Firehose #190: 🎸 Creator equity. 🎸

How Web3 aligns fans and creators to take down online aggregators.

One Big Thought

A popular position in this newsletter is that small businesses are underinvested in relative to the critical role they play in the economy. Two weeks ago, I argued that the opportunity in SMB tech was hiding in plain sight, like mobile and cloud were a decade ago. At Lightspeed, our investments in Faire*, OYO*, and others have shown us that aggregating existing, offline small businesses can deliver massive efficiencies to the entire ecosystem. This is one of the reasons I’ve predicted a next-gen wave of B2B marketplaces in the coming decade.

In aggregate, small, offline businesses have inherent defensibility because people live in the real world. That might sound like a trivial statement, but our offline behavior is markedly different from our online behavior. The former is taking a stroll down Main St, popping your head into various shops along the way. The latter is hanging out on only a few, very popular websites or mobile apps. Case in point: we all start our searches on Google*, our purchases on Amazon*, and reflexively browse our favorite feed-based social products to kill time (Facebook*, TikTok, etc). It’s the offline equivalent of hanging out with friends on the highway median.

On the internet, near zero marginal costs of distribution and powerful network effects make this handful of companies very powerful. If you haven’t read Ben Thompson’s canonical post on Aggregation Theory, now would be a good time to check it out.

If you want to sell a product online, publish a game, or distribute a new app you built, you must pay a tax to one of several dominant aggregators. “Real estate” on the internet can therefore be much more competitive than it is in the physical world, where you pay a market-based rent, but foot traffic comes for free. A few digital companies have been able to grow initially by hacking distribution on someone else’s platform (e.g. Zynga on Facebook, Foursquare on Twitter, Airbnb* on Craigslist), but the bigger platforms eventually stop the fun. Very rarely, inherently viral digital products like Snapchat* or WhatsApp figure out an independent growth model.

This dynamic has begun to change in recent years. With its “arm the rebels” maxim, Shopify* has demonstrated a path for small, online businesses to get on the same footing as Amazon in their own niches. Wix and Squarespace have followed in this direction too. Substack is attempting to do the same in media. Vertically-oriented marketplaces like Outschool* have built platforms for individual creatives to find and engage audiences.

Yet, it’s still quite hard to build an audience online when you (a) don’t have name ID from another platform, (b) aren’t a naturally talented social media promoter, or (c) are creating in a small niche. Even if you are able to build an audience, it’s really hard to monetize it on a big platform unless you’re absolutely massive. For these reasons, Li Jin of Atelier Ventures argued that the creator economy needs a middle class:

The current creator landscape more closely resembles an economy in which wealth is concentrated at the top. On Patreon, only 2% of creators made the federal minimum wage of $1,160 per month in 2017. On Spotify, artists need 3.5 million streams per year to achieve the annual earnings for a full-time minimum-wage worker of $15,080, a fact that drives most musicians to supplement their earnings with touring and merchandise. In contrast, in America in 2016, 52% of adults lived in middle income households, with incomes ranging from $48,500 to $145,500.

A recent post by Cooper Turley and Kinjal Shah advanced my own thinking on this topic. They wrote about online “micro-economies” and what it takes for niche communities to develop an audience and a business model. The vision is that “the shift from Web2 to Web3 [will] create revenue streams which prioritize community ownership over individual ownership.”

Web3 is a new vision of the internet. It takes us away from today’s centralized internet, where data is stored in servers managed by trusted counterparties like Facebook and Google, to a decentralized internet, where a trustless network of peer-to-peer servers manages and verifies data. The network is mediated by various, composable blockchains working together towards a common goal. As Patrick Rivera explains in this presentation, the gravity of the data inside of these trusted counterparties in a traditional client-server architecture leads to monopolistic behavior, centralized control, and a single point of failure for these services.

According to Patrick, Web3 solves these problems by decentralizing governance, pushing data ownership to the individual participants in the network, and establishing a global state. The main challenges to Web3 are technological, but at the rate of change we’re seeing now in blockchain tech, many of those problems will be solved in the near future.

What would solving these problems mean for creators? Most importantly, it would allow fans to invest behind individual creative projects. For example, the aforementioned “Rise of Micro-Economies” post was written on Mirror, a decentralized blogging platform that employs one of the authors. You can see the ownership of the post is split 40%/40% between the two authors, with the remaining 20% split between other contributors — both named and anonymous.

