Recently, I had a discussion with a marketplace I advise, where the team raised an intriguing question. They asked, essentially, if you're scaling a cross-side network effect business, does having a competitor doing the same simultaneously make it all for naught? Historically, we've viewed marketplaces as winner-take-all or winner-take-most scenarios. Usually, this is because one company might initiate their network effect much earlier. However, the dynamics become more complex when several players are scaling in the same space simultaneously. So, do you gain a significant incremental advantage over time simply by being slightly better at compounding?
Let's examine some key case studies. If we go back to the first era of marketplaces, we can observe examples like the online travel portals. In these early battles, two principal players emerged: Expedia and Booking.com. Today, Expedia is valued at approximately $19 billion, which is pretty nice. Yet, if you compare this with Booking which is worth nearly $140 billion, there's a substantial gap in valuation.
Another classic example is seen in the real estate market with Zillow and Trulia. Though they eventually merged, Zillow's valuation was about double that of Trulia's at the point of acquisition. This pattern isn't restricted to the early days of marketplaces; it carries over into the next generation from 2010 onward.
Consider Lyft and Uber in the transportation market. While Lyft holds a significant valuation of $5 billion, Uber dwarfs it with a valuation of over $150 billion. The same pattern appears in food delivery; Postmates, which sold for 2.5 billion, and DoorDash, now valued at $60 billion, both started around the same time with innovations in food delivery methods.
Through these examples, one glaring insight emerges: the concept of being slightly better at compounding over time creates a vast disparity in company valuations. This subtle yet constant advantage in growth can make you about ten times more valuable compared to your closest competitor. To achieve this, you need to excel in aspects like having an astute growth team and efficient supply expansion, among other factors that enhance network effects.
In conclusion, when examining competitive marketplace spaces, remember this: even if there are two similarly sized competitors, always staying slightly ahead will pay off profoundly over the years—far more so for marketplaces than SaaS. If you are part of such a marketplace, I hope you have a good growth team.
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