Dissecting ‘The Business Model Of The Decade’

If there was a hall of fame of tech and VC articles, NFX’s “The Next 10 Years Will Be About Market Networks” would certainly make the cut. The prophecy of a new breed of successful startups combining the best of networks (“the strong network effects, defensibility and scalability”) with the best of SaaS and marketplace businesses (“the lucrative revenue models”), is undoubtedly an enticing notion.  

Four years after the original post — and a couple of Market Network investments of my own later — I’ll use this post to explore what we’ve learnt about this business model and its success attributes, and whether investors (including James Currier, partner at NFX and author of the original post) still believe the next six years will be about market networks.  

Market Networks: What are they and why are we excited? 

A market network is what you get when you combine a social network, a marketplace, and a SaaS company. To make the concept less fuzzy, let’s look at an actual company — Good Monday*. Good Monday is on the one hand a SaaS tool for office management and on the other a curated marketplace with all the service suppliers (ranging cleaning, to catering, to office perks, and beyond) a modern office needs; one point of contact and one (flexible) central system to run their office and source, communicate, collaborate, and transact with all service providers. 

I’ll let James continue: “A market network often starts by providing a SaaS tool to a professional that lets them perform a critical task. That same SaaS tool then also lets the professional connect better with their network as it already exists offline today. . . Many of the people in these professional networks have been transacting with each other for years using fax, checks, overnight packages, and phone calls. By moving these connections and transactions into software, a market network makes it significantly easier for professionals to operate their businesses and clients to get better service.”

One metric that neatly sums up the business model’s core strengths compared to your average SaaS company or marketplace is net negative churn; a metric that speaks to high stickiness and customer satisfaction and low churn and leakage, resulting in cohorts increasing as opposed to decreasing in value over time. The work tool’s integral part in the professionals day to day life makes a market network stickier than most marketplaces, and by making the transacting parties’ lives easier it prevents disintermediation.

The business model’s strengths are many – but they don’t come without challenges. A main challenge is effectively managing the many competing KPIs within the market network business model, figuring out how to build products that serve the sets of KPIs associated with each of SaaS, networks, and transactional marketplaces. “What we’re seeing is that once one of the parts of the business starts working, the teams over index that one piece of the business. They move the company away from the full market network, and thus end up being a SaaS company with a transactional bit, or a marketplace with some embedded SaaS software,” James says. 

Is there a remedy? Mik Stroyberg, founder of Good Monday, stresses that it’s important to be explicit internally about the ambition to build a Market Network to make sure discussions on product development and KPIs are aligned with the long-term vision rather than optimizing for individual short-term KPIs. “The different aspects of the Market Network are not built overnight and so the competing dynamics must continuously be revisited and managed,” he says.  Mik also stresses the importance of paying close attention to metrics related to platform activity such as the number of interactions (even within the same customer group) as these are signals the network is developing in the right direction.

Knowing what we know today about the strengths and the challenges of the business model, do VCs still believe “the next ten years will be about Market Networks”? Well, James certainly does. NFX has not only made a range of recent market network investments, but James is also helping his portfolio of marketplaces, SaaS businesses, and networks develop the other components of what makes a market network. “In a way, a market network can be better understood a set of approaches and principles that should help create larger and more defensible businesses.  It’s at the intersection of several business models and product experiences which have traditionally been separate. Understanding how they work can help you migrate your product or business to a better place,” James says. 

In line with another trend that’s coming strong at the moment, market networks are sector specific as opposed to general-purpose. As Menlo Ventures’s Matt Murphy tells Business Insider, while “many of the hottest enterprise-software companies today have succeeded by creating all-purpose applications that can be used by corporations in many different fields. . .the next wave is going to be all about specialization.” The trends of Vertical Specific SaaS and Market Networks may combine into a wave of even greater amplitude. 

To sum up, the excitement for Market Networks stems from the prospect of marrying the best of the tech industry’s three most beloved business models to maximize revenue potential and defensibility. The price to pay, it seems, is three times the amount of complexity. 

The Updated Market Network Playbook: Success Attributes 

Below I’ve summed up the seven attributes identified in NFX’s original post of what makes a successful Market Network along with new lessons learned in the last couple of years. 

