I spent a considerable amount of time this week studying a white paper by Boris Wertz and Angela Kingyens of Version One Ventures titled, “A Guide to Marketplaces.” The white paper offers many useful insights into building a marketplace and understanding the metrics that support a successful marketplace.
Although at first blush it may not seem like it, the white paper is extremely relevant to the area of online capital formation. Why? Because at the core of all the investment websites popping up, there’s what I call “a marketplace mentality” that drives both buyers (investors) and sellers (companies raising capital) to come to the same place to find each other, and possibly, to transact. This is true regardless of the monetization strategy of the deal platform.
To set the stage a little bit, here’s how I see the 4 primary monetization strategies of online deal platforms:
Pay-to-play platforms: These are websites such as Fundable and EquityNet who charge companies a flat fee to list their deal. Given the heavy-handed compensation constraints on soon-to-be crowdfunding portals, I expect to see many more pay-to-play marketing platforms that offer no transaction capabilities.
Broker platforms: These websites have what in marketplace parlance is called a “take rate.” Meaning they receive a transaction fee based on the consummation of a deal. Because these websites are recommending specific investments, they must be registered as broker-dealers. Examples include CircleUp and I-Bankers Direct.
Principal investment platforms: AngelList is the mother of all principal investment platforms. Even though not all deals funded on AngelList receive investment from an AngelList-run fund, their revenue is derived from the upside in deals that achieve a liquidity event. Other principal investment platforms include FundersClub and OurCrowd. They curate their deal flow and their revenue comes from management/syndication fees and choosing successful investments.
Data/Analytics platforms: Dealflow.com falls into this category because we license access to information on deal opportunities and dealmakers through the use of data and analytics. Other companies offering what could also be described as a “licensed marketplace” include Axial and DealNexus, which focus on M&A.
With these various monetization strategies serving as a backdrop, below are just a few of the take-aways from the Version One white paper as it relates to online capital formation.
Seeding a marketplace
One of the most important things we’ve learned while building Dealflow.com is that serious investors don’t need deal flow. They need good deal flow. The white paper covers various ways to seed the supply-side of a marketplace with inventory but ultimately, the quality of the inventory is all that matters.
So if you’re operating a startup funding portal, you need to focus on getting the best seed-stage deals, if you’re pitching health care, you need the best biotech deals, etc.
This might seem obvious but consider the challenges in finding truly unique deal flow and then convincing the companies running those deals to list on your platform — and only on your platform. When you find areas of deal activity that work for you, as Wertz/Kingyens say, “double down on the hot spots” and don’t worry about scale.
Fostering trust and safety
As any marketplace grows, it will inevitably attract bad actors. Now consider some of the bad actors that the deal business attracts and magnify the problem. Our job as an industry should be to fight the bad actors proactively, so buyers and sellers have confidence in the platforms they’re using.
One idea we’ve bounced around at Dealflow is a ratings system that scores the integrity of users on our platform based on other user’s feedback. Systems that establish trust have been instrumental in marketplaces like Airbnb and Uber. Will it work in the area of investments? I think eventually someone’s going to try it.
Traditional business metrics and KPIs (key performance indicators) don’t necessarily apply to marketplaces. The Wertz/Kingyens paper covers all types of metrics to consider — from overall marketplace metrics to supplier metrics and engagement KPIs. As I read through the list, I kept thinking to myself there’s only one metric that matters in the deal business: How much capital has been raised on the platform? OK, maybe two metrics: How many companies have raised capital on the platform?
Admittedly, it took me a while to come to the realization that auditable metrics are critical. Both for attracting quality deals and also, quality dealmakers. How we’re solving this at Dealflow as a licensed marketplace and not as a broker-dealer could be the subject for an entire blog post.
So if you’re interested, just email me.
There’s really so much to learn from the Version One white paper that I could only scratch the surface here. The big take-away — for me at least — is that regardless of the type of deal platform or monetization strategy, companies getting into the business of online capital formation will only succeed if they create engagement and value. I believe that multiple revenue strategies will coexist in this segment and that further platform fragmentation based on geography, asset types, or sector will also feature prominently in this emerging online landscape. In other words, it’ll look a lot like the real world.