When the scale of investment is proportional to the addressable market of the project, even the smallest creators can bootstrap. Furthermore, their success is financially aligned with the goals of their audience. Equity isn’t just defined in a corporate context; it can be defined on a creator-, or even project-level.

Some readers know that I played music pretty extensively in high school and college. My friends and I would get into bands often before they were widely known. For example, my bandmate Andrew saw John Mayer perform at a local record store (when those existed) in 2001. Mayer’s iconic debut album Room for Squares came out that June. I’m fairly certain that Andrew purchased the album at that event. Imagine if he were able to roll his purchase into tokens tied to the future royalty streams associated with “Your Body is a Wonderland” or “Why Georgia?”. As a fellow musician and fan of acoustic guitar music, Andrew was just as much of an authority on Mayer’s future success as any big label A&R executive.

If the micro-economy vision comes to fruition, college kids hearing their favorite bands play in local coffee shops will be able to participate in those bands’ future success. Doing so will make them even more likely to promote those bands to others — completing a virtuous cycle that funds more artistic production. The same principle could apply to writers, artists, and any manner of creator. The power shift from aggregators to the creators and their fans will be a massive value transfer away from middlemen to those who make things people love, and to those who enjoy them.

I’m excited to participate in this shift as an investor and, most importantly, a fan.


Tweet of the Week

Enjoyed this newsletter?

Getting Drinking from the Firehose in your inbox via Substack is easy. Click below to subscribe:

Have some thoughts? Leave me a comment:

Leave a comment

Or share this post on social media to get the word out:


Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also have economic interest in AAPL, ABNB, ADBE, ADSK, AMT, AMZN, BABA, BRK, BLK, CCI, COUP, CRM, CRWD, GOOG/GOOGL, FB, HD, LMT, MA, MCD, MELI, MSFT, NFLX, NSRGY, NEE, NET, NFLX, NOW, NVDA, PINS, PYPL, SE, SHOP, SNAP, SPOT, SQ, TMO, TWLO, VEEV, and V.

❤️ Happy Mother's Day! ❤️

No newsletter this week. Call your mom!

Hello, all.

I sacrificed a few recent weekends to work, so today I decided to spend the day with my family to celebrate Mother’s Day. That means no newsletter today, but hopefully I’ll be back in your inbox next week.

If you’re looking for interesting stuff to read, check out my last 3 posts on various marketplace-related topics:



Firehose #189: 🥸 Hiding in plain sight 🥸

Small is the next big thing. Plus: oil crops and the environment, vibing out to mix tapes, speed running Pi, and peak shounen anime.

One Big Thought

Great investments tend to exploit information asymmetry.

While some information does a lot of work hiding from you, requiring years of research to unearth, a surprising amount hides in plain sight. Case in point: you could have invested in Apple* the year after iPhone came out (2008) and beat the NASDAQ by a cumulative 31% CAGR return through today. Or, you could have also invested in Amazon* when it first publicly broke out the financials for AWS (2015) and beat the same index by a cumulative 23% CAGR. On a risk and fees-adjusted basis, these returns are comparable with top quartile VC fund performance. Anyone with a brokerage account could have benefited from these investments.

Those who invested in Apple and Amazon over this period likely held a contrarian viewpoint on the potential of mobile and cloud computing, respectively.

How do you like ‘dem Apples?

At the end of 2008, the App Store was only 6 months old, with only a few thousand apps. The top free apps included a flashlight utility, several casual games (Tap Tap Revenge, PAC-MAN Lite, etc), and an HTML-5 based Facebook* app that the company later scrapped and Zuck called “the biggest mistake we’ve made as a company.” All the top paid apps were casual games.

With this app lineup, it would have been relatively easy to relegate the App Store to the junk bin of tech. Furthermore, not only was Apple a minority in PC sales, but its late entry into the smartphone market earned the infamous derision of Steve Ballmer, then CEO of Microsoft:

“That’s the most expensive phone in the world, and it doesn’t appeal to business customers!”

Ballmer’s critique turned out to be irrelevant. iPhone was a blockbuster for consumers, who later brought it forcibly into the enterprise with the “bring your own device” movement. The toy-like apps that littered the early App Store charts gave way to Uber, Foursquare, Instagram, HotelTonight, and many of those early native iOS apps that extended the platform’s utility. The rise of the iOS ecosystem was hard to predict looking at the App Store charts in 2008, but, if you were paying close attention, you could have identified the growth in apps and bet on the Apple stock.

