Going Public Circa 2020; Door #3: The SPAC


This post is by bgurley from Above the Crowd

If you are looking past or through Covid — and why not, all of Wall Street is — the topic du jour in Silicon Valley is Special Purpose Acquisition Companies, or SPACs. SPACs are all the rage, and everybody and their brother have either raised one or are talking about raising one. What are they, and do they matter right now? Historically they have been a kind of back-door way for a company to go public, and as a result have historically had a sub-standard reputation. But in light of where we are in 2020, especially with regard to the degrading efficiency and sky-rocketing cost of capital through the structurally broken IPO process, SPACs may emerge as a legitimate third option for helping Silicon Valley companies efficiently and cost-effectively transition into the public markets. 

SPACs — Background and Recent Trends

There is no need to rewrite the history of SPACs here, or even the recent trends. If you are not up to speed, I would point you to these resources, such that you have a footing on recent SPAC trends.

The are two key things to understand. First, there have been a record number of SPACs raised, and at a much higher capital raise per SPAC. As a result, the gross dollars sitting in SPAC is over $30 billion, and will likely finish the year over 300% higher than any previous year. The second key thing to understand is that this abundant supply of SPACs (arguably an over supply) is leading to competition. This competition is leading to improving terms for the targeted company and an overall lower cost of capital. So while the underpricing and true cost of capital of a traditional IPO is trending worse, the economics behind SPACs are actually improving. This is why SPACS are a truly legitimate and preferable doorway into the public markets.

image.png

Let’s do a quick walk-through of the three options a company has to transition into life as a public company. 

Door #1: The Structurally Broken IPO Process

The traditional way of going public is systematically broken and is robbing Silicon Valley founders, employees, and investors of billions of dollars each year. This problem is getting worse every year, which led Barry McCarthy, the true pioneer of the Direct Listing, to deem the traditional IPO process “moronic.” Here is the data:

image.png

As you can see this problem is growing each year. The numbers from 2020 are truly astonishing. The average company that has gone public in 2020 was underpriced by 31%. This equates to a cost of capital of 31% + 7% (IPO fees) = 38%! And the total dollars of one-day wealth transfer in just 6 months of 2020 was $7.8B. This is way worse than any given year prior in absolute dollars, but it has only been 6 months! At this rate, 2020 IPO underpricing will transfer wealth of $15B in one day give-aways to Wall Street investment firms and their clients. Most of these companies are about 20% employee owned, so that is $3B right out of employees pockets. 

Let’s us first talk about how this is happening, and then we can touch on why it is happening. The traditional IPO process has seven basic key steps. The company runs a competitive bake-off to pick the underwriters. They prepare an S-1. They execute a road-show (in Covid we have proven this can all be done successfully online). Then — the next two steps are key — the underwriter hand-picks a price for the offering (ignoring modern market based approaches) and then they hand-pick who actually gets the underpriced shares. These are the two problematic steps. The next morning, the exchange (either the NYSE or NASDAQ) finally does a market-based matching process where we find out the real price of the shares (ironically this is the exact process used in a Direct Listing, also ironically the only people allowed to sell are the ones given the shares the night before). Shares then begin open trading and the company is forever public — the transom has been crossed. 

image.png

There are two-fatal flaws to the traditional IPO process that are both addressed with Direct Listings. In every conversation about IPOs vs Direct Listings these are the only two things that matter, and they are precisely the two things that IPO advocates are embarrassed to discuss.

  1. The traditional IPO process does not use a market-based approach (like an order-matching system) to efficiently match supply and demand and to discover price. This is despite the fact that almost all other financial assets are all priced/sold this way. Matching supply-demand through an electronic system is exceptionally straight-forward circa 2020.
  2. Most potential buyers of stocks are blocked out of the IPO process. Access is limited to the best clients of the investment bank. Most investors have little to no shot of getting an IPO allocation.

So that is why the process doesn’t work — but why things are getting worse? It has to do with the trends in how much effort the investment banks put into marketing and distribution, versus how much effort they put in historically. Twenty years ago, each investment bank had massive sales teams which were 10X larger than they are today. On an IPO, these commissioned sales executives would “hit the phones” to help make a deal successful (earning commission for each placement). Additionally, the multiple banks on a deal would sometimes have “jump-ball” economics. The more of the IPO shares you were able to place the higher economics your bank would earn on an IPO. Jump-ball economics, the sales commissions, and the majority of these sales people are all gone.

So what have they been replaced with? This is critically important to understand, partially because it’s so outlandish. During each and every modern IPO, the banks all tell the management teams that there are two key objectives in the road-show process. And there are only two. Talk to any management team from any IPO in the past three years, and you will find they had this exact conversation.

  1. For each 1-1 meeting you take, you are told you need 97% of the investors to “put in an order.” They call this a 97% “hit-rate.” Said another way, 97% of each and every investor you meet should have an interest in purchasing the offering.
  2. You are told the “optimal” target is to be 30X over-subscribed. This is not a joke. You are told that you actually need 30X more orders than you actually plan to sell. This is an explicit admission that they plan to ignore 97% of the actual orders and fill only 3%. (One huge side note here — most investors are blocked from even putting in an order, including the majority of all retail investors. So the “real” oversupply is likely much, much higher than 30X – simply because most investors are not even given the opportunity to show their interest [fatal flaw #2 above]. The real oversupply might be over 100X.)

Now imagine you are selling any other asset, be it a piece of art, a home, a piece of software, or perhaps your car. Where would you have to price that asset to ensure that 97% of the people that considered that purchase would make an offer, and you would have 30X more demand than you need? It is truly tautological that underpricing is happening, because this flawed process is being used by each and every investment bank. It’s worse than being “moronic,” it is financially illiterate. It is hard to imagine how anyone can suggest this is a good idea with a straight face. And it is increasingly hard to understand how a board of directors can legitimately exercise their fiduciary duty, while subjecting the company to such a strucurally backwards approach.

I would encourage you to “check-around” with people you know about these two idiotic objectives/goals that are about as far from a market-based approach as you can be. Below is a marketing email sent around by one of the participating investment banks after the recent nCino IPO (which was underpriced in record-setting fashion, 195% first day “pop” – “the biggest first-day surge since the 2000 tech bubble”). You will see highlighted in red the two key objectives that guarantee underpricing. Did anyone think about raising the price with demand and supply being off by 50x? Did anyone here take Microeconomics 101?

image.png

Who benefits from underpricing? Clearly the people that are handed the shares in the hand-chosen allocation process. On the IPO process the underwriters are agents for both the company and the buyside (the shareholders who are allocated shares). The IPO may stand-alone as the only very high-dollar transaction in our world where a single agent represents both sides of the transaction. In real estate, dual agency is frowned upon for obvious reasons — “At best, they say, dual agents can’t fulfill their fiduciary obligations to both parties. They can’t advance the best interests of both buyer and seller because those interests always diverge. At worst, dual agency creates a harmful conflict of interest.” Institutional shareholders have many different financial relationships with these investment banks and much more frequent interactions than the banks have with any single company. As a result the conflict is real. It is therefore natural to assume that underpriced IPOs are allocated to the best brokerage customers (and that many of these dollars return to the investment bank vis commissions). This is backed up by academic researchIt has also been uncovered in email threads. And it also makes sense in light of the dual agency. Why would they give them to anybody else? Who would you give it to if you were in charge?

Door #2: The Direct Listing

When Spotify went public via a Direct Listing in 2018, it marked the heroic two-year work of Spotify’s then CFO Barry McCarthy to bust open Door #2. The direct listing process is much simpler, is elegant, and uses modern market-based approaches to both price discovery and allocation. It is not overly complicated or sophisticated. I would argue that any first year finance student or computer science student would naturally assume this is how traditional public offerings already work (they would be wrong). You are just using a standard order-matching system to “match” supply and demand (as opposed to having the balance off by 50x).

So the Direct Listing avoids the two fatal flaws of the traditional IPO process:

  1. It uses a market-based approach to matching supply and demand and discovering price. Precisely it uses an order matching system following the price-time algorithm
  2. Anyone with a brokerage-account (including Etrade, Schwab, or Robinhood, or any other) is invited to and able to participate/put in an order. It is open to all.

So how does it work? It is actually much simpler than a traditional IPO. You just remove the two steps where the shares are intentionally underpriced and then given to the investment bank’s best clients. You still have the bake-off to pick an adviser and you still prepare an S-1. You also do a presentation to investors that are typically online and more detailed than an IPO. But then you jump straight to the market-based match. Many people don’t know this, but the direct listing uses the exact same process and systems that are used to open every stock for trading each and every day. And they are the exact process and systems used to open a stock the next morning after the hand-priced, hand-allocated traditional IPO. So you simply remove the steps that have been causing the conflicts, biases, and underpricing. Smart.

image.png

As a result of fixing these two flaws, the Direct Listing Door (Door #2) is the simplest, most elegant, most fair (for all shareholders and the company) approach you can take. It is also the obvious choice for those board members that take fiduciary duty seriously — why would you chose to price something as important and valuable as your company’s shares with a manual biased approach that has systematically produced poor results?

So when would you not use a Direct Listing? Today, you cannot use a Direct Listings to go public and simultaneously raise capital. As such, if you have a pressing need for more capital as you go public, Door #2 may not be for you. That said, the NYSE is working with the SEC on a proposal to add primary capital raises to a Direct Listing, and are rumored to be actively looking for a pioneering company to do this (as they did with Spotify on the first DL). If you talk to the market-makers that execute the Direct Listing they have zero technical concerns about how it would work. The company would just put these new shares in the order system. It is purely a regulatory question at this point. Outside of needing money, there is no reason to chose an IPO over a Direct Listing. As Michael Moritz noted in the Financial Times, “…the choice of a direct listing or a traditional IPO has become a test of two attributes: courage and intelligence.”

Door #3: The SPAC Merger

So with that lengthy backdrop, welcome to the table a third way to enter the public market — through a SPAC merger. I will first walk through some important key points to think about with respect to SPACs in 2020, and then give you several reasons why they are a legitimate, timely, and cost effective way to enter the public markets.

Observations on the modern day SPAC market:

  • SPACs are flexible and dynamic. Nearly every term in a SPAC, including the Sponsor share % (this can range from 20% all the way down to 0%), the Sponsor warrant coverage, the negotiated price with the seller, and even who is on the go forward board can change at almost any point in the process. Every thing is negotiable. As one SPAC board member declared, each SPAC is a “choose your own adventure” experience.
  • The competition is real. There are so many SPACs that companies that want to use Door #3 can and should actively negotiate not just price, but also what % the Sponsor shares should be (while these have traditionally been 20%, Ackman took Sponsor shares all the way down to 0%!) as well as the Sponsor warrant coverage. There are now well over 100 active SPACs that have raised over $100mm. And when a SPAC is nearing its termination date, those Sponsor’s should be expected to be extremely flexible (if they don’t close a deal they will soon lose their initial capital commitment). Some companies are even running a process to meet with multiple SPACs — which is being called a SPAC-off. Banks can help you run such a process.
  • The SPAC Sponsors you meet will understand the competitive issues in the market and will absolutely be prepared to negotiate and lower their economics (in terms of Sponsor percentage, warrant coverage or both). If you meet with a SPAC Sponsor that is unwilling to move on their key terms then you should “move on” from that Sponsor. Remember, there are well over a hundred fish in this sea.
  • The PIPE has risks. Some are promoting PIPEs as “smart” addition to the SPAC. This is a follow on investment dollar grab above and beyond the newly raised dollars in the original SPAC. It is considered “smart” because these PIPE dollars don’t have the Sponsor “rake” on them. However, in light of the learned behavior of the buy-side in expecting sweetheart underpricings on traditional IPOs, a PIPE process creates an opportunity for a specific group of players to negotiate down price (which would offset the no-rake point). 
  • Your biggest risk with a SPAC is you don’t actually make it out. You agree on a price with the Sponsor, but then cannot get shareholder approval or have too many redemptions. Some SPACs (like Ackman’s) have features that make redemption less likely. Again, because of this risk the PIPE is problematic. It just invites more players in the mix, and therefore raises both the time to completion and the risk of completion. There are enough SPACs out there with different amounts of available capital. Find one that matches your capital need, and negotiate the terms (rather than use a PIPE).
  • Does the Sponsor matter? The answer to this question is “potentially.” There are three factors to consider when choosing a Sponsor.
    • Are they willing to negotiate? (we already discussed this)
    • Do they understand your story better than most? You will be able to discern this in meetings.
    • Will they actively participate in telling the company story? And if so, how actively? This is a large unknown in the SPAC world today. Some Sponsors have a louder microphone, perhaps a higher profile, and perhaps a better reputation. That could impact the success of closing and the after-market price.
  • VCs are more likely to participate as selling investors on the initial transaction in a DL or a SPAC. The key reason VCs never sell in a traditional IPO is because they all know the game is rigged (the underpricing), and do not want to sell at such a steep discount. As we find new doors to the public market that have truer/fairer pricing, you will see an increased willingness to participate. This may or may not matter to you depending on the circumstances specific to your company, your own capitalization chart, and the size of the SPAC versus how much capital you need.
  • Is there a reputation issue with respect to going public through a SPAC? Some people, particularly traditionalists, will argue that going public through a SPAC might affect the long-term reputation of the company. While I understand this perspective, the argument is actually quite weak. Stock markets do not have have historical artifacts hidden in them. Once you are public, you are public, and you trade based on the discounted future expectations of your company, not based on how you went public. If your board has concerns about the company’s or the board’s public reputation, than they should be more worried about the inaneness of giving away $400mm in a one-day wealth transfer via an underpriced traditional IPO. That’s a true taint on the judgment of the company.

So what are the benefits to choosing Door #3 and using a SPAC to enter the public market?

  1. SPACs have a much lower cost of capital versus a standard IPO. Even before negotiating terms, the SPAC is a cheaper way to go public (because of systematic underpricing). When you are able to improve the terms it becomes a clear no-brainer. 
  2. SPACs have access to primary capital which is an advantage versus today’s version of a Direct Listing.
  3. With a SPAC the company has much, much more control. The company negotiates the company value/price directly with the single Sponsor (as well as many other aspects of the transaction). If you like being in control, this is a good way to go. As I mention above, watch out for the PIPE as this has the potential to recreate the oligopoly power of the large institutional investors (and will likely lead to price reduction). 
  4. SPACS are a much faster way to become a public company. The SPAC door is much faster than an IPO or a Direct Listing, which will both take 6-7 months from beginning to end. With a SPAC you could be public in two-months from when you start the process (assuming you have your house in order). This time window may or may not matter to you.

