Nick Moran 12:57
So you’ve said before, that you’re 100%, focused on scaling the founder, you talked before about some of your talent efforts, but, you know, how do you guys scale founders?

Speaker 1 13:09
You know, it really, it’s, it’s what I, it’s what I articulated, which is, I think that we are really, really focused on investing the time to build a trusted relationship with the founders that we work with. And then, you know, by understanding them, and understanding the organization at a at a really deep level, then helping, you know, as much as possible. You know, my my partner, Peter Fenton describes it as pulling forward the future into the present. You know, it’s just the when you are on a board, and as opposed to the person who’s actually running the company, when you’re, when you’re running the company, you’re, you’re just in the weeds. And the board meeting is really useful and kind of grabbing someone’s, you know, someone’s hair and jerking their head up, so that they look a little bit further along. But I think that what a really great board member does is, is keep that, you know, that long view, and then help the founder see that, both in terms of their own scaling, how can they continue to grow as founders, which, you know, is just one of the hardest things because the job is always changing, and always demanding more of the founder. But then also in terms of the people that they have around them? Do they have the right people? Are they scaling? Or what are their holes? How do we compliment the CEO in the best possible way to help them continue to scale and scale the organization? And then the strategy and I hope it’s through those three things that we really help the founder scale as best as possible.

Nick Moran 14:43
So you mentioned boards, I know that you’re on multiple boards, such as hipcamp, for instance, company that has been affected by the pandemic here. You know, what I’m curious to hear what are some of the more creative responses you’ve seen? In from your portfolio companies in, in their founders.

Speaker 1 15:04
Creative is an interesting word it’s, you know, maybe perhaps all problem solving is, is its own form of creativity, I think that look like hipcamp. And, you know, I’m on five boards, as you mentioned, and an observer for another one. And I would say that four of my companies got affected by COVID. You know, it was, it is, you know, positively and negatively, negatively, it’s like one of those things where, you know, it feels it’s an unprecedented event, obviously. And at one point, I tweeted that it feels almost like companies got hit by the lucky or unlucky stick. It’s true, you know, and it’s, and it’s really hard. And what’s also hard about it is that, it’s not just that some companies were executing really, really well. And then, you know, everything the ground beneath them shifted. But then it’s also the uncertainty that we all are facing in our lives. And when you’re running a business, which is, well, when does this change, and so I think that the best, the responses that I’ve seen have been a combination of a, you know, looking the brutal facts in the eyes, and not being afraid to make some really difficult decisions that, you know, create more optionality for the business. And what I mean by that is, you know, one of the things that I found myself saying, a lot, during the first month of the kind of shelter in place mandate, is that, you know, winning and losing during a time like, this isn’t about surviving, if you’re a startup, it’s about maintaining the resources, so that when things do start to thaw, and people, you know, there’s this, people get, you know, either adapt to the way things are, or we are on the other side of this, which inevitably, we will be that you have enough resources leftover to re accelerate the business, because that’s, you know, it is always about growth. It’s not about survival for these companies if you need to, or want to continue to, you know, be able to raise money, so they can, you can, you can grow faster. And so, the companies that were just reacted really quickly to maintaining resources that they need. And the second thing is that there were some companies that actually saw a tailwind, you know, like they, they kind of caught the early sent, that COVID was going to help some part of their business that maybe they hadn’t prioritized, or it wasn’t immediately on the roadmap. And they pulled forward those parts of the roadmap to be able to ride the tailwind and they’ve seen remarkable results of that. So it’s really been a combination of the two things, and it’s you know, leaning in, not just on preserving optionality, but also grinding the momentum that you see. So

Nick Moran 18:03
when it comes to the the resources, I mean, is that cash as well as talent, like having the cash and the talent for when things come back to, you know, fulfill your, your, your vision and your your mandate? Well, that’s