Head in the clouds?

The same contrarian setup applied to cloud computing in the mid-2010’s. Below is the Gartner Hype Cycle for Cloud Computing, published in mid-2012, which shows cloud computing in the so-called “trough of disillusionment” on a 2-5 year journey towards the “plateau of productivity.” Other similar concepts (elastic multitenancy, PaaS, dbPaaS, public cloud storage, IaaS, etc) were at similar or longer lead times.

IT professionals threw a ton of shade at the cloud back then. I recall hearing a lot of arguments like this one around the security model of cloud computing. We also saw regulatory pushback around the geographic residency of data, or specific industry requirements around the collection and storage of personally identifiable information that the public cloud couldn’t easily support.

You needed to be one of the minority of IT professionals connected to the startup ecosystem to see the potential of the cloud at the time. Almost no one in Silicon Valley purchased servers. As startups grew into large companies, they set the standard for how progressive, flexible infrastructure would be deployed in the enterprise.

I recall a watershed moment, in 2015, when Mark Pincus returned to Zynga as CEO after a brief ouster. In cost cutting mode, he announced that the company was moving its massive computing infrastructure to AWS from its private cloud. He said Zynga would spend $150M with Amazon to do so:

“There’s a lot of places that are not strategic for us to have scale and we think not appropriate like running our own data centers,” said Pincus.

“We’re going to let Amazon do that.”

That last sentence was particularly telling. Here’s how some more progressive industry observers viewed AWS at the time:

It won't be long—maybe not in 2016, but soon—before any computing project that doesn't happen in the cloud will have to spend many cycles justifying what will be seen as an old-fashioned and inefficient approach. 

A few companies still generate their own electricity, but they're rare and special cases. That's the kind of market dominance cloud computing is headed for. And we're likely to get there faster than we think.

Of course, this was the right point of view, but given the concerns about information security and regulatory prohibitions, even in 2015 the public cloud’s dominance in IT infrastructure was not an obvious call. The information was out there, but you needed to speak to the right IT people to appreciate its gravity.

Small is the next big thing.

Small businesses are quite literally everywhere.

According to the SBA, the U.S. has 20 million businesses with fewer than 20 employees. In sectors like food services, construction, wholesale trade, real estate, and agriculture the majority of businesses are SMBs. Yet, while SMBs are ubiquitous, they are notoriously difficult to monitor, track, and analyze.

For example, when we made our initial investment in Faire* in 2018, I spent months looking for data on independent retailers. Because of the industry’s fragmentation and informality, I could only rely on official U.S. Census data from 2012! Beyond that, I had to rely on my intuition and past knowledge of the retail ecosystem. To most outside observers, while independent retail was admittedly everywhere, few thought of it as a large market. I knew enough to believe it was.

Working on a new SMB-focused investment opportunity this week, I realized that the lack of data on this category might, however, be a temporary problem.

If we more see companies like Faire, or Slice, or Toast, succeed, we will necessarily start mapping out the surface area of the SMB ecosystem for the first time. It will be like exploring the ocean’s depths with a new submersible that can dive deeper and reveal the unknown. We’ll make new discoveries, and some of them will influence the way we think about the world. I suspect that these discoveries will validate what has mainly been intuitive to me so far — that SMBs are still vastly underinvested in from a technology perspective and present an economic opportunity similar to mobile and the cloud did in their respective generations. In the context of data yet to be unearthed, what will be seen as contrarian today will therefore be seen as consensus tomorrow.


Tweet of the Week

Links I Enjoy


Drowning in vegetable oil.

More land globally is devoted to vegetable oil crops than all fruits, vegetables, legumes, nuts, roots, and tubers combined. Oil crops are second only to cereals in their global land area, but are growing significantly faster — doubling since the 1970’s.

Oil crops are some of the most land inefficient crops in existence, requiring an order of magnitude more land per kg of food product than barley or potatoes, for example. Higher land use leads to more deforestation, which furthers the outsized climate impact of these crops. And for the benefits of their caloric density, oil crops are some of the most nutritionally poor crops available. They account for 30% of global crop lands, but 0.01% of the world’s essential nutrients.


