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Homebrew’s investment interests: Local Marketplaces

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Local offline-to-online marketplaces are just beginning to impact the lives of individuals and small businesses, enabling them to save time and money and generate new revenue streams.  Where there was previously friction, opacity or scarcity, local marketplaces are providing convenience, transparency and abundance.  Homebrew is focused on supporting seed stage companies like these that are building the Bottom Up Economy.  Our prior experience working with and investing in companies such as OpenTable, Angie’s List and several less successful marketplaces has helped inform how we evaluate and support investments in this segment.  Here are some of the other key things we look for in startups employing a local marketplace model.

Focused use case: We believe that scale is the outgrowth of doing one thing really well. Accordingly, we prefer to see local marketplaces that nail a specific, focused use case rather than take a broad platform approach from the outset.  Homejoy is a great example of a company that has had relentless focus on a single use case, cleaning your home.  An early competitor, Exec, offered a platform where all kinds of services, including home cleaning, could be requested but suffered as a result.  One of the primary benefits of focusing on a narrow use case is that customers don’t need to think about how or why to use the marketplace.  Focus makes that abundantly clear.

Premium experience for sub-premium price: Great local marketplaces enable customers to have a new experience that is magnitudes better than the old. But the best marketplaces deliver that new, better (i.e., premium) experience for a sub-premium price.  Uber and Lyft are the prime examples of delivering infinitely better experiences than hailing taxis and typically at only modestly greater costs (even cheaper in an increasing number of cases).  One of our Homebrew family companies, Shyp, is similar in that it delivers an incredible shipping experience at standard retail rates.

Necessities over luxuries: There are local marketplaces for all kinds of products and services, but we prefer marketplaces that are focused on necessities rather than luxuries. Necessities tend to have higher transaction frequency, greater word-of-mouth and less susceptibility to economic downturns.  Everyone needs to eat, wash their clothes and get to work.  But not everyone needs to fly in a private jet, rent a yacht or hire a Michelin star-winning chef.  Those can be wonderful services and they can be delivered in compelling ways, but our view is that products and services that are truly need-based lead to more vibrant. liquid marketplaces.

Organic distribution: Word of mouth is the best marketing.  But there are other forms of organic distribution that can be just as powerful and cost effective.  For example, when Uber launched, taking a ride with a friend introduced many others to the experience.  When Shyp sends a package, the recipient is exposed to the delightfulness of the service.  Many of the most compelling local marketplaces have dynamics where the same person can be both customer and supplier over time.  Dog owners on DogVacay can be hosts in one transaction and customers in the next.  We love to see marketplaces that have these types of organic distribution opportunities embedded in their services.

Few emerging replacements: While we always tell startups not to fixate on competitors, in today’s world where switching costs and barriers to entry are often low, we prefer to invest in local marketplace startups that are solving problems that few others are addressing with new solutions.  For example, for better or worse, we’ve avoided investments in the various types of food delivery companies because while frequency is high, there are many replacement products available.  This makes it hard to to acquire customers cost effectively, to protect margins and to maintain significant market share over the long term.  Many markets have room for more than one “winner” but very few have room for more than two or three.

The above characteristics may be unique to Homebrew, but we also like to see things that others have recognized as important to marketplace businesses.  Many of these are well-documented by Bill Gurley in his excellent posts on marketplaces and platform transaction fees.  In the past year, we’ve seen local marketplace startups in countless areas, including tech support, parking, home services, cleaning, laundry, food, labor, property rental and transportation.  We’ve made investments in several verticals, including shipping with Shyp, legal services with UpCounsel and property management with an unannounced investment.  But we believe that there are many more use cases for which compelling products and services can be delivered via a marketplace model.  If you’re starting a local marketplace company, especially in specific labor verticals or providing B2B services, please contact me at satya at homebrew.co.

Additional posts on Homebrew investment themes:

Bottom Up Economy

Vertical Software

 

Homebrew’s investment interests: Vertical software

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Homebrew’s first fund focuses on what we’re calling the “Bottom Up Economy.”  The Bottom Up Economy thesis states that as technology becomes more affordable, flexible and accessible, many industries that have not benefitted from or been impacted by technology historically will finally do so  Software is eating the world in many cases but also enabling the world in others.  Accordingly, we spend a great deal of time getting to know entrepreneurs and companies building software solutions that disrupt industries or enable the existing industry players to compete more effectively.  And we’ve already invested in companies serving several different areas, including legal services, mental health, logistics, communications, financial services and commercial construction.  Given our focus on vertically oriented software, I wanted to share a little bit about the attributes we like to see in those startups.

Teams with a unique POV: As my partner, Hunter Walk, has written, we’re excited by teams that aredisrupting industries with love (and just enough greed 🙂 ).  Teams that have experience in the domain tend to have a strong POV about what’s broken and how to fix it.  But often times the most unique insight can come from teams outside of their target industry who are approaching things with fresh eyes.  So we prefer to work with teams that can demonstrate domain expertise without the stagnation of assuming status quo is just the “way things are done”.  What’s critical is that the teams we invest in have an insight that many others either have not seen or don’t agree with.

Distribution focus: We tend not to invest in software companies that are 100% dependent on selling into theC-level via a direct salesforce.  Instead, we prefer a bottom-up entry point via individuals or teams within the enterprise or small business.  The startups that intrigue us have a well-articulated plan for how to get distribution of their software in the industry they are targeting, and most often that includes a strong likelihood for organic or viral growth. No matter how slick and easy-to-use your software is,if you build it they probably won’t come.

Long-term advantage: Nearly all software is replicable, so we look for companies that are likely to have long-term differentiation, ideally via customer or data network effects.  Network effects mean that the value of the software grows as more people use it either because it allows them to interact with more people in the context of their work or it helps collect and aggregate data that informs and improves their work.  The strongest network effects enable customers to benefit from product usage that occurs even outside of their companies (i.e. industry-wide).

Acute pain: VCs are notorious for categorizing things as an aspirin versus a vitamin or need-to-have versus nice-to-have.  But there is a good reason for this.  Unless software is helping addressing an acute pain or delivering value that can’t be ignored, it likely can’t attract the attention it needs to be used or purchased given the limited time of people and budgets of companies.  We like to see software that is addressing what is likely to be one of the top 3 hair-on-fire issues.  This kind of software has a better chance of drawing attention and dollars.

Widespread pain: In addition to the pain being acute, the pain needs to be felt by a lot of people.  This is important because companies need to be able to reach “venture scale”, usage and revenue that allows for a company to be valued many times higher than the value at which a VC firm invests.  For Homebrew, our goal is to invest in companies where we can see a path to returning the value of our entire fund ($35 million) from an investment in that company.  Both the total dollars invested and the price of investment have an impact on that math, but it generally means that we need to believe that the company can eventually generate $100 million in annual revenue.  That kind of scale requires a widespread feeling of acute pain.

Painless path to first dollar: It’s obviously easier to get someone to use something that is free than it is to get him or her to pay for something.  So we like to see products that are likely to have a painless path to the first dollar payment.  It becomes much easier to extract more economic value once the customer is convinced to pay for something because at that point she clearly sees some value in the product that is greater than what she is paying.  This typically means that there is a single person who has three characteristics: 1) she feels the acute pain personally 2) she has the budget needed to buy (can just put it on her company credit card) and 3) she can pilot the product easily (self-service sign-up, no IT involvement).

While we don’t have hard and fast rules or a checklist approach to evaluating investments, we always think about the criteria above when looking at opportunities in vertical software.  If you’re taking a vertically focused approach and have a story to tell that fits with our preferences and approach, don’t hesitate to get introduced to us or to reach out directly.