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November 30, 2017

Marketplace for Marketplaces

MHT Partners  | Business & Information Services Investment Bank

While investment banks help facilitate a marketplace for Mergers and Acquisitions (“M&A”), an interesting meta-trend has developed in the rise in M&A around marketplace platform companies – a marketplace for marketplaces.  What began as a novel means for individuals to trade miscellaneous goods online, has transformed into a diverse ecosystem of platforms, trading an increasingly complex set of assets.  This shift has attracted significant capital to start-ups and existing platforms in search of the next frontier in online trade, and the possibilities seem endless.

Marketplace businesses play a unique role in the eCommerce landscape, ranging from payment processors to digital storefront providers. These types of businesses are attractive investments for a number of reasons:

  1. Marketplaces are uniquely positioned to control a large portion of the entire payment stack. They have touchpoints with both buyer and seller, operate the payment platform, often act as the payment facilitator, and control which payment gateways are used at favorable terms.
  2. Marketplace businesses can enjoy the benefits of both recurring revenue and transaction-based revenue. While customers are typically not contracted like traditional SaaS businesses, established marketplaces create sticky relationships with both buyers and sellers. Additionally, while SaaS businesses constantly need to acquire new customers to achieve growth, marketplaces can leverage upside in their existing customer base as users ramp up and increase transaction sizes.
  3. The business model benefits from ecosystem-driven demand. As long as there is supply and demand for a good, whether it’s hard goods, consumables, services, jobs, or something else, there will be a place for marketplaces.
  4. Marketplaces enjoy the widely desired network effect – as more and more people use the platform, they become more valuable. This creates unique opportunities to scale marketplace businesses, putting them in highly defensible market positions.
  5. Online platforms are highly profitable. While traditional trade tends to require large investments in infrastructure, online marketplaces operate an “asset-light” model and are able to rapidly scale margins as they grow.
  6. As a younger generation of business leaders takes the helm within “old-world” industries, online marketplaces are increasingly disintermediating traditional trade for B2B transactions, increasing the size and scope of what is being transacted through online platforms.

Though it’s hard to compete with long-established horizontal marketplaces like eBay, Amazon, or Craigslist, several companies have carved out niches and created a vertical marketplace on top of it. Examples of this include: OpenTable (restaurant reservations), Airbnb (temporary housing), TaskRabbit (freelance services), and EnergyNet (oil and gas).

MHT Partners recently sold EnergyNet, which exhibits all of the characteristics mentioned above. Marketplaces may come in many shapes and sizes, but MHT believes that the marketplace trend will continue to increase in popularity amongst investors as companies continue to find innovative ways to connect demand with supply.

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