It’s a vibe. →

Like many in my generation, my friends and I grew up making and trading mix tapes. We would often capture songs off the radio, or later rip full CDs of bootlegs from concerts downloaded over the internet. These mixes could be a flex — showing that you had that rarest of rare performance of a Pearl Jam B-side — or the expression of a vibe — unrequited love, teen angst, etc. Sometimes a list of songs can say something that is hard to put into words.

All that’s old is new again, as “oddly specific mix tapes” are starting to emerge on Spotify* and Facebook.* They appeal to a similar need that I found in my middle and high school days, but with the context of a global pandemic:

All of the admins I spoke to say that they have seen the group’s membership grow over the past year—not just a natural incline, but one that they believe is a result of the coronavirus pandemic. As increased loneliness and stress have contributed to declining mental health, people have turned to online communities to seek reassurance and companionship. “I guess loneliness is, more than ever in recent memory, a common experience for many,” says Eli. “This has driven perhaps more extroverted people online to find social interaction, and the chance to find like-minded people worldwide has, and speaking from a personal perspective, really helped me through some dark times.” While he doesn’t believe that everyone in the group is looking for this kind of deep connection, even the posts that are only intended to “get a giggle” out of their audience still inspire and drive the community.

Enjoy “Eating Painkillers at McDonalds” to get a sense of what they’re talking about.


Who disrupts the disrupters?

Packy McCormick at Not Boring wrote an important piece about what comes after the web aggregator phase of the internet. We’ve heard a lot recently about how crypto will enable a new set of disrupters, but not so much how this magic will occur. Packy leans on Clay Christensen’s theory of disruptive innovation to illustrate how crypto tech can enable “better than free” platforms:

While the Aggregators definitionally serve nearly everyone, they actually do overlook a segment of their users: the people who aren’t happy to just use the products for free, but who want to earn ownership, privileges, and money for their participation, and who are willing to accept a lower-quality user experience to get those things. This is where they’re susceptible -- while they generate tiny profits on each user, they’re not willing to go negative and actually pay those users. 

So how do you low-end disrupt a high-quality, ultra-low-margin or even free product? How do you get a price lower than the $0 they’re paying today? You go negative; you actually pay people to use the product, in a currency that gets more valuable as more people join. 


Speed running Pi. →

At age 23, Isaac Newton completely changed the way we calculate the irrational constant Pi. For 2,000 years, upper and lower bounds for Pi were approximated by subdividing polygons into distinct shapes. Newton played around with the binomial theorem and used the calculus he invented to create an infinite series that converges to Pi much faster than the polygon method. This video by Veritasium walks through how Newton derived his brilliant insight.


Peak shounen. →

Anime and manga (the Japanese comic books from which anime are derived) have very specific genres that are designed to be marketed to different groups of fans. The “shounen” genre is marketed towards high school age boys and often follows a teenage protagonist through a progression of battles and obstacles towards a stated goal. Many shounen anime can be fairly predictable — they all have similar plot notes and progression dynamics.

Within the last year, however, anime fans have been blessed with two genre re-defining shows that will become classics. One is Attack on Titan (I’ll write about this one later because it’s incredible), and the other is Jutusu Kaisen. I wouldn’t watch this video unless you’ve spent some time on the series (spoilers!), but if you have it does a great job laying out why Jutusu is the future of shounen in so many ways.

Enjoyed this newsletter?

Getting Drinking from the Firehose in your inbox via Substack is easy. Click below to subscribe:

Have some thoughts? Leave me a comment:

Leave a comment

Or share this post on social media to get the word out:


Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also have economic interest in AAPL, ABNB, ADBE, ADSK, AMT, AMZN, BABA, BRK, BLK, CCI, COUP, CRM, CRWD, GOOG/GOOGL, FB, HD, LMT, MA, MCD, MELI, MSFT, NFLX, NSRGY, NEE, NET, NFLX, NOW, NVDA, PINS, PYPL, SE, SHOP, SNAP, SPOT, SQ, TMO, TWLO, VEEV, and V.

Firehose #188: 🛢 Payment tech is motor oil. 🛢

How payment tech lubricates marketplaces. Plus: Squarespace goes public, the media cycle, Apple's dominance with teens, and more!

One Big Thought

Inspiration for this newsletter comes from all over the place.

I save articles all week long to read over the weekend, and those form most of the topic base for Firehose. In addition, I sometimes draw inspiration from a tweet, a blog post, or a conversation I’ve had with a founder. Occasionally, one of my partners says something so insightful in a meeting that I just have to write about it.

