October 23, 2018  •  17 min read

The Montgomery Summit 2018: State of Digital Marketplace

State of Digital Marketplaces Panel at The Montgomery Summit

Frank Cordek led a panel at the 2018 The Montgomery Summit: The State of Digital Marketplaces. Joined by top founders and investors who focus in the space, they discussed innovations in the sector, its growth and where the industry is headed.

Read the full transcript below.

FRANK CORDEK, DCS ADVISORY*: I co-lead our Digital Media Practice, where digital marketplaces are very much a focus. And I’m really happy to have a fantastic panel here of founders and investors. I’ll just go down the line and do a quick introduction. Then you know how fast these conversations go. So we’ll dive right into it.

David Kalt of Reverb is right beside me, an online instrument marketplace and large very large community. Andy Nielsen, founder of EBTH [Everything But The House], an online estate marketplace.

And then the investors over here, we have Dana Settle from Greycroft, an investor in a number of marketplaces, like the Real Real and also EBTH. And then Peter Garran of Great Hill Partners, a very active private equity group based out of Boston. He’s in Click Studios and a number of other marketplaces.

So that’s the panel. And maybe we’ll just kick it off.

So one of the questions I want to pose to the founders, I think one of the really interesting things that has happened is the evolution of  digital marketplaces. Think about eBay. You think about Craigslist, things of that nature. And then you think about what your companies are doing.

So your companies really probably couldn’t have been as successful as they are 10 years ago or maybe even five years ago. So I’ll start with David, maybe.

The question is, what do you think has happened? What is really the perfect storm that has enabled your company to be growing and successful as it is right now?

DAVID KALT, REVERB: Yeah. You know, I heard a phrase the other day from a marketplace called the “dismantling of eBay.” And I think what eBay did really well was they figured out how to go to multiple categories beyond the categories they were originally really good at, the collectibles and musical instruments was one of their initial great categories.

And as they tried to be all things to all people, it became very hard for them to focus in on the niche and really address what the customer’s needs were.

So when we launched Reverb, it was so evident what the consumers were lacking. Pricing transparency being one of them. Good customer service. A platform that engages people with content, relevant content, personalization segmentation, all the buzzwords you hear.

But when you plug all those things together and you build a community, you really can build fans that are loyal. They become great cohorts. And your platform can become very sticky.

FC: And then Andy, maybe over to you.


FC: When I think of EBTH, I also think brand. And I also think a lot of technology has enabled what we’re able to do. Can you kind of speak to some of that?

AN: Yes. Sure. So Everything But The House has taken a different approach to the second hand or pre-owned commerce marketplace. So you have eBay, Let Go, Offer Up at the bottom end of the second hand kind of industry.

And then you have Christie’s, Sotheby’s, Heritage Auctions all at the highest end of that spectrum of, call it, item value. So you look at high end inventory, full service. You have the auctioneers, and then you have the pre-owned peer to peer marketplaces on the lower end of that spectrum.

We sit-in this giant middle market between the full service auctioneer and the low service peer to peer commerce players. And the reason I bring that up is because you couldn’t have built this business years ago in this space.

So we provide a full service liquidation process for those going through a downsize, a death in the family, or full service liquidation. Or if you have a single item or multi-item collection, we can actually perform the full service there.

And so I bring that up because it takes a lot of technology, a lot of logistics, a lot of infrastructure for us to be able to absorb and inbound these items from the East Coast to the West Coast and transition local to local commerce to a local to global.

And so we’ve had to build the infrastructure the technology to automate many of the processes that exist to take a single SKU item and convert it into a structured data item that has now a marketable image, good data, and allows us to actually transact that and ship that across the country.

FC: Thank you.

AN: You just simply couldn’t do that 10 years ago.

FC: Right. Right. And then, Dana, from your perspective, from an investor perspective, you’ve done a lot of investments in marketplaces. What has been attracting you to them? And how do you feel that really that has evolved and that there is a continued interest in those sectors?

