Stealing Signs - Issue 32
Marketplace Leakage & Ratings Systems, Innovation v. Optimization, Invest in the Midwest, The Multi-Path Career, & MLB's Player Development Pipeline
Worth Reading
Marketplaces, Rating Systems, & Leakage
Charles Hudson, Precursor Ventures
In order for a review system to work in terms of enforcing norms of good behavior, two things have to be true:
1. Suppliers have to value their rating, either as a buyer-facing signal of quality or because supplier rating determines how leads are distributed and routed within the marketplace.
2. Buyers have to trust in the validity and quality of the rating as a reliable indicator of supplier quality.
When both of these conditions hold, there is at least a chance that reviews will be of some value to those in the market. If suppliers do not value their rating, they will not care about taking their transactions off platform because having a high rating does not tie to the things they care about – making more money and potentially getting more customers. And if buyers believe that ratings are gamed or otherwise influenced, they lose their value as a signifier of quality. Getting review systems right is not easy, but well-designed rating systems can provide a strong nudge to settle transaction on-platform.
Leakage is every marketplace’s nightmare. Charles explores how marketplaces can prevent leakage and why ratings systems play an important role.
Ratings Systems. I often turn to Airbnb as an example of a well-executed marketplace strategy. While their Superhost badge is one of the best examples of a successful marketplace ratings system, another great example is GOAT, the sneaker marketplace. Every seller on GOAT receives a a “seller’s rating.” As far as I can tell, the rating is not broadcast to buyers so they can’t rely on it as an indicator of supplier quality, one of the two components of a successful ratings system according to Charles. However, the rating is directly tied to seller earnings — a low seller rating increases the commission fee sellers must pay GOAT per order, reducing the seller’s net income. This means sellers likely value their rating, the other key component of a successful ratings system.
The direct relationship between seller rating and seller earnings incentivizes them to behave appropriately — fulfilling orders and minimizing cancellations. This is where the effects of GOAT’s rating system begin to mirror Airbnb. More high rated sellers means a a better experience for sneaker buyers which leads to more transactions, ultimately increasing seller revenues. GOATs rating system created 2 powerful flywheels: growth and user experience.
Marketplace Leakage. Charles makes an important distinction between marketplaces offering experience goods and commodity goods. He notes experience goods marketplaces tend to suffer from leakage more so than commodity goods marketplaces because the buyer is incentivized to use the same service provider again and again once proven to be a quality supplier. This means that buyers and service providers are more likely to move off-platform after the first transaction than buyers and service providers in commodity marketplaces. It’s important to understand this distinction when evaluating marketplace businesses.
I believe there’s a deeper distinction to be made within the experience good marketplace category: Commodity experience goods and relationship-driven experience goods. Examples of commodity experience goods include housecleaning and ride sharing, and examples of relationship-driven experience goods include physical therapy and baby-sitting. With commodity experience goods, a quality supplier equals a quality supplier in most cases — the relative homogeneity of quality service providers and distance between buyer and provider in service execution means buyers are less concerned with the person delivering the service. So, there’s less risk of leakage in this type of marketplace.
For relationship-driven experience goods, however, a quality supplier does not necessarily equal a quality supplier. Services like physical therapy are hyper-personal — the buyer<>supplier relationship matters as much or more than the service itself. Buyers may prefer one PT over another based on factors entirely unrelated to performance or service level, like how comfortable they are with the service provider in their home. In fact, many aspects of home health demonstrate these dynamics: senior care, nursing, child care, etc. While relationship-driven experience goods benefit from a strong buyer<>supplier relationship, they’re at greater risk of leakage for that very reason — the buyers and suppliers build strong personal relationships and see value in moving off platform.
One way to combat leakage in relationship-driven experience good marketplaces is to make it ultra convenient to transact through the platform or, in some cases, essential. Enter SaaS-enabled marketplaces. A software product tied to a marketplace can incentivize transactions through the platform and prevent leakage because the product is as important to the transaction as the marketplace itself. Let’s use a physical therapy marketplace as our example here. This marketplace connects PTs with patients. Once a patient finds a PT they like, they’re incentivized to transact with the PT off the platform — can negotiate rates separate from the platform’s guidelines, easier to text or call the PT to arrange care, PT circumvents the marketplace’s take rate, etc. However, if the marketplace included a software product that enabled PTs to manage billing, track patients, record notes, communicate with patients, and efficiently run their operation, it becomes much less attractive to the PT to move off platform. It’s much less convenient for the PT to transact outside of the platform because their payments, scheduling, and operations are tied to the product and, thus, the marketplace — the “SaaS” part created marketplace lock-in and reduced leakage.