The bottom line is that SPACs are a very legtimate path to the public markets. They have a lower cost of capital vs a traditional IPO. That cost of capital is falling due to market pressure, whereas it is rising for the IPO. The SPAC has fresh capital whereas the Direct Listing does not (yet), and the SPAC is clearly the fastest path to the public markets (which is a form of risk reduction). I fully expect to see high profile companies walk through Door #3.

Going Public Circa 2020; Door #3: The SPAC


This post is by bgurley from Above the Crowd

If you are looking past or through Covid — and why not, all of Wall Street is — the topic du jour in Silicon Valley is Special Purpose Acquisition Companies, or SPACs. SPACs are all the rage, and everybody and their brother have either raised one or are talking about raising one. What are they, and do they matter right now? Historically they have been a kind of back-door way for a company to go public, and as a result have historically had a sub-standard reputation. But in light of where we are in 2020, especially with regard to the degrading efficiency and sky-rocketing cost of capital through the structurally broken IPO process, SPACs may emerge as a legitimate third option for helping Silicon Valley companies efficiently and cost-effectively transition into the public markets. 

SPACs — Background and Recent Trends

There is no need to rewrite the history of SPACs here, or even the recent trends. If you are not up to speed, I would point you to these resources, such that you have a footing on recent SPAC trends.

The are two key things to understand. First, there have been a record number of SPACs raised, and at a much higher capital raise per SPAC. As a result, the gross dollars sitting in SPAC is over $30 billion, and will likely finish the year over 300% higher than any previous year. The second key thing to understand is that this abundant supply of SPACs (arguably an over supply) is leading to competition. This competition is leading to improving terms for the targeted company and an overall lower cost of capital. So while the underpricing and true cost of capital of a traditional IPO is trending worse, the economics behind SPACs are actually improving. This is why SPACS are a truly legitimate and preferable doorway into the public markets.

image.png

Let’s do a quick walk-through of the three options a company has to transition into life as a public company. 

Door #1: The Structurally Broken IPO Process

The traditional way of going public is systematically broken and is robbing Silicon Valley founders, employees, and investors of billions of dollars each year. This problem is getting worse every year, which led Barry McCarthy, the true pioneer of the Direct Listing, to deem the traditional IPO process “moronic.” Here is the data:

image.png

As you can see this problem is growing each year. The numbers from 2020 are truly astonishing. The average company that has gone public in 2020 was underpriced by 31%. This equates to a cost of capital of 31% + 7% (IPO fees) = 38%! And the total dollars of one-day wealth transfer in just 6 months of 2020 was $7.8B. This is way worse than any given year prior in absolute dollars, but it has only been 6 months! At this rate, 2020 IPO underpricing will transfer wealth of $15B in one day give-aways to Wall Street investment firms and their clients. Most of these companies are about 20% employee owned, so that is $3B right out of employees pockets. 

Let’s us first talk about how this is happening, and then we can touch on why it is happening. The traditional IPO process has seven basic key steps. The company runs a competitive bake-off to pick the underwriters. They prepare an S-1. They execute a road-show (in Covid we have proven this can all be done successfully online). Then — the next two steps are key — the underwriter hand-picks a price for the offering (ignoring modern market based approaches) and then they hand-pick who actually gets the underpriced shares. These are the two problematic steps. The next morning, the exchange (either the NYSE or NASDAQ) finally does a market-based matching process where we find out the real price of the shares (ironically this is the exact process used in a Direct Listing, also ironically the only people allowed to sell are the ones given the shares the night before). Shares then begin open trading and the company is forever public — the transom has been crossed. 

image.png

There are two-fatal flaws to the traditional IPO process that are both addressed with Direct Listings. In every conversation about IPOs vs Direct Listings these are the only two things that matter, and they are precisely the two things that IPO advocates are embarrassed to discuss.

  1. The traditional IPO process does not use a market-based approach (like an order-matching system) to efficiently match supply and demand and to discover price. This is despite the fact that almost all other financial assets are all priced/sold this way. Matching supply-demand through an electronic system is exceptionally straight-forward circa 2020.
  2. Most potential buyers of stocks are blocked out of the IPO process. Access is limited to the best clients of the investment bank. Most investors have little to no shot of getting an IPO allocation.

So that is why the process doesn’t work — but why things are getting worse? It has to do with the trends in how much effort the investment banks put into marketing and distribution, versus how much effort they put in historically. Twenty years ago, each investment bank had massive sales teams which were 10X larger than they are today. On an IPO, these commissioned sales executives would “hit the phones” to help make a deal successful (earning commission for each placement). Additionally, the multiple banks on a deal would sometimes have “jump-ball” economics. The more of the IPO shares you were able to place the higher economics your bank would earn on an IPO. Jump-ball economics, the sales commissions, and the majority of these sales people are all gone.

So what have they been replaced with? This is critically important to understand, partially because it’s so outlandish. During each and every modern IPO, the banks all tell the management teams that there are two key objectives in the road-show process. And there are only two. Talk to any management team from any IPO in the past three years, and you will find they had this exact conversation.

  1. For each 1-1 meeting you take, you are told you need 97% of the investors to “put in an order.” They call this a 97% “hit-rate.” Said another way, 97% of each and every investor you meet should have an interest in purchasing the offering.
  2. You are told the “optimal” target is to be 30X over-subscribed. This is not a joke. You are told that you actually need 30X more orders than you actually plan to sell. This is an explicit admission that they plan to ignore 97% of the actual orders and fill only 3%. (One huge side note here — most investors are blocked from even putting in an order, including the majority of all retail investors. So the “real” oversupply is likely much, much higher than 30X – simply because most investors are not even given the opportunity to show their interest [fatal flaw #2 above]. The real oversupply might be over 100X.)

Now imagine you are selling any other asset, be it a piece of art, a home, a piece of software, or perhaps your car. Where would you have to price that asset to ensure that 97% of the people that considered that purchase would make an offer, and you would have 30X more demand than you need? It is truly tautological that underpricing is happening, because this flawed process is being used by each and every investment bank. It’s worse than being “moronic,” it is financially illiterate. It is hard to imagine how anyone can suggest this is a good idea with a straight face. And it is increasingly hard to understand how a board of directors can legitimately exercise their fiduciary duty, while subjecting the company to such a strucurally backwards approach.

I would encourage you to “check-around” with people you know about these two idiotic objectives/goals that are about as far from a market-based approach as you can be. Below is a marketing email sent around by one of the participating investment banks after the recent nCino IPO (which was underpriced in record-setting fashion, 195% first day “pop” – “the biggest first-day surge since the 2000 tech bubble”). You will see highlighted in red the two key objectives that guarantee underpricing. Did anyone think about raising the price with demand and supply being off by 50x? Did anyone here take Microeconomics 101?

image.png

Who benefits from underpricing? Clearly the people that are handed the shares in the hand-chosen allocation process. On the IPO process the underwriters are agents for both the company and the buyside (the shareholders who are allocated shares). The IPO may stand-alone as the only very high-dollar transaction in our world where a single agent represents both sides of the transaction. In real estate, dual agency is frowned upon for obvious reasons — “At best, they say, dual agents can’t fulfill their fiduciary obligations to both parties. They can’t advance the best interests of both buyer and seller because those interests always diverge. At worst, dual agency creates a harmful conflict of interest.” Institutional shareholders have many different financial relationships with these investment banks and much more frequent interactions than the banks have with any single company. As a result the conflict is real. It is therefore natural to assume that underpriced IPOs are allocated to the best brokerage customers (and that many of these dollars return to the investment bank vis commissions). This is backed up by academic researchIt has also been uncovered in email threads. And it also makes sense in light of the dual agency. Why would they give them to anybody else? Who would you give it to if you were in charge?

Door #2: The Direct Listing

When Spotify went public via a Direct Listing in 2018, it marked the heroic two-year work of Spotify’s then CFO Barry McCarthy to bust open Door #2. The direct listing process is much simpler, is elegant, and uses modern market-based approaches to both price discovery and allocation. It is not overly complicated or sophisticated. I would argue that any first year finance student or computer science student would naturally assume this is how traditional public offerings already work (they would be wrong). You are just using a standard order-matching system to “match” supply and demand (as opposed to having the balance off by 50x).

So the Direct Listing avoids the two fatal flaws of the traditional IPO process:

  1. It uses a market-based approach to matching supply and demand and discovering price. Precisely it uses an order matching system following the price-time algorithm
  2. Anyone with a brokerage-account (including Etrade, Schwab, or Robinhood, or any other) is invited to and able to participate/put in an order. It is open to all.

So how does it work? It is actually much simpler than a traditional IPO. You just remove the two steps where the shares are intentionally underpriced and then given to the investment bank’s best clients. You still have the bake-off to pick an adviser and you still prepare an S-1. You also do a presentation to investors that are typically online and more detailed than an IPO. But then you jump straight to the market-based match. Many people don’t know this, but the direct listing uses the exact same process and systems that are used to open every stock for trading each and every day. And they are the exact process and systems used to open a stock the next morning after the hand-priced, hand-allocated traditional IPO. So you simply remove the steps that have been causing the conflicts, biases, and underpricing. Smart.

image.png

As a result of fixing these two flaws, the Direct Listing Door (Door #2) is the simplest, most elegant, most fair (for all shareholders and the company) approach you can take. It is also the obvious choice for those board members that take fiduciary duty seriously — why would you chose to price something as important and valuable as your company’s shares with a manual biased approach that has systematically produced poor results?

So when would you not use a Direct Listing? Today, you cannot use a Direct Listings to go public and simultaneously raise capital. As such, if you have a pressing need for more capital as you go public, Door #2 may not be for you. That said, the NYSE is working with the SEC on a proposal to add primary capital raises to a Direct Listing, and are rumored to be actively looking for a pioneering company to do this (as they did with Spotify on the first DL). If you talk to the market-makers that execute the Direct Listing they have zero technical concerns about how it would work. The company would just put these new shares in the order system. It is purely a regulatory question at this point. Outside of needing money, there is no reason to chose an IPO over a Direct Listing. As Michael Moritz noted in the Financial Times, “…the choice of a direct listing or a traditional IPO has become a test of two attributes: courage and intelligence.”

Door #3: The SPAC Merger

So with that lengthy backdrop, welcome to the table a third way to enter the public market — through a SPAC merger. I will first walk through some important key points to think about with respect to SPACs in 2020, and then give you several reasons why they are a legitimate, timely, and cost effective way to enter the public markets.

Observations on the modern day SPAC market:

  • SPACs are flexible and dynamic. Nearly every term in a SPAC, including the Sponsor share % (this can range from 20% all the way down to 0%), the Sponsor warrant coverage, the negotiated price with the seller, and even who is on the go forward board can change at almost any point in the process. Every thing is negotiable. As one SPAC board member declared, each SPAC is a “choose your own adventure” experience.
  • The competition is real. There are so many SPACs that companies that want to use Door #3 can and should actively negotiate not just price, but also what % the Sponsor shares should be (while these have traditionally been 20%, Ackman took Sponsor shares all the way down to 0%!) as well as the Sponsor warrant coverage. There are now well over 100 active SPACs that have raised over $100mm. And when a SPAC is nearing its termination date, those Sponsor’s should be expected to be extremely flexible (if they don’t close a deal they will soon lose their initial capital commitment). Some companies are even running a process to meet with multiple SPACs — which is being called a SPAC-off. Banks can help you run such a process.
  • The SPAC Sponsors you meet will understand the competitive issues in the market and will absolutely be prepared to negotiate and lower their economics (in terms of Sponsor percentage, warrant coverage or both). If you meet with a SPAC Sponsor that is unwilling to move on their key terms then you should “move on” from that Sponsor. Remember, there are well over a hundred fish in this sea.
  • The PIPE has risks. Some are promoting PIPEs as “smart” addition to the SPAC. This is a follow on investment dollar grab above and beyond the newly raised dollars in the original SPAC. It is considered “smart” because these PIPE dollars don’t have the Sponsor “rake” on them. However, in light of the learned behavior of the buy-side in expecting sweetheart underpricings on traditional IPOs, a PIPE process creates an opportunity for a specific group of players to negotiate down price (which would offset the no-rake point). 
  • Your biggest risk with a SPAC is you don’t actually make it out. You agree on a price with the Sponsor, but then cannot get shareholder approval or have too many redemptions. Some SPACs (like Ackman’s) have features that make redemption less likely. Again, because of this risk the PIPE is problematic. It just invites more players in the mix, and therefore raises both the time to completion and the risk of completion. There are enough SPACs out there with different amounts of available capital. Find one that matches your capital need, and negotiate the terms (rather than use a PIPE).
  • Does the Sponsor matter? The answer to this question is “potentially.” There are three factors to consider when choosing a Sponsor.
    • Are they willing to negotiate? (we already discussed this)
    • Do they understand your story better than most? You will be able to discern this in meetings.
    • Will they actively participate in telling the company story? And if so, how actively? This is a large unknown in the SPAC world today. Some Sponsors have a louder microphone, perhaps a higher profile, and perhaps a better reputation. That could impact the success of closing and the after-market price.
  • VCs are more likely to participate as selling investors on the initial transaction in a DL or a SPAC. The key reason VCs never sell in a traditional IPO is because they all know the game is rigged (the underpricing), and do not want to sell at such a steep discount. As we find new doors to the public market that have truer/fairer pricing, you will see an increased willingness to participate. This may or may not matter to you depending on the circumstances specific to your company, your own capitalization chart, and the size of the SPAC versus how much capital you need.
  • Is there a reputation issue with respect to going public through a SPAC? Some people, particularly traditionalists, will argue that going public through a SPAC might affect the long-term reputation of the company. While I understand this perspective, the argument is actually quite weak. Stock markets do not have have historical artifacts hidden in them. Once you are public, you are public, and you trade based on the discounted future expectations of your company, not based on how you went public. If your board has concerns about the company’s or the board’s public reputation, than they should be more worried about the inaneness of giving away $400mm in a one-day wealth transfer via an underpriced traditional IPO. That’s a true taint on the judgment of the company.

So what are the benefits to choosing Door #3 and using a SPAC to enter the public market?