DANA SETTLE, GREYCROFT: I like challenges. [LAUGHTER] No. I’m kidding. But seriously, I mean I think marketplaces aren’t for the faint of heart. I mean it’s like– I mean, these guys know much better than I do first hand. But it is. It’s that constant balancing of supply and demand.

And to me, what we look for is having some source of proprietary or quasi-proprietary supply. And that’s really hard to do. But if you can do it, whether it’s through a process like EBTH has done by just really nailing the entire process around an estate sale–

And if you think about that, you think about what happens when a loved one passes away and you live in a different city. I mean, the stress that there is for the family that’s dealing with it, it’s like you come in at that moment and really provide an incredible service. That’s what the supply side is seeing. The buy side is seeing incredible inventory that they’re not seeing anywhere else.

And so that’s sort of the magic of getting the marketplace right. And I think Reverb also has something really special in terms of having this store in Chicago, which, if anybody– I assume you guys still have– is amazing. I mean, it’s like the coolest place ever.

Very cool.

If you’re ever in Chicago and have any interest in music, you should go check it out. Because it’s just this mecca for musicians. And so, you sort have this magic that becomes part of the brand. And I think it makes people want to be involved in that community.

DS: So we’re always looking for something that’s really special that provides that proprietary supply.

FC: And then Peter, from your view being a private equity investor, you think a lot about scale. So how has that kind of evolution of these types of business models affected your view on them and your thought of investing in them?

PETER GARRAN, GREAT HOPE PARTNERS: Sure. So I think, at the highest level, we appreciate the benefits of the model if you can get it right. Obviously you’ve got powerful network effects. And increasingly marketplaces are becoming platforms almost as ecosystems where you’re seeing the old power sellers from eBay become big players in modern day marketplaces in the equivalent.

So in the Real Real, there are brick and mortar consignment shops that are becoming power sellers. So rather than seeing their businesses get decimated by the Real Real, it becomes a transformation of the business.

And so we see the prize. And we’re attracted to the prize. But from our perspective as private equity, we’re also, I’d say, maybe more sensitive to capital loss. And so, we think about barriers. And to us, one of the greatest barriers is complexity.

So in some ways, it sounds counterintuitive. Because it’s difficult to scale. But if you can nail it, it becomes a great competitive mode. I think, in each case of EBTH, Reverb, the Real Real, or PuppySpot– a marketplace business that we own in the pet category– to anybody trying to get into that marketplace, I wish them good luck. Because it’s really ours.

FC: Yeah. I think we’d all agree. Well, given that, I think it would be interesting to talk a little bit about business models. There’s the consignment model. There’s the buy out model. There’s peer to peer. There’s even some subscription-based models.

FC: Maybe I’ll kind of kick it back to you, Andy. Maybe talk a little bit about your model, why it’s been successful. And then we’ll just go from there.

AN: Sure. So everything we sell is on consignment. So if you’re looking to sell full collection or a single item, you’re basically consigning that item to EBTH. At that point in time, we sell it in a competitive auction-like environment on our platform at EBTH.com.

And then at the end of the conclusion of that process, we charge at a take rate of approximately 35% to 40%. So because it’s full service, we can actually charge a much higher take rate and produce healthy unit economics downstream.

And so, the interesting thing here though is, because everything’s on consignment now, I’m not sure we’ll always be like that. It is right now. It’s great. It’s the wheel house where we live and thrive. But over time, talking about data and technology catching up, our price prediction for this unique inventory and proprietary supply on the platform becomes more robust. Right now we can predict value of the item selling on our platform with about 95 degrees of certainty.

And so over time, we see a future where, as a seller hits our platform, yes, you have the consignment auction. And the consignment opportunity will run your auction. But if you’re the no risk seller, we may have a buyout option as well, where we know that we can buy the inventory for $0.60 on the dollar and then sell it and actually make more of an economic equation work downstream.