This week’s inspiration comes from a stranger source — a piece of marketing material from a wealth management firm. Bessemer Trust sends out a Quarterly Investment Perspective, and this past one was on the topic of “The Future of Money.” It’s quite good and can be accessed online here.

A particular section stood out to me, which I’ll quote verbatim:


A virtuous cycle exists when an online marketplace is met by robust digital payments infrastructure. In many cases, the former precedes the latter. In those instances, the marketplace platform has served as an incubator for a payments solution that ultimately extends far beyond the confines of its initial host. This playbook has been adopted globally, much to the benefit of shareholders given its track record of significant value creation, often stemming from expansive growth of these once-incubated payments platforms.

The piece then goes on to discuss the canonical example of the intersection of payments and marketplaces — EBAY/PYPL*:

In 2002, eBay was processing ~$13 billion in merchandise annually. However, 60% was paid for by check or money order, and the sellers usually waited for the checks to clear before shipping their items, resulting in a transaction process that could take as long as two weeks. PayPal’s technology, by contrast, allowed consumers to make and accept payments over the internet without using a credit card, with the bulk of its business coming from eBay auctions. eBay acquired PayPal for $1.5 billion that year, removing friction from the eBay buying process and supporting the virtuous cycle of marketplace network effects. While eBay continued to scale its auction platform, PayPal expanded to the other merchants and has participated directly in the large and growing addressable market of online commerce.

If marketplaces are engines, then payment tech is motor oil. Removing friction from an economic engine lets it work harder and faster. PYPL accelerated EBAY’s network effects by lubricating transactions, and that lower friction translated into more profits and growth.

The article goes on to discuss other global examples:

  • BABA* launched Alipay’s escrow service in 2004 to solve trust problems in its B2C marketplace Taobao, which launched a year prior. Alipay eventually enabled users to do more with their account balances, supporting lending, wealth management, insurance products and more today.

  • MELI* launched in 1999 to a largely unbanked population in LATAM. Over the next decade, its MercadoPago product rolled out to absorb 1/3rd of transaction volume on the platform. Today it covers nearly all transactions on platform and also supports a significant number of off platform transactions.

  • SE* launched in 2015 in Singapore, and its Shopee platform has grown into an e-commerce leader in Southeast Asia. 70% of the region’s population is unbanked or underbanked, so SE launched SeaMoney, a mobile wallet that has grown to 30% of gross orders last October.

Money has gravity. Once users start to accumulate a balance of local currency, the friction is lowest to spend it on the platform itself, or on services directly linked to the platform. That’s why BABA, MELI, and SE have all shown success bringing tightly integrated, non-marketplace use cases to their digital wallet users. While payment tech starts as the lubricator of the marketplace, eventually it forms the foundation of new use cases. That means consumer payments, when incubated inside a marketplace, often become bigger than the marketplace itself. As noted in the Bessemer Trust report, PYPL is now 7x more valuable than EBAY, 6 years post-spinout:

These observations also have implications for the emerging wave of B2B and wholesale marketplaces I discussed last week.

SMB payment tech is quite far behind where consumer payments sit today. We should expect that much of the innovation in lending, insurance, factoring, and other financial services for SMBs will come from marketplaces, not neobanks. In fact, due to the difficulties some B2B marketplaces have extracting sizable take rates (again, read my post from last week!), you might expect digital payments to be the dominant monetization model in the category. Fintech infrastructure providers like Finix* and Synctera* (both Lightspeed portfolio companies) should see strong uptake in the B2B marketplace category as these businesses arm themselves with payments features.

If you see great examples of B2B marketplaces deploying payments tech, please send me a note. I’d love to feature them in the coming weeks.


Tweet of the Week

Links I Enjoy


Hip to be Squarespace.

Squarespace filed its S-1 after nearly two decades as a private company. The prospectus identifies over 800M small businesses globally in its target market, and notes that half a million of these are started each month just in the US. 46% of small businesses are not online today.

Squarespace has 3.6M unique subscribers at a $187 ARPU. When your ARPU is that low, you need to establish a hyper efficient go-to-market strategy. With over $152M of free cash flow and a “Rule of 40” number of 52%, Squarespace has both growth and profitability dialed in.