  1. SPACs have a much lower cost of capital versus a standard IPO. Even before negotiating terms, the SPAC is a cheaper way to go public (because of systematic underpricing). When you are able to improve the terms it becomes a clear no-brainer. 
  2. SPACs have access to primary capital which is an advantage versus today’s version of a Direct Listing.
  3. With a SPAC the company has much, much more control. The company negotiates the company value/price directly with the single Sponsor (as well as many other aspects of the transaction). If you like being in control, this is a good way to go. As I mention above, watch out for the PIPE as this has the potential to recreate the oligopoly power of the large institutional investors (and will likely lead to price reduction). 
  4. SPACS are a much faster way to become a public company. The SPAC door is much faster than an IPO or a Direct Listing, which will both take 6-7 months from beginning to end. With a SPAC you could be public in two-months from when you start the process (assuming you have your house in order). This time window may or may not matter to you.

The bottom line is that SPACs are a very legtimate path to the public markets. They have a lower cost of capital vs a traditional IPO. That cost of capital is falling due to market pressure, whereas it is rising for the IPO. The SPAC has fresh capital whereas the Direct Listing does not (yet), and the SPAC is clearly the fastest path to the public markets (which is a form of risk reduction). I fully expect to see high profile companies walk through Door #3.

Going Public Circa 2020; Door #3: The SPAC


This post is by bgurley from Above the Crowd

If you are looking past or through Covid — and why not, all of Wall Street is — the topic du jour in Silicon Valley is Special Purpose Acquisition Companies, or SPACs. SPACs are all the rage, and everybody and their brother have either raised one or are talking about raising one. What are they, and do they matter right now? Historically they have been a kind of back-door way for a company to go public, and as a result have historically had a sub-standard reputation. But in light of where we are in 2020, especially with regard to the degrading efficiency and sky-rocketing cost of capital through the structurally broken IPO process, SPACs may emerge as a legitimate third option for helping Silicon Valley companies efficiently and cost-effectively transition into the public markets. 

SPACs — Background and Recent Trends

There is no need to rewrite the history of SPACs here, or even the recent trends. If you are not up to speed, I would point you to these resources, such that you have a footing on recent SPAC trends.

The are two key things to understand. First, there have been a record number of SPACs raised, and at a much higher capital raise per SPAC. As a result, the gross dollars sitting in SPAC is over $30 billion, and will likely finish the year over 300% higher than any previous year. The second key thing to understand is that this abundant supply of SPACs (arguably an over supply) is leading to competition. This competition is leading to improving terms for the targeted company and an overall lower cost of capital. So while the underpricing and true cost of capital of a traditional IPO is trending worse, the economics behind SPACs are actually improving. This is why SPACS are a truly legitimate and preferable doorway into the public markets.

image.png

Let’s do a quick walk-through of the three options a company has to transition into life as a public company. 

Door #1: The Structurally Broken IPO Process

The traditional way of going public is systematically broken and is robbing Silicon Valley founders, employees, and investors of billions of dollars each year. This problem is getting worse every year, which led Barry McCarthy, the true pioneer of the Direct Listing, to deem the traditional IPO process “moronic.” Here is the data:

image.png

As you can see this problem is growing each year. The numbers from 2020 are truly astonishing. The average company that has gone public in 2020 was underpriced by 31%. This equates to a cost of capital of 31% + 7% (IPO fees) = 38%! And the total dollars of one-day wealth transfer in just 6 months of 2020 was $7.8B. This is way worse than any given year prior in absolute dollars, but it has only been 6 months! At this rate, 2020 IPO underpricing will transfer wealth of $15B in one day give-aways to Wall Street investment firms and their clients. Most of these companies are about 20% employee owned, so that is $3B right out of employees pockets. 

Let’s us first talk about how this is happening, and then we can touch on why it is happening. The traditional IPO process has seven basic key steps. The company runs a competitive bake-off to pick the underwriters. They prepare an S-1. They execute a road-show (in Covid we have proven this can all be done successfully online). Then — the next two steps are key — the underwriter hand-picks a price for the offering (ignoring modern market based approaches) and then they hand-pick who actually gets the underpriced shares. These are the two problematic steps. The next morning, the exchange (either the NYSE or NASDAQ) finally does a market-based matching process where we find out the real price of the shares (ironically this is the exact process used in a Direct Listing, also ironically the only people allowed to sell are the ones given the shares the night before). Shares then begin open trading and the company is forever public — the transom has been crossed. 

image.png

There are two-fatal flaws to the traditional IPO process that are both addressed with Direct Listings. In every conversation about IPOs vs Direct Listings these are the only two things that matter, and they are precisely the two things that IPO advocates are embarrassed to discuss.

  1. The traditional IPO process does not use a market-based approach (like an order-matching system) to efficiently match supply and demand and to discover price. This is despite the fact that almost all other financial assets are all priced/sold this way. Matching supply-demand through an electronic system is exceptionally straight-forward circa 2020.
  2. Most potential buyers of stocks are blocked out of the IPO process. Access is limited to the best clients of the investment bank. Most investors have little to no shot of getting an IPO allocation.

So that is why the process doesn’t work — but why things are getting worse? It has to do with the trends in how much effort the investment banks put into marketing and distribution, versus how much effort they put in historically. Twenty years ago, each investment bank had massive sales teams which were 10X larger than they are today. On an IPO, these commissioned sales executives would “hit the phones” to help make a deal successful (earning commission for each placement). Additionally, the multiple banks on a deal would sometimes have “jump-ball” economics. The more of the IPO shares you were able to place the higher economics your bank would earn on an IPO. Jump-ball economics, the sales commissions, and the majority of these sales people are all gone.

So what have they been replaced with? This is critically important to understand, partially because it’s so outlandish. During each and every modern IPO, the banks all tell the management teams that there are two key objectives in the road-show process. And there are only two. Talk to any management team from any IPO in the past three years, and you will find they had this exact conversation.

  1. For each 1-1 meeting you take, you are told you need 97% of the investors to “put in an order.” They call this a 97% “hit-rate.” Said another way, 97% of each and every investor you meet should have an interest in purchasing the offering.
  2. You are told the “optimal” target is to be 30X over-subscribed. This is not a joke. You are told that you actually need 30X more orders than you actually plan to sell. This is an explicit admission that they plan to ignore 97% of the actual orders and fill only 3%. (One huge side note here — most investors are blocked from even putting in an order, including the majority of all retail investors. So the “real” oversupply is likely much, much higher than 30X – simply because most investors are not even given the opportunity to show their interest [fatal flaw #2 above]. The real oversupply might be over 100X.)

Now imagine you are selling any other asset, be it a piece of art, a home, a piece of software, or perhaps your car. Where would you have to price that asset to ensure that 97% of the people that considered that purchase would make an offer, and you would have 30X more demand than you need? It is truly tautological that underpricing is happening, because this flawed process is being used by each and every investment bank. It’s worse than being “moronic,” it is financially illiterate. It is hard to imagine how anyone can suggest this is a good idea with a straight face. And it is increasingly hard to understand how a board of directors can legitimately exercise their fiduciary duty, while subjecting the company to such a strucurally backwards approach.

I would encourage you to “check-around” with people you know about these two idiotic objectives/goals that are about as far from a market-based approach as you can be. Below is a marketing email sent around by one of the participating investment banks after the recent nCino IPO (which was underpriced in record-setting fashion, 195% first day “pop” – “the biggest first-day surge since the 2000 tech bubble”). You will see highlighted in red the two key objectives that guarantee underpricing. Did anyone think about raising the price with demand and supply being off by 50x? Did anyone here take Microeconomics 101?

image.png

Who benefits from underpricing? Clearly the people that are handed the shares in the hand-chosen allocation process. On the IPO process the underwriters are agents for both the company and the buyside (the shareholders who are allocated shares). The IPO may stand-alone as the only very high-dollar transaction in our world where a single agent represents both sides of the transaction. In real estate, dual agency is frowned upon for obvious reasons — “At best, they say, dual agents can’t fulfill their fiduciary obligations to both parties. They can’t advance the best interests of both buyer and seller because those interests always diverge. At worst, dual agency creates a harmful conflict of interest.” Institutional shareholders have many different financial relationships with these investment banks and much more frequent interactions than the banks have with any single company. As a result the conflict is real. It is therefore natural to assume that underpriced IPOs are allocated to the best brokerage customers (and that many of these dollars return to the investment bank vis commissions). This is backed up by academic researchIt has also been uncovered in email threads. And it also makes sense in light of the dual agency. Why would they give them to anybody else? Who would you give it to if you were in charge?

Door #2: The Direct Listing

When Spotify went public via a Direct Listing in 2018, it marked the heroic two-year work of Spotify’s then CFO Barry McCarthy to bust open Door #2. The direct listing process is much simpler, is elegant, and uses modern market-based approaches to both price discovery and allocation. It is not overly complicated or sophisticated. I would argue that any first year finance student or computer science student would naturally assume this is how traditional public offerings already work (they would be wrong). You are just using a standard order-matching system to “match” supply and demand (as opposed to having the balance off by 50x).

So the Direct Listing avoids the two fatal flaws of the traditional IPO process:

  1. It uses a market-based approach to matching supply and demand and discovering price. Precisely it uses an order matching system following the price-time algorithm
  2. Anyone with a brokerage-account (including Etrade, Schwab, or Robinhood, or any other) is invited to and able to participate/put in an order. It is open to all.

So how does it work? It is actually much simpler than a traditional IPO. You just remove the two steps where the shares are intentionally underpriced and then given to the investment bank’s best clients. You still have the bake-off to pick an adviser and you still prepare an S-1. You also do a presentation to investors that are typically online and more detailed than an IPO. But then you jump straight to the market-based match. Many people don’t know this, but the direct listing uses the exact same process and systems that are used to open every stock for trading each and every day. And they are the exact process and systems used to open a stock the next morning after the hand-priced, hand-allocated traditional IPO. So you simply remove the steps that have been causing the conflicts, biases, and underpricing. Smart.

image.png

As a result of fixing these two flaws, the Direct Listing Door (Door #2) is the simplest, most elegant, most fair (for all shareholders and the company) approach you can take. It is also the obvious choice for those board members that take fiduciary duty seriously — why would you chose to price something as important and valuable as your company’s shares with a manual biased approach that has systematically produced poor results?

So when would you not use a Direct Listing? Today, you cannot use a Direct Listings to go public and simultaneously raise capital. As such, if you have a pressing need for more capital as you go public, Door #2 may not be for you. That said, the NYSE is working with the SEC on a proposal to add primary capital raises to a Direct Listing, and are rumored to be actively looking for a pioneering company to do this (as they did with Spotify on the first DL). If you talk to the market-makers that execute the Direct Listing they have zero technical concerns about how it would work. The company would just put these new shares in the order system. It is purely a regulatory question at this point. Outside of needing money, there is no reason to chose an IPO over a Direct Listing. As Michael Moritz noted in the Financial Times, “…the choice of a direct listing or a traditional IPO has become a test of two attributes: courage and intelligence.”

Door #3: The SPAC Merger

So with that lengthy backdrop, welcome to the table a third way to enter the public market — through a SPAC merger. I will first walk through some important key points to think about with respect to SPACs in 2020, and then give you several reasons why they are a legitimate, timely, and cost effective way to enter the public markets.

Observations on the modern day SPAC market:

  • SPACs are flexible and dynamic. Nearly every term in a SPAC, including the Sponsor share % (this can range from 20% all the way down to 0%), the Sponsor warrant coverage, the negotiated price with the seller, and even who is on the go forward board can change at almost any point in the process. Every thing is negotiable. As one SPAC board member declared, each SPAC is a “choose your own adventure” experience.
  • The competition is real. There are so many SPACs that companies that want to use Door #3 can and should actively negotiate not just price, but also what % the Sponsor shares should be (while these have traditionally been 20%, Ackman took Sponsor shares all the way down to 0%!) as well as the Sponsor warrant coverage. There are now well over 100 active SPACs that have raised over $100mm. And when a SPAC is nearing its termination date, those Sponsor’s should be expected to be extremely flexible (if they don’t close a deal they will soon lose their initial capital commitment). Some companies are even running a process to meet with multiple SPACs — which is being called a SPAC-off. Banks can help you run such a process.
  • The SPAC Sponsors you meet will understand the competitive issues in the market and will absolutely be prepared to negotiate and lower their economics (in terms of Sponsor percentage, warrant coverage or both). If you meet with a SPAC Sponsor that is unwilling to move on their key terms then you should “move on” from that Sponsor. Remember, there are well over a hundred fish in this sea.
  • The PIPE has risks. Some are promoting PIPEs as “smart” addition to the SPAC. This is a follow on investment dollar grab above and beyond the newly raised dollars in the original SPAC. It is considered “smart” because these PIPE dollars don’t have the Sponsor “rake” on them. However, in light of the learned behavior of the buy-side in expecting sweetheart underpricings on traditional IPOs, a PIPE process creates an opportunity for a specific group of players to negotiate down price (which would offset the no-rake point). 
  • Your biggest risk with a SPAC is you don’t actually make it out. You agree on a price with the Sponsor, but then cannot get shareholder approval or have too many redemptions. Some SPACs (like Ackman’s) have features that make redemption less likely. Again, because of this risk the PIPE is problematic. It just invites more players in the mix, and therefore raises both the time to completion and the risk of completion. There are enough SPACs out there with different amounts of available capital. Find one that matches your capital need, and negotiate the terms (rather than use a PIPE).
  • Does the Sponsor matter? The answer to this question is “potentially.” There are three factors to consider when choosing a Sponsor.
    • Are they willing to negotiate? (we already discussed this)
    • Do they understand your story better than most? You will be able to discern this in meetings.
    • Will they actively participate in telling the company story? And if so, how actively? This is a large unknown in the SPAC world today. Some Sponsors have a louder microphone, perhaps a higher profile, and perhaps a better reputation. That could impact the success of closing and the after-market price.
  • VCs are more likely to participate as selling investors on the initial transaction in a DL or a SPAC. The key reason VCs never sell in a traditional IPO is because they all know the game is rigged (the underpricing), and do not want to sell at such a steep discount. As we find new doors to the public market that have truer/fairer pricing, you will see an increased willingness to participate. This may or may not matter to you depending on the circumstances specific to your company, your own capitalization chart, and the size of the SPAC versus how much capital you need.
  • Is there a reputation issue with respect to going public through a SPAC? Some people, particularly traditionalists, will argue that going public through a SPAC might affect the long-term reputation of the company. While I understand this perspective, the argument is actually quite weak. Stock markets do not have have historical artifacts hidden in them. Once you are public, you are public, and you trade based on the discounted future expectations of your company, not based on how you went public. If your board has concerns about the company’s or the board’s public reputation, than they should be more worried about the inaneness of giving away $400mm in a one-day wealth transfer via an underpriced traditional IPO. That’s a true taint on the judgment of the company.