So yes. Consignment model right now we’re a big fan of. Over time, it could convert.

FC: And David, over at Reverb which– I mentioned a brand for EBTH– I think Reverb is very much a brand. Global, iconic in many ways. It was in your presentation earlier. And you kind of talked about the balance. And you kind of talked about the roadmap of scaling the platform. This company is going to do over– excuse me– almost half a billion of GMV this year.

So what has been the balance and enabled you to really–

DK: Yeah. So I started the business in 2013. After my last business, I said I want to do something totally different. I bought a guitar store. I spent a lot of money on it and learned, the hard way, retail and e-commerce. And I experienced the pain of selling on eBay. So I launched a marketplace.

And what I realized though was, coming from the finance world– my last company was an online brokerage trading firm, retail trading firm– I realized liquidity is everything.

So when I launched Reverb, I realized that buyers and sellers, the spread between the bid out, spread between what a musician wants for their guitar and what they want to pay for their next instrument, was just too massive. And the only way I could deal with that was to have low fees and to inject liquidity into the market.

So on Reverb, instead of getting $0.50 on the dollar when you’re selling and paying 100 cents when you’re buying, you’re getting $0.70 and $0.75. And I’ve now brought 220,000 unique entrepreneurs and sellers and flippers and dealers and all of them together fighting for price.

I share the pricing. And I make it global so that a guitar in Berlin, New York, and Tokyo are all priced the same independent of shipping and vat. And now, all of a sudden, you have velocity.

So what people think is a niche business– it will do around $650 million in GMV this year, projecting to do around $2 billion in the next three years– is a function of instruments not sitting in closets and people not hoarding because availability is so there. Right?

Like an Uber is here, I don’t need to go to Hertz. When you can buy and sell a guitar pedal or a record and you know what the price is going to be and the price is going to be the same tomorrow as in six months, all of a sudden your mind of how to buy and sell changes. You remove the risk. It’s no longer, I got it. Now I’m going to keep it. It’s I got it. I use it. I’m done using it. Now someone else can use it.

You see that with the Real Real. You see that with fashion. And you see that with instruments. You see that with a lot of categories.

I think that is the biggest opportunity for velocity and not so much focused on massive take rate but focused on volume with reduced take rate to increase velocity. And that’s been our model and will continue to be our model.

FC: So Peter and Dana, really you see a lot of these different types of businesses, a lot of these different types of models? What are some of the ones you feel are more successful? Which ones do you think are more challenging? Can you speak to that a bit?

DS: I mean, look. Anything where you’re actually having to touch the inventory is more challenging. I mean, just by virtue of the logistics associated with it, shipping, and all of the things that you have to do.

But again, as Peter said, if you can really nail that and nail those processes and refine, refine, refine so that you cut costs out of every part of the process, I mean that’s just a complete barrier to anybody else entering. And that’s where I think scale is so critical in getting these businesses really to scale to build those barriers around processes and automating little parts of the process.

And then also ultimately, the data. And know you mentioned with the Real Real, they have come out with sort of really interesting data and research around the prices of luxury goods. And it does change the way that people buy. So you go in to buy an Hermes bag. And all of a sudden, you think about it differently. Because you’re going to get potentially even the entire value back in the resale.

FC: Absolutely. And Peter?

PG: So I guess a couple of things. So first, I think on the question of model and is there a preference, clearly, in addition to the complexity of having to touch inventory, there’s also the capital requirements. And funding inventory through equity capital is never very attractive.

But, by the same token, at scale and if you’ve got the insights through pricing and you have the capital and balance sheet to do it, then that becomes another barrier to entry, which is an important consideration.

I think, for me, I’m agnostic on revenue model and more focused on, does the model actually unlock new demand and grow the market? Are you bringing people into the category who weren’t otherwise participating? So that ends up being, I think for us, one of the first considerations. It was one of the things that made us most excited about the Real Real.

