What Investors Look For In Marketplaces (D'Arcy Chat Clip)

10 Jan 2022 · 2 min

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2:05

In this interview, the investor (Speaker B) explains that evaluating marketplace businesses hinges on three core pillars: strong growth, high retention, and solid unit economics. For very early‑stage opportunities—pre‑product or pre‑product‑market‑fit—the focus shifts to assessing whether a clear market need exists and whether the founder possesses unique insight and “earned secrets” to solve it. As a marketplace matures, the investor looks for evidence of network effects, such as improving cohort metrics and accelerating flywheel dynamics, citing examples like Shef and Incredible Health. The conversation underscores that while marketplaces are conceptually simple to analyze, they are difficult to build, and witnessing a successful network‑effect flywheel is both rare and exciting for investors.

Chapters

what do you look for in marketplaces that you're investing in? And maybe even using like one portfolio company or a few, if you'd like, as kind of examples of that.
Yeah. I mean, I think marketplaces, they're not complicated to analyze. They're very hard to build. So it's being a marketplace investor is probably a lot easier than being a marketplace founder. Because I think ultimately what you're looking for is things with good growth, people are pulling the company, people are pulling— the company's getting pulled off the shelf. It's not something where you're trying to sell it really, really hard. So really good growth, really good retention, and really good unit economics. That's kind of like the 3 kind of pillars of a marketplace that's working. Obviously, if we're investing very, very early, pre-product, pre-product market fit, it's really about like, do we think the use case is there? Do we think the market is there? Do we think the founder has the kind of unique insight and the kind of earned secrets in order to build the thing? But as they get farther along, it becomes a little bit more clear kind of like whether it's working or not. And I think whether it's Shef, whether it's Incredible Health, whether it's any of these kinds of companies, as you see them grow, you kind of see those network effects and you see those kind of marketplace metrics really start to take hold. And you see with every cohort, they just get better and better. And that's kind of like, that's the magic of a marketplace. That's the magic of a network effect company that they're really hard to get those flywheels going. But once you do get them going, it's actually kind of like incredible to see how how they start to take off once the kind of network effects really take hold. And I think as a founder, you hopefully see it once in your life. As an investor, you hopefully see it a few times in your life, but when you do see it, it's pretty wild to actually see.