Key performance metrics I look for as a venture capital investor

I have spent more than 15 years of my career building, investing in, advising, and studying online marketplaces.  I am convinced marketplaces possess very unique and fascinating characteristics, which are often counter-intuitive and easily misunderstood.  By “marketplaces,” I am referring to a central exchange of goods or services whereby a large fragmented supply/seller base meets in one concentrated place to sell to a large and fragmented demand/buyer base. Visually, this many-to-many model for commerce has been captured as a butterfly.  Lots of suppliers (one wing) meet lots of buyers (another wing) in one central spot (the body).  That “body,” the marketplace, typically has a lot of the concentrated control and power, which results in high equity values.

Successful marketplaces tend to enjoy incredible network effects that result in winner-take-most dynamics.  For the winners, this is very rewarding and highly defensible.  Unlike companies in most sectors of technology where there can be multiple winners, marketplace dynamics offer no prize for second place.  The results are often binary.

An early successful example of this is my ex-employer, eBay.  eBay was able to dominate most of the auctions marketplaces in the world, but lost the network effect war in China to Alibaba, in Latin America to Mercado Libre, and in Japan to Yahoo! Japan.  All of these regional leaders are now multi-billion dollar businesses.  More recently, we have seen a number of great marketplaces emerge and thrive in many sectors of the economy, from lending (e.g. Lending Club), to hospitality (e.g. AirBnb), to crafts (e.g. Etsy), to transportation (e.g. Uber), to clothing (e.g. Threadflip), and even to education (e.g. Udemy).

I’ve evaluated each of these winning marketplaces, and I’ve found that they are very similar to each other, yet very different to their less-successful competitors, especially in five key dimensions.  What do they do differently early on as compared to their competitors to emerge as the undisputed leaders in their own sector/category?  At the same time, what do these specific winners have in common with each other?  Is there a recipe for success?  I contend that there are really five “uber” ingredients (pun intended), which – if present – create the recipe for the successful early detection of a winning marketplace:

1.   Trading Liquidity: Methods for increasing and sequencing effective supply & demand “matches”

Marketplaces’ most important value proposition is to deliver high-quality demand to providers and high-quality supply to buyers in the most efficient and effective manner.  In other words, a marketplace is only as good as its trading liquidity. When a marketplace first gets started, the suppliers often need to be patient and wait for the buyers to arrive, so the time to “match” (also called “conversion rate”) is slow.  As the marketplace gains momentum, buyer demand increases and the time to match improves.  Uber, for example, religiously focused on the time it takes for a driver to be matched with a passenger; response and pick up time is a critical liquidity metric for them.  Many marketplaces measure this differently, but at the end of the day, a marketplace needs to do its primary job, which is to satisfy sellers and buyers by delivering liquidity.

2.   Trust & Safety Focus

The other key value proposition a marketplace offers its participants is a transparent, well-behaving community of buyers, and sellers, who follow clear rules of engagement. Trust and safety is critical in any marketplace and early marketplaces have an advantage if they focus on it.  A good example here is Lending Club.  Very early on, Lending Club decided to do their own loan underwriting partially to ensure the quality of the loans offered to lenders was very high.  This resulted in a very low loss ratio early on, which fueled very high trust among lenders and borrowers.

3.   Habitual Repeat Usage

Another great sign of initial marketplace success is how the early cohorts of buyers and sellers stick with the marketplace over time and continue to use it more actively.  I always focus very heavily on how early adopters have been retained over time.  For example, I was very happily surprised to see that Udemy’s engagement with consumers of educational videos spans several years and every year its consumer base becomes more and more addicted to Udemy.  Think about Uber and AirBnb as well.  Many of their early adopters are even heavier users and stronger evangelists today.  Marketplaces must master the “hook” and generate intrinsic triggers that get customers coming back again and again.

4.   Increasing Value Capture

A marketplace should be able to capture more of the value without much change in retention numbers.  This is because a network-effect business becomes more valuable as its network effect takes hold.  Marketplaces gain substantial pricing power once they establish clear trust, improve liquidity, and generate a positive brand.  While sellers and buyers may complain at first, a marketplace can change its value capture as long as they are offering more value than they are capturing.  Thus, winning marketplaces are able to charge more; as long as marketplaces don’t become too aggressive, this dynamic should endure.

5.   Signs of Increasing Distance between No. 1 and No. 2 

Ultimately, if the marketplace network effects are taking hold, the clearest measure that a winner is emerging is the increase in distance between No. 1 and No. 2.  This distance can be measured in terms of typical key performance metrics (KPI’s) such as traffic, engagement, supply, conversion, revenue, margin, etc.  In these and other performance metrics, the top marketplace should be performing increasingly better.  By the end of the maturing cycle, the marketplace could end up with a very large majority of the market share and mind share.  Once the market shares and mind shares are cemented, it is then very difficult to displace the winner.  It is not until another disruptive wave of technology comes around that the marketplace becomes vulnerable to displacement.  The lifetime value of a winning marketplace is very long and high, hence the public market valuations and multiples given.

At NVP, our early investments in and lessons from now-successful marketplaces have led us to make our newest marketplace investments, including Udemy and others.  We believe Udemy exhibits these five characteristics and we are very excited about their funding announcement this week.

These five ingredients are not meant to be completely comprehensive. In each of our investments at NVP, we tend to look at dozens of other key ingredients that make a great marketplace thrive.  More importantly, we use our knowledge and best practices to make sure our marketplace partners have a clear competitive advantage.  We actively offer our expertise and guidance to help CEO’s and entrepreneurs achieve that coveted winner-take-all position.

Follow me @vcserge or email me at

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