1. Market networks target complex services, not an on-demand quick fix: James argues that services that can be described as high value; judged subjectively; involved; and longer term, are optimal to build market networks around. 

I add: a fragmented supplier base and the need for the demand side to interact with multiple suppliers to achieve wished-for results, i.e. markets with high transaction costs, also provide excellent conditions for a market network. 

2. The supply side is not commoditized: Currier argues that on marketplaces like Uber
UBER
the supply side is commoditized and drivers are interchangable, while market networks are for markets where suppliers are valued for their uniqueness. 

I add: A sector where the supply side has been commoditized as a result of a marketplace may also be a good fit for a market network, i.e. if suppliers feel an incumbent marketplace have boxed them in and robbed them of their uniqueness. We saw this with our portfolio company Floom – Market Network in the florist space – that was able to attract florists from incumbent Interflora for this very reason. 

3. Collaboration happens around a project: ‘multiple professionals collaborate among themselves and with a client, with the SaaS at the center, on a project that takes days or years to complete.’  

I add: It’s great if this project is ongoing – as with the management of an office in the case of Good Monday – as long as the “project” is continuously evolving so that it can not be solved once and then forgotten about. 

4. People involved have unique profiles: these profiles should capture their identity better than elsewhere on the internet.

I add: Since James wrote the piece, this is the aspect he has seen most companies fail on. “Few of the market networks we are working with have been able to develop new professional profiles for their verticals against the pull of LinkedIn,” he shares. Even developing profiles is only half the task — the magic kicks in when the people behind those profiles interact as they would on a network. Helping professionals better showcase themselves can be particularly powerful in sectors that are either i) lagging on digital, and inefficient in sales and marketing, or ii) professionals can’t showcase their capabilities effectively on existing networks due to the nature of their work (e.g. creatives who need the platform to support audio and video). 

5. They help build long term relationships: bringing professional connections online and capitalizing on them to promote commerce.  

I add: Good Monday’s net negative churn – with each cohort increasing in value over time – is testament to market networks stickiness and how they help build long term relationships. Why do both sides prefer for the transaction to happen on the platform? For the supplier, Good Monday ensures timely payment, simplifies invoicing, and improves communication with clients which in turn improves retention. For the office manager, Good Monday means time, money, and headache saved by bringing all office activities into one work tool. 

6. Referrals flow freely: The market network software is designed to make referrals simple and more frequent. 

I add: The holy grail is to build a tool that makes professionals’ lives so much easier that they only want to work with partners who use your tool; to have clients convert suppliers and suppliers convert clients for you.

7. They increase transaction velocity and satisfaction through software: a market network “increases the close rate on proposals and speeds up payment. The software also increases customer satisfaction scores, reduces miscommunication, and makes the work pleasing and beautiful.” 

I add: Building productivity tools for the supply side, automating invoicing,  pre-negotiating contracts and quotes to make transactions smoother, and moving communication from fragmented platforms with no data capture to an intelligent platform that learns, are examples of tactics for market networks to achieve these results. As James recently put it, “there’s no better way to work your way into the heart of the professional than to help them make more money.”

Summary 

Summing up, a market network is a sector specific SaaS tool with an integrated marketplace, deeply embedded in the users day-to-day workflow; stickier than your average SaaS, more prone to network effects and less to leakage than your average marketplace, with higher revenue potential than the typical network.The benefits of combining the SaaS, Marketplace, and Network business models are many, but comes with challenges: building product(s) that serve the three competing sets of KPIs is not an easy task. Key to success – whether you’re aiming to build a Market Network from the start or slowly evolving into one as you’re adding layers to your business – is to center everything around a must-have feature that professionals will interact with many times per day. 

Do VCs still believe the next six years will be about Market Networks? The Market Network trend is likely to pick up momentum as it collides with the wave of Vertical Specific SaaS companies. The new decade will not only bring new Market Network companies to life, but will also see existing Marketplaces, SaaS companies, and Networks increasingly adopt features from one another to create larger and more defensible businesses in each vertical. 

*Disclosure: firstminute capital is an investor in Good Monday and Clara serves on Good Monday’s board.

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