So what are the benefits to choosing Door #3 and using a SPAC to enter the public market?

  1. SPACs have a much lower cost of capital versus a standard IPO. Even before negotiating terms, the SPAC is a cheaper way to go public (because of systematic underpricing). When you are able to improve the terms it becomes a clear no-brainer. 
  2. SPACs have access to primary capital which is an advantage versus today’s version of a Direct Listing.
  3. With a SPAC the company has much, much more control. The company negotiates the company value/price directly with the single Sponsor (as well as many other aspects of the transaction). If you like being in control, this is a good way to go. As I mention above, watch out for the PIPE as this has the potential to recreate the oligopoly power of the large institutional investors (and will likely lead to price reduction). 
  4. SPACS are a much faster way to become a public company. The SPAC door is much faster than an IPO or a Direct Listing, which will both take 6-7 months from beginning to end. With a SPAC you could be public in two-months from when you start the process (assuming you have your house in order). This time window may or may not matter to you.

The bottom line is that SPACs are a very legtimate path to the public markets. They have a lower cost of capital vs a traditional IPO. That cost of capital is falling due to market pressure, whereas it is rising for the IPO. The SPAC has fresh capital whereas the Direct Listing does not (yet), and the SPAC is clearly the fastest path to the public markets (which is a form of risk reduction). I fully expect to see high profile companies walk through Door #3.

Going Public Circa 2020; Door #3: The SPAC


This post is by bgurley from Above the Crowd

If you are looking past or through Covid — and why not, all of Wall Street is — the topic du jour in Silicon Valley is Special Purpose Acquisition Companies, or SPACs. SPACs are all the rage, and everybody and their brother have either raised one or are talking about raising one. What are they, and do they matter right now? Historically they have been a kind of back-door way for a company to go public, and as a result have historically had a sub-standard reputation. But in light of where we are in 2020, especially with regard to the degrading efficiency and sky-rocketing cost of capital through the structurally broken IPO process, SPACs may emerge as a legitimate third option for helping Silicon Valley companies efficiently and cost-effectively transition into the public markets. 

SPACs — Background and Recent Trends

There is no need to rewrite the history of SPACs here, or even the recent trends. If you are not up to speed, I would point you to these resources, such that you have a footing on recent SPAC trends.

The are two key things to understand. First, there have been a record number of SPACs raised, and at a much higher capital raise per SPAC. As a result, the gross dollars sitting in SPAC is over $30 billion, and will likely finish the year over 300% higher than any previous year. The second key thing to understand is that this abundant supply of SPACs (arguably an over supply) is leading to competition. This competition is leading to improving terms for the targeted company and an overall lower cost of capital. So while the underpricing and true cost of capital of a traditional IPO is trending worse, the economics behind SPACs are actually improving. This is why SPACS are a truly legitimate and preferable doorway into the public markets.

image.png

Let’s do a quick walk-through of the three options a company has to transition into life as a public company. 

Door #1: The Structurally Broken IPO Process

The traditional way of going public is systematically broken and is robbing Silicon Valley founders, employees, and investors of billions of dollars each year. This problem is getting worse every year, which led Barry McCarthy, the true pioneer of the Direct Listing, to deem the traditional IPO process “moronic.” Here is the data:

image.png

As you can see this problem is growing each year. The numbers from 2020 are truly astonishing. The average company that has gone public in 2020 was underpriced by 31%. This equates to a cost of capital of 31% + 7% (IPO fees) = 38%! And the total dollars of one-day wealth transfer in just 6 months of 2020 was $7.8B. This is way worse than any given year prior in absolute dollars, but it has only been 6 months! At this rate, 2020 IPO underpricing will transfer wealth of $15B in one day give-aways to Wall Street investment firms and their clients. Most of these companies are about 20% employee owned, so that is $3B right out of employees pockets. 

Let’s us first talk about how this is happening, and then we can touch on why it is happening. The traditional IPO process has seven basic key steps. The company runs a competitive bake-off to pick the underwriters. They prepare an S-1. They execute a road-show (in Covid we have proven this can all be done successfully online). Then — the next two steps are key — the underwriter hand-picks a price for the offering (ignoring modern market based approaches) and then they hand-pick who actually gets the underpriced shares. These are the two problematic steps. The next morning, the exchange (either the NYSE or NASDAQ) finally does a market-based matching process where we find out the real price of the shares (ironically this is the exact process used in a Direct Listing, also ironically the only people allowed to sell are the ones given the shares the night before). Shares then begin open trading and the company is forever public — the transom has been crossed. 

image.png

There are two-fatal flaws to the traditional IPO process that are both addressed with Direct Listings. In every conversation about IPOs vs Direct Listings these are the only two things that matter, and they are precisely the two things that IPO advocates are embarrassed to discuss.

  1. The traditional IPO process does not use a market-based approach (like an order-matching system) to efficiently match supply and demand and to discover price. This is despite the fact that almost all other financial assets are all priced/sold this way. Matching supply-demand through an electronic system is exceptionally straight-forward circa 2020.
  2. Most potential buyers of stocks are blocked out of the IPO process. Access is limited to the best clients of the investment bank. Most investors have little to no shot of getting an IPO allocation.

So that is why the process doesn’t work — but why things are getting worse? It has to do with the trends in how much effort the investment banks put into marketing and distribution, versus how much effort they put in historically. Twenty years ago, each investment bank had massive sales teams which were 10X larger than they are today. On an IPO, these commissioned sales executives would “hit the phones” to help make a deal successful (earning commission for each placement). Additionally, the multiple banks on a deal would sometimes have “jump-ball” economics. The more of the IPO shares you were able to place the higher economics your bank would earn on an IPO. Jump-ball economics, the sales commissions, and the majority of these sales people are all gone.

So what have they been replaced with? This is critically important to understand, partially because it’s so outlandish. During each and every modern IPO, the banks all tell the management teams that there are two key objectives in the road-show process. And there are only two. Talk to any management team from any IPO in the past three years, and you will find they had this exact conversation.

  1. For each 1-1 meeting you take, you are told you need 97% of the investors to “put in an order.” They call this a 97% “hit-rate.” Said another way, 97% of each and every investor you meet should have an interest in purchasing the offering.
  2. You are told the “optimal” target is to be 30X over-subscribed. This is not a joke. You are told that you actually need 30X more orders than you actually plan to sell. This is an explicit admission that they plan to ignore 97% of the actual orders and fill only 3%. (One huge side note here — most investors are blocked from even putting in an order, including the majority of all retail investors. So the “real” oversupply is likely much, much higher than 30X – simply because most investors are not even given the opportunity to show their interest [fatal flaw #2 above]. The real oversupply might be over 100X.)

Now imagine you are selling any other asset, be it a piece of art, a home, a piece of software, or perhaps your car. Where would you have to price that asset to ensure that 97% of the people that considered that purchase would make an offer, and you would have 30X more demand than you need? It is truly tautological that underpricing is happening, because this flawed process is being used by each and every investment bank. It’s worse than being “moronic,” it is financially illiterate. It is hard to imagine how anyone can suggest this is a good idea with a straight face. And it is increasingly hard to understand how a board of directors can legitimately exercise their fiduciary duty, while subjecting the company to such a strucurally backwards approach.

I would encourage you to “check-around” with people you know about these two idiotic objectives/goals that are about as far from a market-based approach as you can be. Below is a marketing email sent around by one of the participating investment banks after the recent nCino IPO (which was underpriced in record-setting fashion, 195% first day “pop” – “the biggest first-day surge since the 2000 tech bubble”). You will see highlighted in red the two key objectives that guarantee underpricing. Did anyone think about raising the price with demand and supply being off by 50x? Did anyone here take Microeconomics 101?

image.png

Who benefits from underpricing? Clearly the people that are handed the shares in the hand-chosen allocation process. On the IPO process the underwriters are agents for both the company and the buyside (the shareholders who are allocated shares). The IPO may stand-alone as the only very high-dollar transaction in our world where a single agent represents both sides of the transaction. In real estate, dual agency is frowned upon for obvious reasons — “At best, they say, dual agents can’t fulfill their fiduciary obligations to both parties. They can’t advance the best interests of both buyer and seller because those interests always diverge. At worst, dual agency creates a harmful conflict of interest.” Institutional shareholders have many different financial relationships with these investment banks and much more frequent interactions than the banks have with any single company. As a result the conflict is real. It is therefore natural to assume that underpriced IPOs are allocated to the best brokerage customers (and that many of these dollars return to the investment bank vis commissions). This is backed up by academic researchIt has also been uncovered in email threads. And it also makes sense in light of the dual agency. Why would they give them to anybody else? Who would you give it to if you were in charge?

Door #2: The Direct Listing

When Spotify went public via a Direct Listing in 2018, it marked the heroic two-year work of Spotify’s then CFO Barry McCarthy to bust open Door #2. The direct listing process is much simpler, is elegant, and uses modern market-based approaches to both price discovery and allocation. It is not overly complicated or sophisticated. I would argue that any first year finance student or computer science student would naturally assume this is how traditional public offerings already work (they would be wrong). You are just using a standard order-matching system to “match” supply and demand (as opposed to having the balance off by 50x).

So the Direct Listing avoids the two fatal flaws of the traditional IPO process:

  1. It uses a market-based approach to matching supply and demand and discovering price. Precisely it uses an order matching system following the price-time algorithm
  2. Anyone with a brokerage-account (including Etrade, Schwab, or Robinhood, or any other) is invited to and able to participate/put in an order. It is open to all.

So how does it work? It is actually much simpler than a traditional IPO. You just remove the two steps where the shares are intentionally underpriced and then given to the investment bank’s best clients. You still have the bake-off to pick an adviser and you still prepare an S-1. You also do a presentation to investors that are typically online and more detailed than an IPO. But then you jump straight to the market-based match. Many people don’t know this, but the direct listing uses the exact same process and systems that are used to open every stock for trading each and every day. And they are the exact process and systems used to open a stock the next morning after the hand-priced, hand-allocated traditional IPO. So you simply remove the steps that have been causing the conflicts, biases, and underpricing. Smart.

image.png

As a result of fixing these two flaws, the Direct Listing Door (Door #2) is the simplest, most elegant, most fair (for all shareholders and the company) approach you can take. It is also the obvious choice for those board members that take fiduciary duty seriously — why would you chose to price something as important and valuable as your company’s shares with a manual biased approach that has systematically produced poor results?

So when would you not use a Direct Listing? Today, you cannot use a Direct Listings to go public and simultaneously raise capital. As such, if you have a pressing need for more capital as you go public, Door #2 may not be for you. That said, the NYSE is working with the SEC on a proposal to add primary capital raises to a Direct Listing, and are rumored to be actively looking for a pioneering company to do this (as they did with Spotify on the first DL). If you talk to the market-makers that execute the Direct Listing they have zero technical concerns about how it would work. The company would just put these new shares in the order system. It is purely a regulatory question at this point. Outside of needing money, there is no reason to chose an IPO over a Direct Listing. As Michael Moritz noted in the Financial Times, “…the choice of a direct listing or a traditional IPO has become a test of two attributes: courage and intelligence.”

Door #3: The SPAC Merger

So with that lengthy backdrop, welcome to the table a third way to enter the public market — through a SPAC merger. I will first walk through some important key points to think about with respect to SPACs in 2020, and then give you several reasons why they are a legitimate, timely, and cost effective way to enter the public markets.

Observations on the modern day SPAC market:

  • SPACs are flexible and dynamic. Nearly every term in a SPAC, including the Sponsor share % (this can range from 20% all the way down to 0%), the Sponsor warrant coverage, the negotiated price with the seller, and even who is on the go forward board can change at almost any point in the process. Every thing is negotiable. As one SPAC board member declared, each SPAC is a “choose your own adventure” experience.
  • The competition is real. There are so many SPACs that companies that want to use Door #3 can and should actively negotiate not just price, but also what % the Sponsor shares should be (while these have traditionally been 20%, Ackman took Sponsor shares all the way down to 0%!) as well as the Sponsor warrant coverage. There are now well over 100 active SPACs that have raised over $100mm. And when a SPAC is nearing its termination date, those Sponsor’s should be expected to be extremely flexible (if they don’t close a deal they will soon lose their initial capital commitment). Some companies are even running a process to meet with multiple SPACs — which is being called a SPAC-off. Banks can help you run such a process.
  • The SPAC Sponsors you meet will understand the competitive issues in the market and will absolutely be prepared to negotiate and lower their economics (in terms of Sponsor percentage, warrant coverage or both). If you meet with a SPAC Sponsor that is unwilling to move on their key terms then you should “move on” from that Sponsor. Remember, there are well over a hundred fish in this sea.
  • The PIPE has risks. Some are promoting PIPEs as “smart” addition to the SPAC. This is a follow on investment dollar grab above and beyond the newly raised dollars in the original SPAC. It is considered “smart” because these PIPE dollars don’t have the Sponsor “rake” on them. However, in light of the learned behavior of the buy-side in expecting sweetheart underpricings on traditional IPOs, a PIPE process creates an opportunity for a specific group of players to negotiate down price (which would offset the no-rake point). 
  • Your biggest risk with a SPAC is you don’t actually make it out. You agree on a price with the Sponsor, but then cannot get shareholder approval or have too many redemptions. Some SPACs (like Ackman’s) have features that make redemption less likely. Again, because of this risk the PIPE is problematic. It just invites more players in the mix, and therefore raises both the time to completion and the risk of completion. There are enough SPACs out there with different amounts of available capital. Find one that matches your capital need, and negotiate the terms (rather than use a PIPE).
  • Does the Sponsor matter? The answer to this question is “potentially.” There are three factors to consider when choosing a Sponsor.
    • Are they willing to negotiate? (we already discussed this)
    • Do they understand your story better than most? You will be able to discern this in meetings.
    • Will they actively participate in telling the company story? And if so, how actively? This is a large unknown in the SPAC world today. Some Sponsors have a louder microphone, perhaps a higher profile, and perhaps a better reputation. That could impact the success of closing and the after-market price.
  • VCs are more likely to participate as selling investors on the initial transaction in a DL or a SPAC. The key reason VCs never sell in a traditional IPO is because they all know the game is rigged (the underpricing), and do not want to sell at such a steep discount. As we find new doors to the public market that have truer/fairer pricing, you will see an increased willingness to participate. This may or may not matter to you depending on the circumstances specific to your company, your own capitalization chart, and the size of the SPAC versus how much capital you need.
  • Is there a reputation issue with respect to going public through a SPAC? Some people, particularly traditionalists, will argue that going public through a SPAC might affect the long-term reputation of the company. While I understand this perspective, the argument is actually quite weak. Stock markets do not have have historical artifacts hidden in them. Once you are public, you are public, and you trade based on the discounted future expectations of your company, not based on how you went public. If your board has concerns about the company’s or the board’s public reputation, than they should be more worried about the inaneness of giving away $400mm in a one-day wealth transfer via an underpriced traditional IPO. That’s a true taint on the judgment of the company.