Another source of marketplace leakage relevant here is the percentage of service provider income the marketplace is responsible for. If a marketplace is responsible for a small sliver of that income, suppliers are less inclined to stay loyal to the marketplace and more likely to move off the platform to transact. If responsible for significant supplier income, the marketplace is less likely to experience leakage. In the SaaS-enabled PT marketplace example, the marketplace could be responsible for all of a PT’s income, which means it’s less susceptible to leakage. This model can be quite effective in combatting leakage in experience goods marketplaces.
Innovation vs. Optimization
Mike Volpi, Index Ventures
eBay continuously optimized its take rate in order to improve the profitability of the business: in 1998, the take rate was 6%, but by 2008, eBay’s take rate had ballooned to 14%. Similarly, by creating efficiency in cost structures, eBay improved its operating margins from 13% to 24% over the same period of time. Once again, this contrasts with Amazon where profits were not a priority over those years. Rather the company maintained its focus on customer-obsession, growth, and innovation. Today, Amazon is valued at $1.2 Trillion.
Mike’s post is a great dive into the tradeoffs between innovation and optimization strategy and the corresponding outcomes each strategy produces. The difference between the two is evident in the eBay vs. Amazon example above.
The shift from optimization-driven strategy to innovation-driven strategy is extremely difficult yet often critical for mature organizations. I spend a lot of time thinking about how this change occurs — it seems the mindset, not the execution, is the key constraint.
Mature organizations, especially digitally-nonnative ones, are typically rooted in an optimization mindset: double down and refine what’s working, eliminate waste. While most also want to innovate and “disrupt themselves,” they aren’t wired to seed and grow innovative initiatives. This requires a different mindset than optimization because it’s both scary and counterintuitive to continually disrupt oneself. Corporate innovation initiatives require high risk tolerance, contrarian thinking, and often take years to show up on the bottom line. Before ideation and execution, a re-wiring of the corporate brain must occur. The common trope, “skate to where the puck is going” comes to mind. In this case, the mature corporation has been skating alongside the puck for years, a conservative approach providing support derived from what’s known — where the puck is. This is optimization strategy. The shift to innovation strategy requires the corporation to skate where the puck is going. The decision to skate to where the puck will be can only be made with incomplete information and takes on greater risk than skating alongside the puck. So, how does the corporation realize it needs to skate ahead, from where the puck is to where it will be? The first step is to acclimate to operating under conditions of uncertainty, which inherently seeds higher risk tolerance and the ability to make decisions with incomplete information.
Invest in the Midwest
Victor Gutwein, M25
HumanPredictions, the most exhaustive database of tech talent primarily used for recruiting purposes, analyzed 7 different Midwest markets and saw that founders in each city were more than 90% likely to stay in their city after exit/dissolution— and this trend is increasing compared to 10–20 years ago [see Figure 4]. When they analyzed the trend for software developers, it was a bit lower but still a huge majority of those that worked at successful startups: 85% of Grubhub, Groupon and Orbitz alumni stayed in Chicago, 86% of ExactTarget grads stuck around Indy and 82% of CoverMyMeds veterans remained in Columbus.
Victor makes a compelling case for investing in the Midwest with some extremely interesting data about talent recycling. First, let’s look at the premier example of talent recycling: The Bay Area. This ecosystem benefits tremendously from the flywheel they’ve built over the last 50 years:
1. Entrepreneurs flock to Silicon Valley (SV) for the abundance of opportunities in funding and hiring —> 2. Entrepreneurs build companies there to capitalize on these opportunities —> 3. Entrepreneurs hire employees from the rich SV talent pool to build their company —> 4. Said company grows very large and successful —> 5. founders (& employees) cash in and/or leave to start new companies —> Back to step 1.
SV talent is recycled, strengthening the company building advantages of the region and producing an increasing number of successful startups. This has long been the primary competitive advantage of SV and why Unicorns are more common there than anywhere else in the world.
The data Victor presents suggests the Midwest is well on its way to a powerful talent recycling flywheel of their own. The top 7 Midwest cities see 90%+ founder retention rates — in other words, 90% of the founders of companies in major Midwest cities stay in the Midwest (presumably to start their next company). We’re seeing the benefits of this in the first graphic above — second and third generation companies have been seeded by the talent of the successful startups before them.
The Multi-Path Career
James Beshara, Angel Investor and Below The Line Podcast
Slowly but surely, the fractions of fractions of the cost + the separation of your physical labor from your co-workers will lead to the question: “Could I do this for multiple businesses at the same time?”… and that question will lead to some more pioneering leaders answering it for themselves, providing the social precedent of “my friend does this” instead of “Elon Musk does this.” Personally-connected-precedents grow into social norms. 10-inch puddles represent little-to-no-risk… and before you know it, people are trying it out for themselves, diversifying career bets, and showing us the way.