Speaker 1 18:17
usually the trade off, right. And so it’s about choosing, there are some resources like, um, you know, you never want to stop investing, and in product and engineering. And so there are some resources where you want to just continue to build for the future. And there are other resources, like as an example, you know, sales, if, you know, one of my boards that I’m on is a marketplace for restaurants and their suppliers. And so, when restaurants feel like they have been hit by, you know, the biggest shock that they’ve ever experienced, it’s really difficult to sell to them. And so, if you think about the, you know, the done like, in the most rational, crude way of thinking about it is that if you have $100 to spend, now you have $100, you can spend, and that’s the resources that you have on your balance sheet. If you put that resource to work now, when things are really hard, and restaurants are unsure of what their future is, and probably more focused on on their own cash flow and and what they’re going to do with their rent than they are about trying a new product. versus, you know, two years from now, you’re probably going to get a much better ROI on that $100.02 years from now, just you know, and so it’s it’s those types of conversations of where are the resources, where do you invest resources, and where do you actually wait to invest the resource?

Nick Moran 19:47
You know, I do want to sort of dive into marketplaces today. I mean, this is a huge part of your focus. It’s something that we’ve been looking to address your on the show for some time. You know, you wrote a really good piece that talk about the food delivery space, we’ve seen DoorDash GrubHub, Postmates, UberEATS, you know, many, many different players here. And GrubHub, of course, merge was seamless and became the largest player, largest incumbent, greatest market share. But very recently, we saw DoorDash unsweetened and take over kind of the largest share position. Can you kind of describe for us, you know, how they did it? How they pull it off?

Speaker 1 20:29
Yeah, it is a remarkable story, isn’t it? We’re so used to, you know, in marketplaces, we’re so used to the idea that if there’s an incumbent that has, you know, kind of just tremendous market leadership, it’s really hard to unseat them. And then we see what happened with with GrubHub and Uber sorry, with DoorDash. And Uber Eats unseating, GrubHub. And it just, it’s a, and there’s so there’s countless other examples I could give along this trend. You know, DoorDash did, you know, it’s always a combination of doing something really right and getting a little lucky. There were, there were two things that they did really, right. One is that they had this insight, which they actually copied from Postmates and other company in the space, that if they, you know, GrubHub had limited to whom they provide delivery, you know, to whom they let get on their marketplace, to restaurants that have their own delivery fleets. And Postmates was the first to realize that if we provide a delivery fleet fleet to the restaurant or to the to the retailer, then we can put, we can list more of these businesses on our marketplace, which creates a stronger value proposition for the consumer. So DoorDash took that insight of expanding the supply. And then they applied that insight to a really small market, which was the suburbs of the Bay Area, you know, and which was actually a very different approach to what Postmates was doing. Postmates actually went after San Francisco, they went after a bunch of different categories, you know, not just restaurants, but retailers and cafes, and a bunch of other things. Whereas DoorDash, they just super focused on restaurants in the suburbs of the Bay Area. And they just, they just really nailed it. And they were able to kind of take that playbook that they developed, and apply it to a lot of other, you know, suburbs and cities, and just start to really grow and leapfrog GrubHub in the availability that they had, just because they were they were, they were going, you know, they were going after these restaurants that didn’t actually have their own delivery fleet. But the thing that they did that got lucky is that there was a period of time truthfully, we’re, you know, DoorDash struggled to raise money. And then they, you know, they got the they got an investment from Softbank, a pretty significant investment. And it let them really invest ahead of, of what GrubHub was able to do. Because GrubHub, you know, it’s a public company, and they, you know, report every quarter their profitability and cash flow and earnings per share, were just a very different orientation to what DoorDash was hearing from their investors, which was, you know, a more of a growth at all cost mentality. And, you know, it’s always in marketplaces about how much bigger you are than the number two, like that’s, that’s what you want to get to. And it’s much easier to get to that leadership position, when you know, you can when you’re encouraged by your investors, and you can kind of have an orientation around the unit economics, that it’s more about winning that market leadership position than it is about the actual unit economics of that of that approach. And so DoorDash has been able to do that to great success so far in terms of market leadership. Yeah, so

Nick Moran 24:04
you mentioned this, this point around how it’s important to be or the degree to which you’re bigger than number two is, is critical. And building a marketplace business. You also wrote this great series on the hierarchy of marketplaces with three major phases, sort of a framework, there was the kickstart phase, the tip phase and the outrun, maybe we can dive in here and just to kick it off, talk to us more about this, this approach of, you know, really doubling down and being best in the market versus just pushing to aggregate GMV across many markets.