So what are the benefits to choosing Door #3 and using a SPAC to enter the public market?

  1. SPACs have a much lower cost of capital versus a standard IPO. Even before negotiating terms, the SPAC is a cheaper way to go public (because of systematic underpricing). When you are able to improve the terms it becomes a clear no-brainer. 
  2. SPACs have access to primary capital which is an advantage versus today’s version of a Direct Listing.
  3. With a SPAC the company has much, much more control. The company negotiates the company value/price directly with the single Sponsor (as well as many other aspects of the transaction). If you like being in control, this is a good way to go. As I mention above, watch out for the PIPE as this has the potential to recreate the oligopoly power of the large institutional investors (and will likely lead to price reduction). 
  4. SPACS are a much faster way to become a public company. The SPAC door is much faster than an IPO or a Direct Listing, which will both take 6-7 months from beginning to end. With a SPAC you could be public in two-months from when you start the process (assuming you have your house in order). This time window may or may not matter to you.

The bottom line is that SPACs are a very legtimate path to the public markets. They have a lower cost of capital vs a traditional IPO. That cost of capital is falling due to market pressure, whereas it is rising for the IPO. The SPAC has fresh capital whereas the Direct Listing does not (yet), and the SPAC is clearly the fastest path to the public markets (which is a form of risk reduction). I fully expect to see high profile companies walk through Door #3.

Money Out of Nowhere: How Internet Marketplaces Unlock Economic Wealth


This post is by bgurley from Above the Crowd

(*) Benchmark is/was an investor in companies labeled with the asterisk.

In 1776, Adam Smith released his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, in which he outlined his fundamental economic theories. Front and center in the book — in fact in Book 1, Chapter 1 — is his realization of the productivity improvements made possible through the “Division of Labour”:

It is the great multiplication of the production of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of society.

Smith identified that when men and women specialize their skills, and also importantly “trade” with one another, the end result is a rise in productivity and standard of living for everyone. In 1817, David Ricardo published On the Principles of Political Economy and Taxation where he expanded upon Smith’s work in developing the theory of Comparative Advantage. What Ricardo proved mathematically, is that if one country has simply a comparative advantage (not even an absolute one), it still is in everyone’s best interest to embrace specialization and free trade. In the end, everyone ends up in a better place.

There are two key requirements for these mechanisms to take force. First and foremost, you need free and open trade. It is quite bizarre to see modern day politicians throw caution to the wind and ignore these fundamental tenants of economic science. Time and time again, the fact patterns show that when countries open borders and freely trade, the end result is increased economic prosperity. The second, and less discussed, requirement is for the two parties that should trade to be aware of one another’s goods or services. Unfortunately, either information asymmetry or physical distances and the resulting distribution costs can both cut against the economic advantages that would otherwise arise for all.

Fortunately, the rise of the Internet, and specifically Internet marketplace models, act as accelerants to the productivity benefits of the division of labour AND comparative advantage by reducing information asymmetry and increasing the likelihood of a perfect match with regard to the exchange of goods or services. In his 2005 book, The World Is Flat, Thomas Friedman recognizes that the Internet has the ability to create a “level playing field” for all participants, and one where geographic distances become less relevant. The core reason that Internet marketplaces are so powerful is because in connecting economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist. In other words, they literally create “money out of nowhere.”

Exchange of Goods Marketplaces

Any discussion of Internet marketplaces begins with the first quintessential marketplace, ebay(*). Pierre Omidyar founded AuctionWeb in September of 1995, and its rise to fame is legendary. What started as a web site to trade laser pointers and Beanie Babies (the Pez dispenser start is quite literally a legend), today enables transactions of approximately $100B per year. Over its twenty-plus year lifetime, just over one trillion dollars in goods have traded hands across eBay’s servers. These transactions, and the profits realized by the sellers, were truly “unlocked” by eBay’s matching and auction services.

In 1999, Jack Ma created Alibaba, a Chinese-based B2B marketplace for connecting small and medium enterprise with potential export opportunities. Four years later, in May of 2003, they launched Taobao Marketplace, Alibaba’s answer to eBay. By aggressively launching a free to use service, Alibaba’s Taobao quickly became the leading person-to-person trading site in China. In 2018, Taobao GMV (Gross Merchandise Value) was a staggering RMB2,689 billion, which equates to $428 billion in US dollars.

There have been many other successful goods marketplaces that have launched post eBay & Taobao — all providing a similar service of matching those who own or produce goods with a distributed set of buyers who are particularly interested in what they have to offer. In many cases, a deeper focus on a particular category or vertical allows these marketplaces to distinguish themselves from broader marketplaces like eBay.

  • In 2000, Eric Baker and Jeff Fluhr founded StubHub, a secondary ticket exchange marketplace. The company was acquired by ebay in January 2007. In its most recent quarter, StubHub’s GMV reached $1.4B, and for the entire year 2018, StubHub had GMV of $4.8B.
  • Launched in 2005, Etsy is a leading marketplaces for the exchange of vintage and handmade items. In its most recent quarter, the company processed the exchange of $923 million of sales, which equates to a $3.6B annual GMV.
  • Founded by Michael Bruno in Paris in 2001, 1stdibs(*) is the world’s largest online marketplace for luxury one-of-a-kind antiques, high-end modern furniture, vintage fashion, jewelry, and fine art. In November 2011, David Rosenblatt took over as CEO and has been scaling the company ever since. Over the past few years dealers, galleries, and makers have matched billions of dollars in merchandise to trade buyers and consumer buyers on the platform.
  • Poshmark was founded by Manish Chandra in 2011. The website, which is an exchange for new and used clothing, has been remarkably successful. Over 4 million sellers have earned over $1 billion transacting on the site.
  • Julie Wainwright founded The Real Real in 2011. The company is an online marketplace for authenticated luxury consignment. In 2017, the company reported sales of over $500 million.
  • In 2015, Eddy Lu and Daishin Sugano launched GOAT, a marketplace for the exchange of sneakers. Despite this narrow focus, the company has been remarkably successful. The estimated annual GMV of GOAT and its leading competitor Stock X is already over $1B per year (on a combined basis).

SHARING ECONOMY MARKETPLACES

With the launch of Airbnb in 2008 and Uber (*) in 2009, these two companies established a new category of marketplaces known as the “sharing economy.” Homes and automobiles are the two most expensive items that people own, and in many cases the ability to own the asset is made possible through debt — mortgages on houses and car loans or leases for automobiles. Despite this financial exposure, for many people these assets are materially underutilized. Many extra rooms and second homes are vacant most of the year, and the average car is used less than 5% of the time. Sharing economy marketplaces allow owners to “unlock” earning opportunities from these underutilized assets.

Airbnb was founded by Joe Gebbia and Brian Chesky in 2008. Today there are over 5 million Airbnb listings in 81,000 cities. Over two million people stay in an Airbnb each night. In November of this year, the company announced that it had achieved “substantially” more than $1B in revenue in the third quarter. Assuming a marketplace rake of something like 11%, this would imply gross room revenue of over $9B for the quarter — which would be $36B annualized. As the company is still growing, we can easily guess that in 2019-2020 time frame, Airbnb will be delivering around $50B per year to home-owners who were previously sitting on highly underutilized assets. This is a major “unlocking.”

When Garrett Camp and Travis Kalanick founded Uber in 2009, they hatched the industry now known as ride-sharing. Today over 3 million people around the world use their time and their underutilized automobiles to generate extra income. Without the proper technology to match people who wanted a ride with people who could provide that service, taxi and chauffeur companies were drastically underserving the potential market. As an example, we estimate that ride-sharing revenues in San Francisco are well north of 10X what taxis and black cars were providing prior to the launch of ride-sharing. These numbers will go even higher as people increasingly forgo the notion of car ownership altogether. We estimate that the global GMV for ride sharing was over $100B in 2018 (including Uber, Didi, Grab, Lyft, Yandex, etc) and still growing handsomely. Assuming a 20% rake, this equates to over $80B that went into the hands of ride-sharing drivers in a single year — and this is an industry that did not exist 10 years ago. The matching made possible with today’s GPS and Internet-enabled smart phones is a massive unlocking of wealth and value.

While it is a lesser known category, using your own backyard and home to host dog guests as an alternative to a kennel is a large and growing business. Once again, this is an asset against which the marginal cost to host a dog is near zero. By combining their time with this otherwise unused asset, dog sitters are able to offer a service that is quite compelling for consumers. Rover.com (*) in Seattle, which was founded by Greg Gottesman and Aaron Easterly in 2011, is the leading player in this market. (Benchmark is an investor in Rover through a merger with DogVacay in 2017). You may be surprised to learn that this is already a massive industry. In less than a decade since the company started, Rover has already paid out of half a billion dollars to hosts that participate on the platform.

Exchange of LABOR Marketplaces

While not as well known as the goods exchanges or sharing economy marketplaces, there is a growing and exciting increase in the number of marketplaces that help match specifically skilled labor with key opportunities to monetize their skills. The most noteworthy of these is likely Upwork(*), a company that formed from the merger of Elance and Odesk. Upwork is a global freelancing platform where businesses and independent professionals can connect and collaborate remotely. Popular categories include web developers, mobile developers, designers, writers, and accountants. In the 12 months ended June 30, 2018, the Upwork platform enabled $1.56 billion of GSV (gross services revenue) across 2.0 million projects between approximately 375,000 freelancers and 475,000 clients in over 180 countries. These labor matches represent the exact “world is flat” reality outlined in Friedman’s book.

Other noteworthy and emerging labor marketplaces:

  • HackerOne(*) is the leading global marketplace that coordinates the world’s largest corporate “bug bounty” programs with a network of the world’s leading hackers. The company was founded in 2012 by Michiel Prins, Jobert Abma, Alex Rice and Merijn Terheggen, and today serves the needs of over 1,000 corporate bug bounty programs. On top of that, the HackerOne network of over 300,000 hackers (adding 600 more each day) has resolved over 100K confirmed vulnerabilities which resulted in over $46 million in awards to these individuals. There is an obvious network effect at work when you bring together the world’s leading programs and the world’s leading hackers on a single platform. The Fortune 500 is quickly learning that having a bug bounty program is an essential step in fighting cyber crime, and that HackerOne is the best place to host their program.
  • Wyzant is a leading Chicago-based marketplace that connects tutors with students around the country. The company was founded by Andrew Geant and Mike Weishuhn in 2005. The company has over 80,000 tutors on its platform and has paid out over $300 million to these professionals. The company started matching students with tutors for in-person sessions, but increasingly these are done “virtually” over the Internet.
  • Stitch Fix (*) is a leading provider of personalized clothing services that was founded by Katrina Lake in 2011. While the company is not primarily a marketplace, each order is hand-curated by a work-at-home “stylist” who works part-time on their own schedule from the comfort of their own home. Stitch Fix’s algorithms match the perfect stylist with each and every customer to help ensure the optimal outcome for each client. As of the end of 2018, Stitch Fix has paid out well over $100 million to their stylists.
  • Swing Education was founded in 2015 with the objective of creating a marketplace for substitute teachers. While it is still early in the company’s journey, they have already established themselves as the leader in the U.S. market. Swing is now at over 1,200 school partners and has filled over 115,000 teacher absence days. They have helped 2,000 substitute teachers get in the classroom in 2018, including 400 educators who earned permits, which Swing willingly financed. While it seems obvious in retrospect, having all substitutes on a single platform creates massive efficiency in a market where previously every single school had to keep their own list and make last minute calls when they had vacancies. And their subs just have to deal with one Swing setup process to get access to subbing opportunities at dozens of local schools and districts.
  • RigUp was founded by Xuan Yong and Mike Witte in Austin, Texas in March of 2014. RigUp is a leading labor marketplace focused on the oilfield services industry. “The company’s platform offers a large network of qualified, insured and compliant contractors and service providers across all upstream, midstream and downstream operations in every oil and gas basin, enabling companies to hire quickly, track contractor compliance, and minimize administrative work.” According to the company, GMV for 2017 was an impressive $150 million, followed by an astounding $600 million in 2018. Often, investors miss out on vertically focused companies like RigUp as they find themselves overly anxious about TAM (total available market). As you can see, that can be a big mistake.
  • VIPKid, which was founded in 2013 by Cindy Mi, is a truly amazing story. The idea is simple and simultaneously brilliant. VIPKid links students in China who want to learn English with native English speaking tutors in the United States and Canada. All sessions are done over the Internet, once again epitomizing Friedman’s very flat world. In November of 2018, the company reported having 60,000 teachers contracted to teach over 500,000 students. Many people believe the company is now well north of a US$1B run rate, which implies that around $1B will pass hands from Chinese parents to western teachers in 2019. That is quite a bit of supplemental income for U.S.-based teachers.

These vertical labor marketplaces are to LinkedIn what companies like Zillow, Expedia, and GrubHub are to Google search. Through a deeper understanding of a particular vertical, a much richer perspective on the quality and differentiation of the participants, and the enablement of transactions — you create an evolved service that has much more value to both sides of the transaction. And for those professionals participating in these markets, your reputation on the vertical service matters way more than your profile on LinkedIn.

NEW EMERGING MARKETPLACES

Having been a fortunate investor in many of the previously mentioned companies (*), Benchmark remains extremely excited about future marketplace opportunities that will unlock wealth on the Internet. Here are an example of two such companies that we have funded in the past few years.