Just bringing new people who had never consigned before, making them consigners who had never bought online luxury on consignment. That’s extremely powerful.

FC: So I think this is a question to all of you, whoever wants to jump out at it first. Really just kind of the idea of the adoption of recommerce. I think it was kind of taboo even a few years back. But you have millennials. And like Dana said, you have all this data around luxury goods and some of the stuff that David and Andy have on their side, it doesn’t really depreciate almost. It has a 10 to 15 year lifetime or more. Some of it really appreciates.

So can you speak a little bit– maybe I’ll just throw this out there to Andy because you’re looking at me. But what do you think about kind of the adoption of re-commerce?

AN: Don’t look at Frank. He’ll call on you.

FC: There you go.

AN: Yeah. I think the recommerce thing is definitely a huge trend. And it continues. You know, we see [NO SPEECH] frankly speaking, the things that people want to buy. And there is a buyer, there’s a consumer for everything.

And I think there is a trend right now that’s unique. It’s the proprietary supply model. It’s what excites Dana about this industry at large. It’s the fact that, yeah. I’m not selling Ikea furniture, Pottery Barn, or Restoration Hardware. I’m selling stuff that was manufactured 20, 50, even 200 years ago.

And that to me is, yes, there are trends that are consistent with that. And then you do see that as those values continue to grow through the platform.

The other interesting thing that I love about this trend is, because we have such a broad swath of inventory and categories on our platform, not as specific vertical, that we can see the trend in the consumer behavior. So several years ago Asian antiquities was hot. And that market was hot. And other subcategories weren’t as hot. Well, now mid-century modern has kind of taken over and Asian antiquities have softened.

And so we can kind of ride these times. But it’s all based on that recommerce trend that we’re seeing at large.

DS: And I think that’s also a trend that’s driven by the millennial buyer where they actually care. They care about waste and are much more thoughtful, I think, than those of us who are not millennials.


DS: And it’s interesting. I mean it’s not a fad. I mean, it’s a very real trend, long term trend. And I think that that’s going to play into every market.

PG: I do think it’s also worth keeping in mind that used purchases have been around for a long time. And they’ve been large GMV, just not online historically. And whether that’s used autos, used musical instruments, local consignment stores, going back to where the conversation started around what’s activated the e-commerce component of it, I think comes back to community and then trust.

And whatever the trust markers are by vertical, I think people have gotten a lot better at it. In some cases, it’s just taken time. And then there is the overlay of millennial purchasing behavior, which I think is a clear accelerant.

FC: I think you hit the nail on the head there. I mean David, I’ll kick it to you. But I think you’ve built a trusted brand right in between the buyers and sellers.

DK: You combine the trust with content. So I think, while it has existed, the used market, in my industry– for many, many years, people have sought after used instruments. But what we’re doing is we’re educating people. We’re giving them pricing data. So now all of a sudden, we’re removing some of that uncertainty.

And then combine that with a trust element where we’ll take care of any problem that exists between buyer and seller and make it go away. Then all of a sudden, used actually has a better value proposition than paying a premium for new.

The other element I’ll add to that in my category, which I think applies to EBTH and others, is specifically with music, this sort of revenge of analog. So we started a record marketplace. And it’s not 50-year-olds like me. I mean it’s 25-year-olds that are buying old Miles Davis records.

And same thing with musical instruments. I think the next 10 years, you’re going to see this backlash while we’re all going to be glued to our phones or whatever chips we embed in us, there’s going to be a love for old, cool vibey, analog, tactile experiences. And if you can box that in a marketplace, you’re going to have the goods.

FC: That’s fantastic. So we started a little late. So maybe I’m going to steal an extra minute or two. But there are a couple questions that I think are really kind of interesting.

One, I’m going to kick to you, Dana. It’s really around KPIs and metrics, whether it’s traffic, it’s engagement, it’s average order value. What are kind of the top things that you look at?