Speaker 1 24:42
Yeah, yeah. No, it’s It’s exactly what you allude to, which is I see this mistake happen a lot, which is that founders come in and they just they get very fixated on you know, we need to hit a million of annual sgmp In order to, to be able to raise our A or you know, whatever. for whatever it ends up being, and forget that like what you’re solving for, when you’re building a marketplace, is that you want to become the place that is just such a no brainer that you would be irresponsible not to use if you’re on the supply side or the demand side. And that, that generally means that you’ve tipped the market towards you. And in order to be in a position to tip the market, you have to, you want to be what you just articulated, which is that you want to be so much bigger than the number two, that you’re you’re just you’re growing, you’re focused on a market, and a network effect starts to really kick in, so that it becomes easier and easier for you to grow. And by growing, you’re creating more value. And that that’s when you you’re able to create, you know more value for your, for your constituents, your supply and your demand side, and therefore, capture it yourself. And when people are focused on aggregate GMV instead, what where you end up is that you end up inevitably, as middle of the pack, you know, there’s no single marketplace, that’s the leader. And when you’re not, when you’re in the middle of the pack, and you’re not a leader, then you’re you know, you’re fighting tooth and nail for every percentage point of market share. And that’s when you see, you know, just talking about food delivery, that’s when you see the food delivery companies offering, you know, big coupons for people very generous roofing rebates, if they got something wrong, because they realize that it’s a fight for every incremental, you know, customer on the buy side of the demand side, because there’s so neck and neck and trying to get to that dominant number one position. And as you know, a startup can only take on so much at the same time. And so when you’re, you know, diffusing your focus across a bunch of different markets, you’re gonna get beat by someone who’s more focused on an individual market

Nick Moran 27:02
yet, so we hear a lot of investors talking about reaching a critical mass in a market. And I really liked your material, because you took it a step further, and you talk about this, this concept of minimum viable happiness. And, you know, there’s, there’s some marketplaces that don’t have multiple players, like at the beginning, an emerging tech marketplace, it’s just them. And so I think a lot of actually, there’s a deal we’re closing right now marketplace, business, consumer marketplace, marketplace business, really fast growing, the guys are fantastic. But they’re struggling with this, like, how many markets do we expand to? and at what time? Do we make that expansion decision? versus, you know, just doubling down and focusing more on the existing core? Right, so can you can you talk to us more about when do you see how do you measure Minimum Viable happiness? And when do you see that tipping point that tells you you’ve you’ve had success? And you’re ready to, to launch in more markets?

Speaker 1 28:01
Yeah, it’s a great question. And it’s, you know, it’s, it’s funny, this, this may be I hear, you know, a lot of companies that come in, and, and they’re getting different advice from, from, from me, and from my partner Bill on this question. And so it’s worth expanding upon a little bit. You know, I call it Minimum Viable happiness. And the idea is that, you know, again, a lot of people get oriented towards growth and growing GMV numbers, but there are countless examples. And, you know, we talked about GrubHub as one of them, but you could talk about goat, you could talk about Uber, you could talk about Airbnb, where there was another incumbent that was much bigger, and yet the new startup was able to disrupt them and leapfrog the experience and ultimately get bigger than the incumbent was. And the reason they’re able to do that is because they, they often focus on something that you know, just is more constrained, like, they really nail a value proposition. So goat as an example, was battling eBay, where there was a lot of inventory and a lot of transactions, but they really nailed the value proposition around counterfeits and I’ll just buy Yeah, first of all time. That’s exactly it’s, um, and so they, you know, by really, really focusing you can, you can, you can create, not just, you know, more liquidity but more happiness, like the end to end transaction ends up being a far better experience for both the buyer and the supplier. And I think that when, when, when marketplace, founders just focus on liquidity, I think it narrows the focus too much and thinking about happiness makes you think more about that end to end experience. The product, the policies you use, the trust people have, when they’re transacting, how quickly they get their money, like all those things, the error rates. And so I think about, you know, happiness, not just the Quiddity. And then what has happened, what is the minimum viable happiness mean, right? For me, it’s when you get to a point where you’ve tuned both your focus area, your product, your policies, everything that I just articulated, such that there is a sufficient percentage of your buyers or sellers, that that stick with you, you know, you’ll you’ll see, like, I always encourage, you know, marketplace founders to be tracking their business on, you know, a weekly cohort basis, what you’ll see is that you and what you need to see, in order to feel like your comp, like you’ve you’ve nailed the value proposition is that you see your, your cohorts actually start to ask them to vote. So it’s not this leaky bucket, but that you’ve, you’ve made people happy enough that they stick with you directionally,