The New York Times describes Hipcamp as “The Sharing Economy Visits the Backcountry.” Hipcamp(*) was founded in 2013 by Alyssa Ravasio as an engine to search across the dozens and dozens of State and National park websites for campsite availability. As Hipcamp gained traction with campers, landowners with land near many of the National and State parks started to reach out to Hipcamp asking if they could list their land on Hipcamp too. Hipcamp now offers access to more than 350k campsites across public and private land, and their most active private land hosts make over $100,000 per year hosting campers. This is a pretty amazing value proposition for both land owners and campers. If you are a rural landowner, here is a way to create “money out of nowhere” with very little capital expenditures. And if you are a camper, what could be better than to camp at a unique, bespoke campsite in your favorite location.

Instawork(*) is an on-demand staffing app for gig workers (professionals) and hospitality businesses (partners). These working professionals seek economic freedom and a better life, and Instawork gives them both — an opportunity to work as much as they like, but on their own terms with regard to when and where. On the business partner side, small business owners/managers/chefs do not have access to reliable sources to help them with talent sourcing and high turnover, and products like  LinkedIn are more focused on white-collar workers. Instawork was cofounded by Sumir Meghani in San Franciso and was a member of the 2015 Y-Combinator class. 2018 was a break-out year for Instawork with 10X revenue growth and 12X growth in Professionals on the platform. The average Instawork Professional is highly engaged on the platform, and typically opens the Instawork app ten times a day. This results in 97% of gigs being matched in less than 24 hours — which is powerfully important to both sides of the network. Also noteworthy, the Professionals on Instawork average 150% of minimum wage, significantly higher than many other labor marketplaces. This higher income allows Instawork Professionals like Jose, to begin to accomplish their dreams.

The Power of These Platforms

As you can see, these numerous marketplaces are a direct extension of the productivity enhancers first uncovered by Adam Smith and David Ricardo. Free trade, specialization, and comparative advantage are all enhanced when we can increase the matching of supply and demand of goods and services as well as eliminate inefficiency and waste caused by misinformation or distance. As a result, productivity naturally improves.

Specific benefits of global internet marketplaces:

    1. Increase wealth distribution (all examples)
    2. Unlock wasted potential of assets (Uber, AirBNB, Rover, and Hipcamp)
    3. Better match of specific workers with specific opportunities (Upwork, WyzAnt, RigUp, VIPKid, Instawork)
    4. Make specific assets reachable and findable (Ebay, Etsy, 1stDibs, Poshmark, GOAT)
    5. Allow for increased specialization (Etsy, Upwork, RigUp)
    6. Enhance supplemental labor opportunities (Uber, Stitch Fix, SwingEducation, Instawork, VIPKid), where the worker is in control of when and where they work
    7. Reduces forfeiture by enhancing utilization (mortgages, car loans, etc) (Uber, AirBnb, Rover, Hipcamp)

If you are a founder who is excited about starting a new marketplace, there are two caveats that are important to remember. First, you will need to find industries where the opportunity to improve the efficiency in the ways noted above is evident. If the network does not create true economic leverage, you will find it hard to be successful. Second, for any marketplace to be successful, the conditions in that given market must be optimal for a new marketplace entrant. Please check out our previous post, All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces, for a list of factors that help distinguish a great opportunity. If after taking in these considerations you think you have found such an opportunity, we would love to talk to you about potentially partnering together. Please send us an email to unlockingwealth@benchmark.com.

(*) Benchmark either is or was an investor in companies labeled with the asterisk.

Interested in “Unlocking Wealth” Yourself?

Money Out of Nowhere: How Internet Marketplaces Unlock Economic Wealth


This post is by bgurley from Above the Crowd

(*) Benchmark is/was an investor in companies labeled with the asterisk.

In 1776, Adam Smith released his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, in which he outlined his fundamental economic theories. Front and center in the book — in fact in Book 1, Chapter 1 — is his realization of the productivity improvements made possible through the “Division of Labour”:

It is the great multiplication of the production of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of society.

Smith identified that when men and women specialize their skills, and also importantly “trade” with one another, the end result is a rise in productivity and standard of living for everyone. In 1817, David Ricardo published On the Principles of Political Economy and Taxation where he expanded upon Smith’s work in developing the theory of Comparative Advantage. What Ricardo proved mathematically, is that if one country has simply a comparative advantage (not even an absolute one), it still is in everyone’s best interest to embrace specialization and free trade. In the end, everyone ends up in a better place.

There are two key requirements for these mechanisms to take force. First and foremost, you need free and open trade. It is quite bizarre to see modern day politicians throw caution to the wind and ignore these fundamental tenants of economic science. Time and time again, the fact patterns show that when countries open borders and freely trade, the end result is increased economic prosperity. The second, and less discussed, requirement is for the two parties that should trade to be aware of one another’s goods or services. Unfortunately, either information asymmetry or physical distances and the resulting distribution costs can both cut against the economic advantages that would otherwise arise for all.

Fortunately, the rise of the Internet, and specifically Internet marketplace models, act as accelerants to the productivity benefits of the division of labour AND comparative advantage by reducing information asymmetry and increasing the likelihood of a perfect match with regard to the exchange of goods or services. In his 2005 book, The World Is Flat, Thomas Friedman recognizes that the Internet has the ability to create a “level playing field” for all participants, and one where geographic distances become less relevant. The core reason that Internet marketplaces are so powerful is because in connecting economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist. In other words, they literally create “money out of nowhere.”

Exchange of Goods Marketplaces

Any discussion of Internet marketplaces begins with the first quintessential marketplace, ebay(*). Pierre Omidyar founded AuctionWeb in September of 1995, and its rise to fame is legendary. What started as a web site to trade laser pointers and Beanie Babies (the Pez dispenser start is quite literally a legend), today enables transactions of approximately $100B per year. Over its twenty-plus year lifetime, just over one trillion dollars in goods have traded hands across eBay’s servers. These transactions, and the profits realized by the sellers, were truly “unlocked” by eBay’s matching and auction services.

In 1999, Jack Ma created Alibaba, a Chinese-based B2B marketplace for connecting small and medium enterprise with potential export opportunities. Four years later, in May of 2003, they launched Taobao Marketplace, Alibaba’s answer to eBay. By aggressively launching a free to use service, Alibaba’s Taobao quickly became the leading person-to-person trading site in China. In 2018, Taobao GMV (Gross Merchandise Value) was a staggering RMB2,689 billion, which equates to $428 billion in US dollars.

There have been many other successful goods marketplaces that have launched post eBay & Taobao — all providing a similar service of matching those who own or produce goods with a distributed set of buyers who are particularly interested in what they have to offer. In many cases, a deeper focus on a particular category or vertical allows these marketplaces to distinguish themselves from broader marketplaces like eBay.

  • In 2000, Eric Baker and Jeff Fluhr founded StubHub, a secondary ticket exchange marketplace. The company was acquired by ebay in January 2007. In its most recent quarter, StubHub’s GMV reached $1.4B, and for the entire year 2018, StubHub had GMV of $4.8B.
  • Launched in 2005, Etsy is a leading marketplaces for the exchange of vintage and handmade items. In its most recent quarter, the company processed the exchange of $923 million of sales, which equates to a $3.6B annual GMV.
  • Founded by Michael Bruno in Paris in 2001, 1stdibs(*) is the world’s largest online marketplace for luxury one-of-a-kind antiques, high-end modern furniture, vintage fashion, jewelry, and fine art. In November 2011, David Rosenblatt took over as CEO and has been scaling the company ever since. Over the past few years dealers, galleries, and makers have matched billions of dollars in merchandise to trade buyers and consumer buyers on the platform.
  • Poshmark was founded by Manish Chandra in 2011. The website, which is an exchange for new and used clothing, has been remarkably successful. Over 4 million sellers have earned over $1 billion transacting on the site.
  • Julie Wainwright founded The Real Real in 2011. The company is an online marketplace for authenticated luxury consignment. In 2017, the company reported sales of over $500 million.
  • In 2015, Eddy Lu and Daishin Sugano launched GOAT, a marketplace for the exchange of sneakers. Despite this narrow focus, the company has been remarkably successful. The estimated annual GMV of GOAT and its leading competitor Stock X is already over $1B per year (on a combined basis).

SHARING ECONOMY MARKETPLACES

With the launch of Airbnb in 2008 and Uber (*) in 2009, these two companies established a new category of marketplaces known as the “sharing economy.” Homes and automobiles are the two most expensive items that people own, and in many cases the ability to own the asset is made possible through debt — mortgages on houses and car loans or leases for automobiles. Despite this financial exposure, for many people these assets are materially underutilized. Many extra rooms and second homes are vacant most of the year, and the average car is used less than 5% of the time. Sharing economy marketplaces allow owners to “unlock” earning opportunities from these underutilized assets.

Airbnb was founded by Joe Gebbia and Brian Chesky in 2008. Today there are over 5 million Airbnb listings in 81,000 cities. Over two million people stay in an Airbnb each night. In November of this year, the company announced that it had achieved “substantially” more than $1B in revenue in the third quarter. Assuming a marketplace rake of something like 11%, this would imply gross room revenue of over $9B for the quarter — which would be $36B annualized. As the company is still growing, we can easily guess that in 2019-2020 time frame, Airbnb will be delivering around $50B per year to home-owners who were previously sitting on highly underutilized assets. This is a major “unlocking.”

When Garrett Camp and Travis Kalanick founded Uber in 2009, they hatched the industry now known as ride-sharing. Today over 3 million people around the world use their time and their underutilized automobiles to generate extra income. Without the proper technology to match people who wanted a ride with people who could provide that service, taxi and chauffeur companies were drastically underserving the potential market. As an example, we estimate that ride-sharing revenues in San Francisco are well north of 10X what taxis and black cars were providing prior to the launch of ride-sharing. These numbers will go even higher as people increasingly forgo the notion of car ownership altogether. We estimate that the global GMV for ride sharing was over $100B in 2018 (including Uber, Didi, Grab, Lyft, Yandex, etc) and still growing handsomely. Assuming a 20% rake, this equates to over $80B that went into the hands of ride-sharing drivers in a single year — and this is an industry that did not exist 10 years ago. The matching made possible with today’s GPS and Internet-enabled smart phones is a massive unlocking of wealth and value.

While it is a lesser known category, using your own backyard and home to host dog guests as an alternative to a kennel is a large and growing business. Once again, this is an asset against which the marginal cost to host a dog is near zero. By combining their time with this otherwise unused asset, dog sitters are able to offer a service that is quite compelling for consumers. Rover.com (*) in Seattle, which was founded by Greg Gottesman and Aaron Easterly in 2011, is the leading player in this market. (Benchmark is an investor in Rover through a merger with DogVacay in 2017). You may be surprised to learn that this is already a massive industry. In less than a decade since the company started, Rover has already paid out of half a billion dollars to hosts that participate on the platform.

Exchange of LABOR Marketplaces

While not as well known as the goods exchanges or sharing economy marketplaces, there is a growing and exciting increase in the number of marketplaces that help match specifically skilled labor with key opportunities to monetize their skills. The most noteworthy of these is likely Upwork(*), a company that formed from the merger of Elance and Odesk. Upwork is a global freelancing platform where businesses and independent professionals can connect and collaborate remotely. Popular categories include web developers, mobile developers, designers, writers, and accountants. In the 12 months ended June 30, 2018, the Upwork platform enabled $1.56 billion of GSV (gross services revenue) across 2.0 million projects between approximately 375,000 freelancers and 475,000 clients in over 180 countries. These labor matches represent the exact “world is flat” reality outlined in Friedman’s book.

Other noteworthy and emerging labor marketplaces:

  • HackerOne(*) is the leading global marketplace that coordinates the world’s largest corporate “bug bounty” programs with a network of the world’s leading hackers. The company was founded in 2012 by Michiel Prins, Jobert Abma, Alex Rice and Merijn Terheggen, and today serves the needs of over 1,000 corporate bug bounty programs. On top of that, the HackerOne network of over 300,000 hackers (adding 600 more each day) has resolved over 100K confirmed vulnerabilities which resulted in over $46 million in awards to these individuals. There is an obvious network effect at work when you bring together the world’s leading programs and the world’s leading hackers on a single platform. The Fortune 500 is quickly learning that having a bug bounty program is an essential step in fighting cyber crime, and that HackerOne is the best place to host their program.
  • Wyzant is a leading Chicago-based marketplace that connects tutors with students around the country. The company was founded by Andrew Geant and Mike Weishuhn in 2005. The company has over 80,000 tutors on its platform and has paid out over $300 million to these professionals. The company started matching students with tutors for in-person sessions, but increasingly these are done “virtually” over the Internet.
  • Stitch Fix (*) is a leading provider of personalized clothing services that was founded by Katrina Lake in 2011. While the company is not primarily a marketplace, each order is hand-curated by a work-at-home “stylist” who works part-time on their own schedule from the comfort of their own home. Stitch Fix’s algorithms match the perfect stylist with each and every customer to help ensure the optimal outcome for each client. As of the end of 2018, Stitch Fix has paid out well over $100 million to their stylists.
  • Swing Education was founded in 2015 with the objective of creating a marketplace for substitute teachers. While it is still early in the company’s journey, they have already established themselves as the leader in the U.S. market. Swing is now at over 1,200 school partners and has filled over 115,000 teacher absence days. They have helped 2,000 substitute teachers get in the classroom in 2018, including 400 educators who earned permits, which Swing willingly financed. While it seems obvious in retrospect, having all substitutes on a single platform creates massive efficiency in a market where previously every single school had to keep their own list and make last minute calls when they had vacancies. And their subs just have to deal with one Swing setup process to get access to subbing opportunities at dozens of local schools and districts.
  • RigUp was founded by Xuan Yong and Mike Witte in Austin, Texas in March of 2014. RigUp is a leading labor marketplace focused on the oilfield services industry. “The company’s platform offers a large network of qualified, insured and compliant contractors and service providers across all upstream, midstream and downstream operations in every oil and gas basin, enabling companies to hire quickly, track contractor compliance, and minimize administrative work.” According to the company, GMV for 2017 was an impressive $150 million, followed by an astounding $600 million in 2018. Often, investors miss out on vertically focused companies like RigUp as they find themselves overly anxious about TAM (total available market). As you can see, that can be a big mistake.
  • VIPKid, which was founded in 2013 by Cindy Mi, is a truly amazing story. The idea is simple and simultaneously brilliant. VIPKid links students in China who want to learn English with native English speaking tutors in the United States and Canada. All sessions are done over the Internet, once again epitomizing Friedman’s very flat world. In November of 2018, the company reported having 60,000 teachers contracted to teach over 500,000 students. Many people believe the company is now well north of a US$1B run rate, which implies that around $1B will pass hands from Chinese parents to western teachers in 2019. That is quite a bit of supplemental income for U.S.-based teachers.