DS: All of the above. But the balance of the marketplace. So again, making sure that you do have the sort of balance of supply and demand. And ideally, buyers are selling and sellers are buying. And that does become kind of a virtual cycle and automatically dramatically decreases your customer acquisition cost.

At the end of the day, keeping people engaged in these platforms so that they will come back again and again and again and transact is that the key to building a really healthy marketplace.

FC: Absolutely. And Peter, you think about exits all day long. Right? So whenever you’re thinking about valuation, can you talk about things you are thinking about? Obviously scaling and technology there, that type of stuff.

PG: Sure. I think it’s one of the most difficult questions that we grapple with because typically where we’re getting involved, businesses are of scale but they are not mature. And so if you’ve got a business that is–

So first of all, I would amplify everything, I agree with everything Dana said. And if you’ve got high repeating businesses, there’s a risk that you’re going to value a business based on current economics and just roll out cohorts as they are.

But in both David and Andy’s businesses, I’m sure the actual unit economics are changing and improving year by year, cohort by cohort. And so the math becomes, what do you think happens at each step of the flow of unit economics? And we’re typically underwriting our exits to some lofty but rational multiple [INAUDIBLE]. And it’s really challenging when you’re talking about businesses that are, again, scaled but nowhere near maturity.

So it’s facts and circumstances. But we spend a lot of time on everything from literally product level margin to freight in to freight out to everything. It’s a great question.

FC: And then the last question that we have time for. This is to the founders here. Really just, as you think about exits, you have a lot of options. Marketplaces are a very interesting sector right now, whether it’s a strategic buyer like eBay or someone like that, or whether it’s a private equity exit, or even working with a private equity group to maybe even roll up other properties.

How do you think– and I’m not asking to say what is your actual plan– but whenever you think about these options, what is interesting to you right now?

DK: I’ve done a couple of businesses. So to me, it’s the fun factor. If you’re having fun and you’re building a great team, Google shouldn’t be in the email business. Why do we all use Gmail? Because they [UNPRINTABLE] built Gmail. And it kicks ass. [LAUGHTER] As long as I’m having fun and building marketplaces, I’ve got a lot of ideas for other marketplaces. I’m sure Andy has ways to grow like this, ways to grow like this.

When you build a good team and you’re excited about what you do, you should keep doing it for as long as you can. So that’s how I approach my every day.

But I do have investors and I’m here to maximize shareholder value. The best investments most of you have had are when your founders or your entrepreneur-backed companies go beyond your wildest expectations. So you’ve got to push them. You’ve got to give them wide open spaces to see beyond whatever is in their current model or their current spreadsheet. And you’ve got to be able to dream.

I was at the Zillow presentation. And Rich Barton is one of my most admired entrepreneurs. That guy is– when he launched Zillow, because I saw what he did with Expedia– I was in the travel business and I sold my business when Rich launched Expedia. [LAUGHTER] And then when he launched Zillow, I was like, watch. This is transforming everything. So you’ve got to think big.

FC: OK. Andy, quickly?

AN: Yeah. I think a similar sentiment here to David, which is just continue to have fun. Build a great brand. Make sure you’re building a sustainable business model. So keep an eye on the unit economics, especially at scale because Peter’s point is a good one. If you’re scaling the right way and deploying technology in the right way and the right form and function throughout the business, you should actually see improving margins at scale.

And so, as we look at our business, it’s about execution, execution, execution. Don’t get lost in who or how we’re going to exit this business. Because if we do that and we prove the economics at maturity, those options will be there.

And so, yeah. I think there are the traditional players in eBay or Amazon and Alibaba. Zillow is an interesting thought because we deal a lot in the real estate side of things.

So there are certainly the strategics that are out. There are PE opportunities. But eye on the prize right now is all about execution and becoming operationally excellent.

FC: Fantastic. Well, unfortunately, that’s all the time we have. And I want to thank the panel. You folks have been fantastic.

*DCS Advisory is a legacy firm of DC Advisory US. Find out more >

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