Nick Moran 31:00
or their percentages, or, or levels,

Speaker 1 31:03
it really depends on the vertical. And so it’s, it’s, it’s hard to say so as an example, and travel, you can imagine, and sorry, it actually it depends on the vertical. And then I also think that there’s tends to be different behaviors on both the supply and the demand side. So travel as an example, as you would imagine, the supply side ends up having, you know, a very high retention rate, and you would actually hope to see net revenue retention, that is positive over time. So you get someone started, and then they, they divert more and more of their business to your marketplace. But the the demand side might actually have really poor retention, you know, over a period of time, because, you know, I think Airbnb talks about people booking with them, you know, it’s like less than two times a year. And so you have to track those, those cohorts over a really long period of time, in order to see the benefit of that of that value proposition. You see it more on the other side, taking Uber on the other side, you can imagine that the demand side is just crazy in terms of the retention, but they have to put more effort into maintaining the supply side.

Nick Moran 32:09
Got it transaction frequency plays a big role. Huge role. Cool. Let’s talk a little bit about the second phase is the tipping phase. Is this related to to the happiness concept, when you reach happiness, then things start to tip or, you know, what, what is it that happens, that indicates to you that the marketplace is tipping. So

Speaker 1 32:30
it’s, you know, I always think about this, this, you know, a graph and X Y axis where what you are trying to do with the x axis is call it happiness for the supply side, and the y axis is happiness for the demand side, and just imagine a line that’s up into the right. You know, as a as a marketplace, what you’re constantly trying to do is, you know, it’s not about growing, it’s about going up this curve, and an almost growth is the positive externality of going up the curve. Or it’s really a means to the end and the means is growth, and the end is increasing your happiness, right. And so if you can, and part of the way, there’s a few ways to do that, one of the ways, you know, if you have the possibility of a network effect is to grow, right? Like, as you grow, and you’re adding more suppliers, the suppliers then attract more of the demand side, and the demand side, you know, then creates more revenue for the suppliers. And so more suppliers come. And if you can get to that, that flywheel, then you’re in a really great position, because the happiness that you’re able to create for both sides of your marketplace just keeps on going up until relative to any substitute, you’re just the no brainer, and then the market tips to you. And there’s, you know, there’s a bunch of different ways, and I’m happy to talk about some of the loops that can help you get there. But that’s, that’s the core idea with tipping. Yeah,

Nick Moran 34:07
I love that. I feel like my team and I, we talk a lot about how revenue is a lagging indicator, right? It’s symptomatic of the right first principles and focusing on the right things. And if you’re doing the right things, then that comes whereas I think of a number of peers, not to be named specifically but a number of people like they preference traction first or want to see certain traction levels just to engage in I try and take that principle and get it out of my my team’s head because it’s just not the way that we like to approach. I’m

Speaker 1 34:39
so with you like I am a huge believer like I will never trade off a short term, you know, vanity metric for the long term health of the business. And I think, you know, the growth versus happiness is one of those trade offs that people should really be aware of. And

Nick Moran 34:55
I do want we’ve got some other questions here, but I do want to hear Maybe can you give us an example of one of the loops that you had mentioned?