James suggests that shifting career norms could lead to more “multi-path careers,” where workers embrace distributed work and take advantage of reduced costs of building to create more value.
Today, our society is built on the notion of a single-path career — a 1:1 relationship between employee and employer. Labor is tied to who we work with and where we work, which are severe limitations to value creation. The multi-path career concept, on the other hand, lifts these restrictions, suggesting workers can create value on many vectors for many different entities — a 1:many relationship between employee and employers. An analogous model is fractional leadership — VC investors on the boards of many companies, Elon Musk running Tesla, spaceX, and 6 other co’s, Buffet and Munger as investors and operators of 60 businesses, and Jack Dorsey running Twitter and Square.
James questions whether this model can be applied to the masses, citing the separation of physical labor from co-workers and decreased costs of creating as the driving forces behind the democratization of fractional leadership.
Some of the most prominent examples of this can be found in the rise of business writing online. Not just blogs, but in-depth analysis. Deep explorations of topics and ideas by people whose “day job” is not writing. Matthew Ball (MatthewBall.vc), Danielle Morrill (A Ticker A Day), and Brett Bivens (Venture Desktop) are great examples of this. They write on top of their day jobs as investors, advisors, and entrepreneurs. Each are leveraging the benefits of remote work and decreased costs of creation to become fractional leaders in a sense. While these examples are not quite a 1:1 comparison to James’s multi-path career concept, they’re close. And one could argue at least Brett and Danielle, who write on Substack, are in fact creating value for multiple entities: Their firms/companies + Substack itself:
<stuff> Weekly
LOL Weekly: All Those Substack Newsletters…
lollllll
Funding Weekly: ID.me
ID.me is a digital identity network that allows consumers to prove who they are online while controlling how their information is shared with brands. For participating organizations, ID.me acts as a trusted intermediary, capable of verifying consumer identity and group affiliations in real-time allowing brands to ensure the customer experience across offline and online channels while reducing costs and security risks associated with manual verification.
ID.me raised a $10M Series A round ($7.5M equity / $2.5M venture debt) from USAA, Silicon Valley Bank, local Chicago VC Lightbank, and angel investors including David Tisch’s Box Group.
I believe there’s an opportunity for a massive company in the digital identity space. ID.me reminds me of Fast for identities — one click verification across many platforms. The opportunity is especially large in access to government programs and in employment where credentials and accreditations play a significant role like construction and engineering. Employers lack a simple, unified portal to verify identity and skills or credentials associated with an identity. This makes hiring slow and difficult process susceptible to fake identities and credentials. A digital wallet like Apple Wallet for identity and credentials is the best analog I can think of.
Baseball Weekly: MLB Is Coming Back. Its Player Development Pipeline Is Not.
Michael Baumann, The Ringer
After taxes and agents’ fees, $125,000 doesn’t seem like such a big number, particularly when it’s spread over five or six years. But it’s still a lot of money, enough for a fringy amateur prospect to give pro baseball a shot. Limiting that bonus to $20,000 actually offers a powerful financial incentive for amateur players to go pro in something other than sports. This is particularly true of college players, who could wrap up their playing careers with a degree and—since full-ride scholarships are vanishingly rare in college baseball—student loan debt. The next deGrom, Merrifield, or Pillar could well end up going to dental school or managing a convenience store rather than pursuing that slim shot at a major league career.
An excellent piece examining the effects of a shortened draft and narrowing talent pipeline on Major League Baseball. The effects of a truncated MLB draft in 2020 and 2021 are obvious. Fewer players drafted means more potential stars miss their chance to make it. But, add in a 6x reduction of the cap on bonuses for undrafted free agents from $125k to $20k and we have the perfect recipe for depleted talent pool. Draft and signing bonuses often support players for their entire career unless they make it to the big leagues for a sustained period of time. Without these bonuses to lean on, many players will opt not to take their shot in the minor leagues and return to college or simply graduate and move on to the real world. This talent drain will damage baseball far more than a shortened season.
Art Weekly: Violent Treasure at Palais de Tokyo
Futura 2000
For his exhibition “Violent Treasure” on the windows of the Palais de Tokyo, Futura 2000 is deploying a cloud of corrosive, misty pigments, contaminating the art center’s architecture and setting off a radioactive flash that broadens the horizon. Then its vibrations of white, black, yellow and orange colors spread out in a play of chaotic expansion and overlapping, interspersed with vibrant lines and furtive ellipses.