The media clock. →

Someone on Twitter shared this old Wired article by Aaron Zamost of Square*. It’s just as relevant in today’s media environment. Aaron’s metaphor is a clock. In my conversations on this topic, I’ve often thought of media as a pendulum that swings from friend to foe. Because media needs to create conflict to drive engagement, it often builds up a company in order to knock it down later. Then it loves to tell the redemption story.

Unfortunately, it’s quite hard to opt-out of this model. So instead startups need to embrace the cycles and understand where they are in it. Planning for the inevitable crisis also helps navigate through the fog of war when it eventually happens.


Apple’s dominance with teens.

Airpods launched in 2016 to confusion and jeers. I think I might have called them “ear cigarettes” at some point. But when I tried them, I instantly fell in love. Airpods are the best product Apple* has created since the iPhone.

The teens agree. A whopping 70% (!) own a pair (up from 52% a year ago), slightly less than the 88% who own an iPhone. Only 34% of teens own a smart watch, but 84% of those who do own an Apple Watch. Apple’s utter dominance with teens, and the seamless interoperability between its devices, means that it’s quite unlikely they shift to Android in later years.


Muon along.

We don’t encounter new physics very often, and when we do, the results are often attributed to experimental or human error. Scientists recently observed muons in a particle collider oscillating at a rate not explained by the Standard Model of physics. That would suggest the presence of a particle or force not yet predicted by the Standard Model. The measurements have only a 1 in 40,000 chance of being a fluke, or something like 4 standard deviations from the mean.


Edible art.

I’ve been baking a lot during quarantine. It appeals to my inner chemist and somehow breaks up the monotony of sitting in my house all week. My kids also love getting their hands into the ingredients and getting to consume the results of their labor!

As the YouTube algo has adjusted to my new passion, I come across videos like these which are mesmerizing. I would never have the patience to make something this intricate, but admire those who do.

Enjoyed this newsletter?

Getting Drinking from the Firehose in your inbox via Substack is easy. Click below to subscribe:

Have some thoughts? Leave me a comment:

Leave a comment

Or share this post on social media to get the word out:


Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also have economic interest in AAPL, ABNB, ADBE, ADSK, AMT, AMZN, BABA, BRK, BLK, CCI, COUP, CRM, CRWD, GOOG/GOOGL, FB, HD, LMT, MA, MCD, MELI, MSFT, NFLX, NSRGY, NEE, NET, NFLX, NOW, NVDA, PINS, PYPL, SE, SHOP, SNAP, SPOT, SQ, TMO, TWLO, VEEV, and V.

Firehose #187: 🌊 A new marketplace wave. 🌊

Wholesale marketplaces are coming. Here are 3 strategies to help them succeed.

One Big Thought

Consumer marketplaces in the US have exploded in value over the last 5 years.

Of the publicly traded, independent US marketplaces that exist today, only 6 were public companies in April 2016 — EBAY ($30B), GRUB ($1.8B), GRPN ($1.8B), ETSY ($715M), CHGG ($321M) and OSTK ($234M). These companies were worth a combined $34B, 88% of which was EBAY — a company that was already 20 years old back then.

Since then, the public markets have embraced 16 new consumer marketplaces ranging from travel (ABNB*), logistics (DASH, UBER, LYFT), apparel (POSH, REAL, TDUP*, FTCH), real estate (OPEN), e-commerce (WISH), automotive (CVNA, VRM), events (EB), and services (ANGI, FVRR, UPWK). EBAY has shrunk from 88% of aggregate marketplace enterprise value to only 10% today. Aggregate enterprise value has exploded to $474B across these 22 listed companies. Of the $440B of gain in enterprise value over the last 5 years, only 15% came from the original 6 stocks. These 16 new marketplaces have been responsible for nearly all the incremental value creation.

Consumers have been the prime beneficiaries of the marketplace model of innovation. Connecting fragmented populations of individual buyers and sellers has created a surplus of economic value for consumers, a fraction of which has been captured by the platforms themselves in the form of a take rate (ranging from 5-50%, depending on a variety of factors, but typically settling in the 10-20% range for most):

Offline buyers and sellers face all sorts of issues that an internet platform can solve: trust & safety, logistics, financing, etc. Solving these problems creates a wedge to disrupt incumbent middlemen like travel agents, auto dealers, real estate agents, ticket brokers, and department stores. While much of the low hanging fruit has been picked in consumer marketplaces, we still see new examples popping up, including in education (Outschool*), coaching (BetterUp*), and entertainment (Cameo*).