Speaker 1 35:02
Yeah, sure. Like I think about you know, every, there’s two types of loops that I think about one of them is something that is not unique to me, which is growth loops. So finding ways where you can use your existing, you know, biocide or supply side in order to help grow the business. So a super simple example is, you know, supplier to supplier referral. So, Uber driver loves driving, and so refers Uber to one of their friends. And that’s like a natural loop that happens. And then your job as a marketplace founder is to find that type of loop and maximize it. And a way to do that is financial incentive as an example. There’s another type of loop though, that I think a lot about, because you know, to our discussion, for me, it’s not just about growth, it’s also the quality of that growth. And I think about a happiness loop, which is, you know, a loop that actually improves the quality of your matching your your liquidity as you grow. And so an example of that is like reputation. So as you know, if you have a great experience with a with a supplier, you read a review, or you know, give them a thumbs up whatever the mode is, have a reputation. And you can you know, as you do that, it means that more value will accrue to the suppliers that are great. And then the suppliers who are bad will actually churn out. And it’s it’s an interesting point, which is that churn by itself actually isn’t bad. What you want to avoid is that the good suppliers, the suppliers, you want to keep churn, but it’s very healthy for the bad suppliers to churn out. And so you want to find loops that that are constantly, almost like the kidney for your marketplace and cleaning out the weaker suppliers. Well.

Nick Moran 37:01
So what happens in the next phase, right, the outrun phase is this is this where you’re doubling down and you’ve figured out these loops that are working, you’ve tapped the market, and you do more of what’s working or talk us through, you know, the, the core tenets of this phase? Sure.

Speaker 1 37:16
And so it is very much like, okay, you’ve got something like you developed a playbook and level one, which is kickstarting is solving the chicken or the egg problem, but then also getting to this point of, you know, minimum viable happiness, then in level two, you figured out a second playbook, which is, how do you you know, find these loops that we just talked about, and maximize them, so that you’re the flywheel that you’ve, you know, your network effect just starts to gain more and more steam, and then eventually tips a market? And then you’re faced with this question of like, and kind of to the, the founders that you talked about earlier? Like, what do we do now? Do we, you know, do we grow? Or do we just stay focus on the categories or geographies that we’re where we are? Where we are? Do we? Do we go after new geographies? How far do we spread ourselves? And, you know, to the conversation we had earlier, you know, the value of a marketplace is so dependent on the competitive landscape, that I think that you have to really think through and be situationally aware of your competitive set and where they are in each geography or category, in order to make the best decision here. And if you’re as lucky as the founders that you described earlier, and you have no competition, that I think first you go slow to go fast, you really nailed those two playbooks, and then you take on as many geographies or categories that are consistent with your brand as possible. If, if on the other hand, you have competitors, then I think that what I always think about is I think about Postmates, Port Postmates I love basketball, and I love what they’ve done. But you know, when you what you have to do is you have to look at all where you are, and make a decision of where am I going to put my resources behind, so that I win that city, or I win that category. And so, you know, it’s not just about being somewhere, it’s about winning it. And I kind of think like, if you’re not at least to x bigger than a competitor in a particular geography or a category, then you have to make a decision and your decision is either invest more in that you know, city or category so that you do become the number two, I mean, the number one, buy at least two acts the number two, or cut your losses, you know, why put more good money after bad just move on and direct your resources to the places where you can be number one, and be number one by a big margin and I allude to Postmates because what they you know, I would say and look hindsight 2020 But they spread themselves too thin, they put a lot of money into a lot of different cities. And if they had just, you know, put more wood behind fewer arrows, and really focused on places like Los Angeles, they would have been able to, you know, get really dominant leadership there. Versus now what you see happening is that they’re fighting, you know, neck and neck, with with with DoorDash, and others. And so it’s very much about win the market or cut your losses. Well,

Nick Moran 40:32
I love the example you gave before, where DoorDash changed their frame on the market. So it didn’t have to be, Hey, let’s go win San Francisco first or New York first. But maybe we go to the suburbs, and we build a lot of momentum there. Because there’s a place where we won’t have as much competition. That’s exactly

Speaker 1 40:50
it. And it was such a smart decision. Like I really give them credit for that it was a very smart decision. Because you know what, go after the Greenfield, like, it’s a lot easier to be the best when you’re the only right, such a better chance of winning, and then you go from strength, you know? Yep,