These vertical labor marketplaces are to LinkedIn what companies like Zillow, Expedia, and GrubHub are to Google search. Through a deeper understanding of a particular vertical, a much richer perspective on the quality and differentiation of the participants, and the enablement of transactions — you create an evolved service that has much more value to both sides of the transaction. And for those professionals participating in these markets, your reputation on the vertical service matters way more than your profile on LinkedIn.

NEW EMERGING MARKETPLACES

Having been a fortunate investor in many of the previously mentioned companies (*), Benchmark remains extremely excited about future marketplace opportunities that will unlock wealth on the Internet. Here are an example of two such companies that we have funded in the past few years.

The New York Times describes Hipcamp as “The Sharing Economy Visits the Backcountry.” Hipcamp(*) was founded in 2013 by Alyssa Ravasio as an engine to search across the dozens and dozens of State and National park websites for campsite availability. As Hipcamp gained traction with campers, landowners with land near many of the National and State parks started to reach out to Hipcamp asking if they could list their land on Hipcamp too. Hipcamp now offers access to more than 350k campsites across public and private land, and their most active private land hosts make over $100,000 per year hosting campers. This is a pretty amazing value proposition for both land owners and campers. If you are a rural landowner, here is a way to create “money out of nowhere” with very little capital expenditures. And if you are a camper, what could be better than to camp at a unique, bespoke campsite in your favorite location.

Instawork(*) is an on-demand staffing app for gig workers (professionals) and hospitality businesses (partners). These working professionals seek economic freedom and a better life, and Instawork gives them both — an opportunity to work as much as they like, but on their own terms with regard to when and where. On the business partner side, small business owners/managers/chefs do not have access to reliable sources to help them with talent sourcing and high turnover, and products like  LinkedIn are more focused on white-collar workers. Instawork was cofounded by Sumir Meghani in San Franciso and was a member of the 2015 Y-Combinator class. 2018 was a break-out year for Instawork with 10X revenue growth and 12X growth in Professionals on the platform. The average Instawork Professional is highly engaged on the platform, and typically opens the Instawork app ten times a day. This results in 97% of gigs being matched in less than 24 hours — which is powerfully important to both sides of the network. Also noteworthy, the Professionals on Instawork average 150% of minimum wage, significantly higher than many other labor marketplaces. This higher income allows Instawork Professionals like Jose, to begin to accomplish their dreams.

The Power of These Platforms

As you can see, these numerous marketplaces are a direct extension of the productivity enhancers first uncovered by Adam Smith and David Ricardo. Free trade, specialization, and comparative advantage are all enhanced when we can increase the matching of supply and demand of goods and services as well as eliminate inefficiency and waste caused by misinformation or distance. As a result, productivity naturally improves.

Specific benefits of global internet marketplaces:

    1. Increase wealth distribution (all examples)
    2. Unlock wasted potential of assets (Uber, AirBNB, Rover, and Hipcamp)
    3. Better match of specific workers with specific opportunities (Upwork, WyzAnt, RigUp, VIPKid, Instawork)
    4. Make specific assets reachable and findable (Ebay, Etsy, 1stDibs, Poshmark, GOAT)
    5. Allow for increased specialization (Etsy, Upwork, RigUp)
    6. Enhance supplemental labor opportunities (Uber, Stitch Fix, SwingEducation, Instawork, VIPKid), where the worker is in control of when and where they work
    7. Reduces forfeiture by enhancing utilization (mortgages, car loans, etc) (Uber, AirBnb, Rover, Hipcamp)

If you are a founder who is excited about starting a new marketplace, there are two caveats that are important to remember. First, you will need to find industries where the opportunity to improve the efficiency in the ways noted above is evident. If the network does not create true economic leverage, you will find it hard to be successful. Second, for any marketplace to be successful, the conditions in that given market must be optimal for a new marketplace entrant. Please check out our previous post, All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces, for a list of factors that help distinguish a great opportunity. If after taking in these considerations you think you have found such an opportunity, we would love to talk to you about potentially partnering together. Please send us an email to unlockingwealth@benchmark.com.

(*) Benchmark either is or was an investor in companies labeled with the asterisk.

Interested in “Unlocking Wealth” Yourself?

Money Out of Nowhere: How Internet Marketplaces Unlock Economic Wealth


This post is by bgurley from Above the Crowd

(*) Benchmark is/was an investor in companies labeled with the asterisk.

In 1776, Adam Smith released his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, in which he outlined his fundamental economic theories. Front and center in the book — in fact in Book 1, Chapter 1 — is his realization of the productivity improvements made possible through the “Division of Labour”:

It is the great multiplication of the production of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of society.

Smith identified that when men and women specialize their skills, and also importantly “trade” with one another, the end result is a rise in productivity and standard of living for everyone. In 1817, David Ricardo published On the Principles of Political Economy and Taxation where he expanded upon Smith’s work in developing the theory of Comparative Advantage. What Ricardo proved mathematically, is that if one country has simply a comparative advantage (not even an absolute one), it still is in everyone’s best interest to embrace specialization and free trade. In the end, everyone ends up in a better place.

There are two key requirements for these mechanisms to take force. First and foremost, you need free and open trade. It is quite bizarre to see modern day politicians throw caution to the wind and ignore these fundamental tenants of economic science. Time and time again, the fact patterns show that when countries open borders and freely trade, the end result is increased economic prosperity. The second, and less discussed, requirement is for the two parties that should trade to be aware of one another’s goods or services. Unfortunately, either information asymmetry or physical distances and the resulting distribution costs can both cut against the economic advantages that would otherwise arise for all.

Fortunately, the rise of the Internet, and specifically Internet marketplace models, act as accelerants to the productivity benefits of the division of labour AND comparative advantage by reducing information asymmetry and increasing the likelihood of a perfect match with regard to the exchange of goods or services. In his 2005 book, The World Is Flat, Thomas Friedman recognizes that the Internet has the ability to create a “level playing field” for all participants, and one where geographic distances become less relevant. The core reason that Internet marketplaces are so powerful is because in connecting economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist. In other words, they literally create “money out of nowhere.”

Exchange of Goods Marketplaces

Any discussion of Internet marketplaces begins with the first quintessential marketplace, ebay(*). Pierre Omidyar founded AuctionWeb in September of 1995, and its rise to fame is legendary. What started as a web site to trade laser pointers and Beanie Babies (the Pez dispenser start is quite literally a legend), today enables transactions of approximately $100B per year. Over its twenty-plus year lifetime, just over one trillion dollars in goods have traded hands across eBay’s servers. These transactions, and the profits realized by the sellers, were truly “unlocked” by eBay’s matching and auction services.

In 1999, Jack Ma created Alibaba, a Chinese-based B2B marketplace for connecting small and medium enterprise with potential export opportunities. Four years later, in May of 2003, they launched Taobao Marketplace, Alibaba’s answer to eBay. By aggressively launching a free to use service, Alibaba’s Taobao quickly became the leading person-to-person trading site in China. In 2018, Taobao GMV (Gross Merchandise Value) was a staggering RMB2,689 billion, which equates to $428 billion in US dollars.

There have been many other successful goods marketplaces that have launched post eBay & Taobao — all providing a similar service of matching those who own or produce goods with a distributed set of buyers who are particularly interested in what they have to offer. In many cases, a deeper focus on a particular category or vertical allows these marketplaces to distinguish themselves from broader marketplaces like eBay.

  • In 2000, Eric Baker and Jeff Fluhr founded StubHub, a secondary ticket exchange marketplace. The company was acquired by ebay in January 2007. In its most recent quarter, StubHub’s GMV reached $1.4B, and for the entire year 2018, StubHub had GMV of $4.8B.
  • Launched in 2005, Etsy is a leading marketplaces for the exchange of vintage and handmade items. In its most recent quarter, the company processed the exchange of $923 million of sales, which equates to a $3.6B annual GMV.
  • Founded by Michael Bruno in Paris in 2001, 1stdibs(*) is the world’s largest online marketplace for luxury one-of-a-kind antiques, high-end modern furniture, vintage fashion, jewelry, and fine art. In November 2011, David Rosenblatt took over as CEO and has been scaling the company ever since. Over the past few years dealers, galleries, and makers have matched billions of dollars in merchandise to trade buyers and consumer buyers on the platform.
  • Poshmark was founded by Manish Chandra in 2011. The website, which is an exchange for new and used clothing, has been remarkably successful. Over 4 million sellers have earned over $1 billion transacting on the site.
  • Julie Wainwright founded The Real Real in 2011. The company is an online marketplace for authenticated luxury consignment. In 2017, the company reported sales of over $500 million.
  • In 2015, Eddy Lu and Daishin Sugano launched GOAT, a marketplace for the exchange of sneakers. Despite this narrow focus, the company has been remarkably successful. The estimated annual GMV of GOAT and its leading competitor Stock X is already over $1B per year (on a combined basis).

SHARING ECONOMY MARKETPLACES

With the launch of Airbnb in 2008 and Uber (*) in 2009, these two companies established a new category of marketplaces known as the “sharing economy.” Homes and automobiles are the two most expensive items that people own, and in many cases the ability to own the asset is made possible through debt — mortgages on houses and car loans or leases for automobiles. Despite this financial exposure, for many people these assets are materially underutilized. Many extra rooms and second homes are vacant most of the year, and the average car is used less than 5% of the time. Sharing economy marketplaces allow owners to “unlock” earning opportunities from these underutilized assets.

Airbnb was founded by Joe Gebbia and Brian Chesky in 2008. Today there are over 5 million Airbnb listings in 81,000 cities. Over two million people stay in an Airbnb each night. In November of this year, the company announced that it had achieved “substantially” more than $1B in revenue in the third quarter. Assuming a marketplace rake of something like 11%, this would imply gross room revenue of over $9B for the quarter — which would be $36B annualized. As the company is still growing, we can easily guess that in 2019-2020 time frame, Airbnb will be delivering around $50B per year to home-owners who were previously sitting on highly underutilized assets. This is a major “unlocking.”

When Garrett Camp and Travis Kalanick founded Uber in 2009, they hatched the industry now known as ride-sharing. Today over 3 million people around the world use their time and their underutilized automobiles to generate extra income. Without the proper technology to match people who wanted a ride with people who could provide that service, taxi and chauffeur companies were drastically underserving the potential market. As an example, we estimate that ride-sharing revenues in San Francisco are well north of 10X what taxis and black cars were providing prior to the launch of ride-sharing. These numbers will go even higher as people increasingly forgo the notion of car ownership altogether. We estimate that the global GMV for ride sharing was over $100B in 2018 (including Uber, Didi, Grab, Lyft, Yandex, etc) and still growing handsomely. Assuming a 20% rake, this equates to over $80B that went into the hands of ride-sharing drivers in a single year — and this is an industry that did not exist 10 years ago. The matching made possible with today’s GPS and Internet-enabled smart phones is a massive unlocking of wealth and value.

While it is a lesser known category, using your own backyard and home to host dog guests as an alternative to a kennel is a large and growing business. Once again, this is an asset against which the marginal cost to host a dog is near zero. By combining their time with this otherwise unused asset, dog sitters are able to offer a service that is quite compelling for consumers. Rover.com (*) in Seattle, which was founded by Greg Gottesman and Aaron Easterly in 2011, is the leading player in this market. (Benchmark is an investor in Rover through a merger with DogVacay in 2017). You may be surprised to learn that this is already a massive industry. In less than a decade since the company started, Rover has already paid out of half a billion dollars to hosts that participate on the platform.

Exchange of LABOR Marketplaces

While not as well known as the goods exchanges or sharing economy marketplaces, there is a growing and exciting increase in the number of marketplaces that help match specifically skilled labor with key opportunities to monetize their skills. The most noteworthy of these is likely Upwork(*), a company that formed from the merger of Elance and Odesk. Upwork is a global freelancing platform where businesses and independent professionals can connect and collaborate remotely. Popular categories include web developers, mobile developers, designers, writers, and accountants. In the 12 months ended June 30, 2018, the Upwork platform enabled $1.56 billion of GSV (gross services revenue) across 2.0 million projects between approximately 375,000 freelancers and 475,000 clients in over 180 countries. These labor matches represent the exact “world is flat” reality outlined in Friedman’s book.

Other noteworthy and emerging labor marketplaces:

  • HackerOne(*) is the leading global marketplace that coordinates the world’s largest corporate “bug bounty” programs with a network of the world’s leading hackers. The company was founded in 2012 by Michiel Prins, Jobert Abma, Alex Rice and Merijn Terheggen, and today serves the needs of over 1,000 corporate bug bounty programs. On top of that, the HackerOne network of over 300,000 hackers (adding 600 more each day) has resolved over 100K confirmed vulnerabilities which resulted in over $46 million in awards to these individuals. There is an obvious network effect at work when you bring together the world’s leading programs and the world’s leading hackers on a single platform. The Fortune 500 is quickly learning that having a bug bounty program is an essential step in fighting cyber crime, and that HackerOne is the best place to host their program.
  • Wyzant is a leading Chicago-based marketplace that connects tutors with students around the country. The company was founded by Andrew Geant and Mike Weishuhn in 2005. The company has over 80,000 tutors on its platform and has paid out over $300 million to these professionals. The company started matching students with tutors for in-person sessions, but increasingly these are done “virtually” over the Internet.
  • Stitch Fix (*) is a leading provider of personalized clothing services that was founded by Katrina Lake in 2011. While the company is not primarily a marketplace, each order is hand-curated by a work-at-home “stylist” who works part-time on their own schedule from the comfort of their own home. Stitch Fix’s algorithms match the perfect stylist with each and every customer to help ensure the optimal outcome for each client. As of the end of 2018, Stitch Fix has paid out well over $100 million to their stylists.
  • Swing Education was founded in 2015 with the objective of creating a marketplace for substitute teachers. While it is still early in the company’s journey, they have already established themselves as the leader in the U.S. market. Swing is now at over 1,200 school partners and has filled over 115,000 teacher absence days. They have helped 2,000 substitute teachers get in the classroom in 2018, including 400 educators who earned permits, which Swing willingly financed. While it seems obvious in retrospect, having all substitutes on a single platform creates massive efficiency in a market where previously every single school had to keep their own list and make last minute calls when they had vacancies. And their subs just have to deal with one Swing setup process to get access to subbing opportunities at dozens of local schools and districts.
  • RigUp was founded by Xuan Yong and Mike Witte in Austin, Texas in March of 2014. RigUp is a leading labor marketplace focused on the oilfield services industry. “The company’s platform offers a large network of qualified, insured and compliant contractors and service providers across all upstream, midstream and downstream operations in every oil and gas basin, enabling companies to hire quickly, track contractor compliance, and minimize administrative work.” According to the company, GMV for 2017 was an impressive $150 million, followed by an astounding $600 million in 2018. Often, investors miss out on vertically focused companies like RigUp as they find themselves overly anxious about TAM (total available market). As you can see, that can be a big mistake.
  • VIPKid, which was founded in 2013 by Cindy Mi, is a truly amazing story. The idea is simple and simultaneously brilliant. VIPKid links students in China who want to learn English with native English speaking tutors in the United States and Canada. All sessions are done over the Internet, once again epitomizing Friedman’s very flat world. In November of 2018, the company reported having 60,000 teachers contracted to teach over 500,000 students. Many people believe the company is now well north of a US$1B run rate, which implies that around $1B will pass hands from Chinese parents to western teachers in 2019. That is quite a bit of supplemental income for U.S.-based teachers.