While nearly half a trillion in enterprise value created by US consumer marketplaces in the last 5 years, we may see an even greater wave over the next 5 years in wholesale marketplaces.

Wholesale value chains have similar problems. They lack price transparency, suffer from inefficient logistics, and struggle to collect and distribute payments on time. Furthermore, the dollar values are significantly higher and margins are often lower — which means that errors have significantly greater consequences. As such, many wholesale markets have built-in redundancy to deal with inefficiency and minimize risk.

The most challenging aspect of wholesale marketplaces is how you fight disintermediation. If two businesses continually work together, they will have low willingness to pay to a marketplace that connects them. Two consumers who want to coordinate an Uber ride (one in the other’s car) have few options to practically arrange a pick up. But, a grocery store might purchase bread from the same bakery it has been working with for years. At the end of the day, the owner can always pick up the phone and place an order the old fashioned way.

Creating a repeatable purchase pattern between two recurring buyers is therefore the main challenge and opportunity for a wholesale marketplace. Extracting a 10-20% take rate is only possible when each transaction has more value than the matching itself. Here are a few ideas that could help:

  1. Take risk away. Trying new products is risky in a variety of ways for wholesale buyers. New products might not sell through. New vendors can have variable quality. A buyer might not have a liquidation channel to recapture value in the event an item does not sell. To solve this problem in its own business, Faire* guaranteed free returns on new brand orders and, over time, managed the risk itself as a feature of the platform. This innovation allowed retailers to shop without worry for new items and find new ways to grow their businesses. Because retailers want to maintain “freshness” of inventory, there’s a recurring need for new merchandise and, definitionally, these new brands are incremental to the platform.

  2. Come for the logistics; stay for the network. Some wholesale industries are limited by delivery times and availability of product. Produce, chemicals, and construction materials are all industries where products must arrive when expected. Fruit can rot, chemicals can expire, and steel beams can miss their construction window. Providing more reliable logistics can be the reason that a buyer will reorder from the same vendor and still pay the required take rate.

  3. Business-in-a-box. Since I wrote my original post on this topic in 2019, I’ve seen more examples of companies that are giving away vertical software for free to SMBs in order to insert themselves in the flow of payments and services. Many SMB sectors have some form of order management, point-of-sale, or other horizontal software. But few have software truly built for their own vertical. If you can build the system of record for an industry and make it freely available, SMBs will be inclined to order through your system as well.

If a wholesale marketplace solves the disintermediation problem, it can often generate multiple orders per month. Few consumer marketplaces can come close to this level of purchase frequency, so the success metrics for wholesale marketplaces tend to look much different. The north star metric I follow in wholesale is “share of wallet.” Often a wholesale marketplace will “land” a customer with a single SKU line that has high purchase frequency and low margin. The goal is then to “expand” through cross-sell into the other buying needs of that business — ideally the less frequent, high margin purchases. The marketplace can cross over into a very defensible position once the customer is purchasing a meaningful amount of their volume through the platform. I often see a share of wallet tipping point after which churn become negligible (other than a customer going out of business).

Dollar retention is therefore very strong for successful wholesale marketplaces. For SaaS companies, valuation multiples are strongly correlated with net dollar retention, and I expect wholesale marketplaces will exhibit the same dynamics as future public companies:

Increasing scale benefits these marketplaces on the customer acquisition side as well. As product catalogues grow, conversion rates go up. While cost of leads might go up over time, the increased conversion rate can provide a buffer to CAC and keep the unit economics of the business strong. We see similar effects in consumer marketplaces like DASH, which has been able to increase its LTV/CAC over time:

In short, consumer marketplaces have become relatively mature, but wholesale marketplaces are just getting started. I’m excited to meet more entrepreneurs building these businesses in the coming years and back more of them.


Tweet of the Week

Enjoyed this newsletter?

Getting Drinking from the Firehose in your inbox via Substack is easy. Click below to subscribe:

Have some thoughts? Leave me a comment:

Leave a comment

Or share this post on social media to get the word out:


Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also have economic interest in AAPL, ABNB, ADBE, AMT, AMZN, BABA, BRK, BLK, CCI, CRM, GOOG/GOOGL, FB, HD, LMT, MA, MCD, MSFT, NFLX, NSRGY, NEE, PYPL, SHOP, SNAP, SPOT, SQ, TDUP, TMO, TWLO, VEEV, and V.

Loading more posts…