Nick Moran 41:08
it’s part of the reason I launched the podcast at the very beginning, we were the only ones there was just nobody doing audio and kind of, of course, better better hosts came along, of course, but but we were first. So, you know, I want to talk, we could probably do a whole podcast on this. I don’t know if we can boil this down. But, you know, how does your evaluation process differ? You know, when it’s a b2b company versus b2c? Um, on the marketplace said,

Speaker 1 41:37
Yeah, on the marketplace side? Um, you know, I don’t know if it really, is that different? You know, you see, I think probably the nature of the marketplaces are more different, you know, you in on the b2b side, it tends to be more about labor marketplaces, as opposed to on the b2c side, you see, you know, a very wide variety of the types of marketplaces. But it’s a lot of the same questions. It’s a lot of, you know, getting to market share, I mean, getting to share of wallet, getting to, you know, the net revenue, retention, all those things. So I think it’s pretty similar.

Nick Moran 42:15
Okay, so I’m gonna put you on the spot. We’ve got a quick segment here, we call three questions. So let’s say your approach to invest in a consumer marketplace company, the company has 10 million of GMV, they got a 25% take rate, they’re growing 20% month over month, let’s say for the last six months. The catch here is you can only ask for three data points to make your decision. And no shortcuts. No. Give me a p&l. So what three questions do you ask?

Speaker 1 42:47
Um, interesting. Well, I would ask, you know, I’ve talked about this at nauseam at this point about cohorts. So seeing the cohorts, like weekly cohorts, by both the number of the number of participants both on the supply side and the demand side, and then also the revenue that they’re they’re generating, either because they’re buying or selling. So that would be does that get to count as one

Nick Moran 43:17
that might be three data points? All right,

Speaker 1 43:19
well done. If I’d let a small one, which would be then the cost to acquire those. And that you just, that would be you get a lot of data by looking at that. Because you can see, like, you see how, how cohorts are trending over time, you see how the cost to acquire those cohorts is trending over time. sides of the cohorts like there’s just so the richness of data that you get there is is extremely high fidelity. That’s

Nick Moran 43:51
great. So just to wrap up here, Sarah, any resources that you found really valuable that you would recommend to listeners?

Speaker 1 43:58
Oh, man, I can’t I can’t even pick favorites here. There’s just I think in this business, you just have to be such a student and always growing and there’s, there’s so many things that I read and and listen to that are always pushing my thinking, so I’m not gonna I’m not going to name names.

Nick Moran 44:17
Well, I will sign up for Sara travels hierarchy of marketplaces series and her newsletter. It’s very good. It is published on medium later, but she does kind of a private group earlier, so sign up for that. How about what do you know, you need to get better at?

Speaker 1 44:36
Oh, man, tough ones. You know, I think one of the things that I need to get better at is, you know, especially when, I don’t know if you’re, you know, in the same place, but I have a two year old at home. And I find that sometimes, I’m just like with the two year old and everything else on my plate. that I ended up being reactionary on a bunch of things and not taking the space or time that I need to think. And I’m definitely one of those people that, that love to synthesize and have space and, and then engage kind of more proactively with people to to uncover those opportunities. And I’m feeling with limited childcare right now that I am way behind the eight ball and do split taking that time.

Nick Moran 45:33
It’s having that very conversation with my wife yesterday. I have a two year old as well. It’s not easy. And then finally, what’s the best way for listeners to follow you and benchmark and connect?

Speaker 1 45:46
We don’t have a great website at benchmark. But I would highly recommend, you know, following me on Twitter, and I, I have my DMs open, I’ll admit that I am not able to respond to the vast majority but I do read them and and and try my best to do that.

Nick Moran 46:05
Well, Sarah, this was a great pleasure. Thank you so much for joining us and for giving us much more insight on marketplaces. This

Unknown Speaker 46:12
was great. Thanks, Nick. It’s a pleasure

Nick Moran 46:19
that we’ll wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co in search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet dotnet and until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us