Why Benchmark Likes Investing In Marketplaces

20 Sept 2023 · 2 min

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2:07

In this brief discussion, a Benchmark representative explains the firm’s investment thesis for marketplace businesses. Drawing on the influence of Bill Gates and the ideas of Peter Thiel, the speaker emphasizes a scale‑first perspective: evaluating a company as if it were already a public‑scale entity and working backwards to build it. The core belief is that a marketplace that can "escape competition" by achieving clear dominance enjoys dramatically lower customer‑acquisition costs, greater leverage over both demand‑side and supply‑side participants, and ultimately generates strong cash flow, which drives valuation. The conversation cites the early‑stage competition among DoorDash, Grubhub, and Uber Eats as an illustration of how intense rivalry suppresses profit, whereas a dominant platform becomes a “black hole” that attracts users and suppliers effortlessly. The speaker concludes that network‑effect‑driven marketplaces, though often small in number, are attractive because they can achieve this dominance and cash‑flow profitability.

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You know, what makes marketplaces great businesses, do you think?
I mean, so we at Benchmark, and I think this is a lot of Bill's influence, like we are always thinking of like, what's, what does this company look like at scale as a public company? Like, how do you, you know, if you think about, like, you think about it that way and you work backwards, like you really want to get, you really want to build a business that, as Peter Thiel says, escapes competition, you know, because once you escape competition, once you like are, as I think of it, like really dominate, like you're number one by a long shot, then, you know, all the costs that typically go into like to acquisition are so much lower. Like, you know, I don't know if you guys remember when DoorDash versus Grubhub versus Uber Eats were competing. It felt like if they were 2 minutes late with their order, you would get like a $20 gift certificate. You know, like they were always— because they were fighting for each point of market share, they were, you know, they were having no contribution profit. But once you get to a point where you dominate, you just have more leverage with the customer, you have more leverage with the supply side, and you You know, more leveraged, but also you become more of like a black hole where it just is obvious that you're gonna go work with the dominant platform. And so you end up having a business, being able to build a business that's really profitable. And ultimately, we forgot about this in 2021, 2022, but like cash is, you know, it's not the whole point of building a business, but ultimately it's how your business gets valued, cash flow. And so How do you build a cash-flowing business? You, you escape competition. And how do you do that? The best way is to have a network effect and network effect businesses that have dollars involved are marketplaces, and those tend to be pretty small. So that creates a lot of focus.