These vertical labor marketplaces are to LinkedIn what companies like Zillow, Expedia, and GrubHub are to Google search. Through a deeper understanding of a particular vertical, a much richer perspective on the quality and differentiation of the participants, and the enablement of transactions — you create an evolved service that has much more value to both sides of the transaction. And for those professionals participating in these markets, your reputation on the vertical service matters way more than your profile on LinkedIn.

NEW EMERGING MARKETPLACES

Having been a fortunate investor in many of the previously mentioned companies (*), Benchmark remains extremely excited about future marketplace opportunities that will unlock wealth on the Internet. Here are an example of two such companies that we have funded in the past few years.

The New York Times describes Hipcamp as “The Sharing Economy Visits the Backcountry.” Hipcamp(*) was founded in 2013 by Alyssa Ravasio as an engine to search across the dozens and dozens of State and National park websites for campsite availability. As Hipcamp gained traction with campers, landowners with land near many of the National and State parks started to reach out to Hipcamp asking if they could list their land on Hipcamp too. Hipcamp now offers access to more than 350k campsites across public and private land, and their most active private land hosts make over $100,000 per year hosting campers. This is a pretty amazing value proposition for both land owners and campers. If you are a rural landowner, here is a way to create “money out of nowhere” with very little capital expenditures. And if you are a camper, what could be better than to camp at a unique, bespoke campsite in your favorite location.

Instawork(*) is an on-demand staffing app for gig workers (professionals) and hospitality businesses (partners). These working professionals seek economic freedom and a better life, and Instawork gives them both — an opportunity to work as much as they like, but on their own terms with regard to when and where. On the business partner side, small business owners/managers/chefs do not have access to reliable sources to help them with talent sourcing and high turnover, and products like  LinkedIn are more focused on white-collar workers. Instawork was cofounded by Sumir Meghani in San Franciso and was a member of the 2015 Y-Combinator class. 2018 was a break-out year for Instawork with 10X revenue growth and 12X growth in Professionals on the platform. The average Instawork Professional is highly engaged on the platform, and typically opens the Instawork app ten times a day. This results in 97% of gigs being matched in less than 24 hours — which is powerfully important to both sides of the network. Also noteworthy, the Professionals on Instawork average 150% of minimum wage, significantly higher than many other labor marketplaces. This higher income allows Instawork Professionals like Jose, to begin to accomplish their dreams.

The Power of These Platforms

As you can see, these numerous marketplaces are a direct extension of the productivity enhancers first uncovered by Adam Smith and David Ricardo. Free trade, specialization, and comparative advantage are all enhanced when we can increase the matching of supply and demand of goods and services as well as eliminate inefficiency and waste caused by misinformation or distance. As a result, productivity naturally improves.

Specific benefits of global internet marketplaces:

    1. Increase wealth distribution (all examples)
    2. Unlock wasted potential of assets (Uber, AirBNB, Rover, and Hipcamp)
    3. Better match of specific workers with specific opportunities (Upwork, WyzAnt, RigUp, VIPKid, Instawork)
    4. Make specific assets reachable and findable (Ebay, Etsy, 1stDibs, Poshmark, GOAT)
    5. Allow for increased specialization (Etsy, Upwork, RigUp)
    6. Enhance supplemental labor opportunities (Uber, Stitch Fix, SwingEducation, Instawork, VIPKid), where the worker is in control of when and where they work
    7. Reduces forfeiture by enhancing utilization (mortgages, car loans, etc) (Uber, AirBnb, Rover, Hipcamp)

If you are a founder who is excited about starting a new marketplace, there are two caveats that are important to remember. First, you will need to find industries where the opportunity to improve the efficiency in the ways noted above is evident. If the network does not create true economic leverage, you will find it hard to be successful. Second, for any marketplace to be successful, the conditions in that given market must be optimal for a new marketplace entrant. Please check out our previous post, All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces, for a list of factors that help distinguish a great opportunity. If after taking in these considerations you think you have found such an opportunity, we would love to talk to you about potentially partnering together. Please send us an email to unlockingwealth@benchmark.com.

(*) Benchmark either is or was an investor in companies labeled with the asterisk.

Interested in “Unlocking Wealth” Yourself?

Money Out of Nowhere: How Internet Marketplaces Unlock Economic Wealth


This post is by bgurley from Above the Crowd

(*) Benchmark is/was an investor in companies labeled with the asterisk.

In 1776, Adam Smith released his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, in which he outlined his fundamental economic theories. Front and center in the book — in fact in Book 1, Chapter 1 — is his realization of the productivity improvements made possible through the “Division of Labour”:

It is the great multiplication of the production of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of society.

Smith identified that when men and women specialize their skills, and also importantly “trade” with one another, the end result is a rise in productivity and standard of living for everyone. In 1817, David Ricardo published On the Principles of Political Economy and Taxation where he expanded upon Smith’s work in developing the theory of Comparative Advantage. What Ricardo proved mathematically, is that if one country has simply a comparative advantage (not even an absolute one), it still is in everyone’s best interest to embrace specialization and free trade. In the end, everyone ends up in a better place.

There are two key requirements for these mechanisms to take force. First and foremost, you need free and open trade. It is quite bizarre to see modern day politicians throw caution to the wind and ignore these fundamental tenants of economic science. Time and time again, the fact patterns show that when countries open borders and freely trade, the end result is increased economic prosperity. The second, and less discussed, requirement is for the two parties that should trade to be aware of one another’s goods or services. Unfortunately, either information asymmetry or physical distances and the resulting distribution costs can both cut against the economic advantages that would otherwise arise for all.

Fortunately, the rise of the Internet, and specifically Internet marketplace models, act as accelerants to the productivity benefits of the division of labour AND comparative advantage by reducing information asymmetry and increasing the likelihood of a perfect match with regard to the exchange of goods or services. In his 2005 book, The World Is Flat, Thomas Friedman recognizes that the Internet has the ability to create a “level playing field” for all participants, and one where geographic distances become less relevant. The core reason that Internet marketplaces are so powerful is because in connecting economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist. In other words, they literally create “money out of nowhere.”

Exchange of Goods Marketplaces

Any discussion of Internet marketplaces begins with the first quintessential marketplace, ebay(*). Pierre Omidyar founded AuctionWeb in September of 1995, and its rise to fame is legendary. What started as a web site to trade laser pointers and Beanie Babies (the Pez dispenser start is quite literally a legend), today enables transactions of approximately $100B per year. Over its twenty-plus year lifetime, just over one trillion dollars in goods have traded hands across eBay’s servers. These transactions, and the profits realized by the sellers, were truly “unlocked” by eBay’s matching and auction services.

In 1999, Jack Ma created Alibaba, a Chinese-based B2B marketplace for connecting small and medium enterprise with potential export opportunities. Four years later, in May of 2003, they launched Taobao Marketplace, Alibaba’s answer to eBay. By aggressively launching a free to use service, Alibaba’s Taobao quickly became the leading person-to-person trading site in China. In 2018, Taobao GMV (Gross Merchandise Value) was a staggering RMB2,689 billion, which equates to $428 billion in US dollars.

There have been many other successful goods marketplaces that have launched post eBay & Taobao — all providing a similar service of matching those who own or produce goods with a distributed set of buyers who are particularly interested in what they have to offer. In many cases, a deeper focus on a particular category or vertical allows these marketplaces to distinguish themselves from broader marketplaces like eBay.

  • In 2000, Eric Baker and Jeff Fluhr founded StubHub, a secondary ticket exchange marketplace. The company was acquired by ebay in January 2007. In its most recent quarter, StubHub’s GMV reached $1.4B, and for the entire year 2018, StubHub had GMV of $4.8B.
  • Launched in 2005, Etsy is a leading marketplaces for the exchange of vintage and handmade items. In its most recent quarter, the company processed the exchange of $923 million of sales, which equates to a $3.6B annual GMV.
  • Founded by Michael Bruno in Paris in 2001, 1stdibs(*) is the world’s largest online marketplace for luxury one-of-a-kind antiques, high-end modern furniture, vintage fashion, jewelry, and fine art. In November 2011, David Rosenblatt took over as CEO and has been scaling the company ever since. Over the past few years dealers, galleries, and makers have matched billions of dollars in merchandise to trade buyers and consumer buyers on the platform.
  • Poshmark was founded by Manish Chandra in 2011. The website, which is an exchange for new and used clothing, has been remarkably successful. Over 4 million sellers have earned over $1 billion transacting on the site.
  • Julie Wainwright founded The Real Real in 2011. The company is an online marketplace for authenticated luxury consignment. In 2017, the company reported sales of over $500 million.
  • In 2015, Eddy Lu and Daishin Sugano launched GOAT, a marketplace for the exchange of sneakers. Despite this narrow focus, the company has been remarkably successful. The estimated annual GMV of GOAT and its leading competitor Stock X is already over $1B per year (on a combined basis).

SHARING ECONOMY MARKETPLACES

With the launch of Airbnb in 2008 and Uber (*) in 2009, these two companies established a new category of marketplaces known as the “sharing economy.” Homes and automobiles are the two most expensive items that people own, and in many cases the ability to own the asset is made possible through debt — mortgages on houses and car loans or leases for automobiles. Despite this financial exposure, for many people these assets are materially underutilized. Many extra rooms and second homes are vacant most of the year, and the average car is used less than 5% of the time. Sharing economy marketplaces allow owners to “unlock” earning opportunities from these underutilized assets.

Airbnb was founded by Joe Gebbia and Brian Chesky in 2008. Today there are over 5 million Airbnb listings in 81,000 cities. Over two million people stay in an Airbnb each night. In November of this year, the company announced that it had achieved “substantially” more than $1B in revenue in the third quarter. Assuming a marketplace rake of something like 11%, this would imply gross room revenue of over $9B for the quarter — which would be $36B annualized. As the company is still growing, we can easily guess that in 2019-2020 time frame, Airbnb will be delivering around $50B per year to home-owners who were previously sitting on highly underutilized assets. This is a major “unlocking.”

When Garrett Camp and Travis Kalanick founded Uber in 2009, they hatched the industry now known as ride-sharing. Today over 3 million people around the world use their time and their underutilized automobiles to generate extra income. Without the proper technology to match people who wanted a ride with people who could provide that service, taxi and chauffeur companies were drastically underserving the potential market. As an example, we estimate that ride-sharing revenues in San Francisco are well north of 10X what taxis and black cars were providing prior to the launch of ride-sharing. These numbers will go even higher as people increasingly forgo the notion of car ownership altogether. We estimate that the global GMV for ride sharing was over $100B in 2018 (including Uber, Didi, Grab, Lyft, Yandex, etc) and still growing handsomely. Assuming a 20% rake, this equates to over $80B that went into the hands of ride-sharing drivers in a single year — and this is an industry that did not exist 10 years ago. The matching made possible with today’s GPS and Internet-enabled smart phones is a massive unlocking of wealth and value.

While it is a lesser known category, using your own backyard and home to host dog guests as an alternative to a kennel is a large and growing business. Once again, this is an asset against which the marginal cost to host a dog is near zero. By combining their time with this otherwise unused asset, dog sitters are able to offer a service that is quite compelling for consumers. Rover.com (*) in Seattle, which was founded by Greg Gottesman and Aaron Easterly in 2011, is the leading player in this market. (Benchmark is an investor in Rover through a merger with DogVacay in 2017). You may be surprised to learn that this is already a massive industry. In less than a decade since the company started, Rover has already paid out of half a billion dollars to hosts that participate on the platform.

Exchange of LABOR Marketplaces

While not as well known as the goods exchanges or sharing economy marketplaces, there is a growing and exciting increase in the number of marketplaces that help match specifically skilled labor with key opportunities to monetize their skills. The most noteworthy of these is likely Upwork(*), a company that formed from the merger of Elance and Odesk. Upwork is a global freelancing platform where businesses and independent professionals can connect and collaborate remotely. Popular categories include web developers, mobile developers, designers, writers, and accountants. In the 12 months ended June 30, 2018, the Upwork platform enabled $1.56 billion of GSV (gross services revenue) across 2.0 million projects between approximately 375,000 freelancers and 475,000 clients in over 180 countries. These labor matches represent the exact “world is flat” reality outlined in Friedman’s book.

Other noteworthy and emerging labor marketplaces:

  • HackerOne(*) is the leading global marketplace that coordinates the world’s largest corporate “bug bounty” programs with a network of the world’s leading hackers. The company was founded in 2012 by Michiel Prins, Jobert Abma, Alex Rice and Merijn Terheggen, and today serves the needs of over 1,000 corporate bug bounty programs. On top of that, the HackerOne network of over 300,000 hackers (adding 600 more each day) has resolved over 100K confirmed vulnerabilities which resulted in over $46 million in awards to these individuals. There is an obvious network effect at work when you bring together the world’s leading programs and the world’s leading hackers on a single platform. The Fortune 500 is quickly learning that having a bug bounty program is an essential step in fighting cyber crime, and that HackerOne is the best place to host their program.
  • Wyzant is a leading Chicago-based marketplace that connects tutors with students around the country. The company was founded by Andrew Geant and Mike Weishuhn in 2005. The company has over 80,000 tutors on its platform and has paid out over $300 million to these professionals. The company started matching students with tutors for in-person sessions, but increasingly these are done “virtually” over the Internet.
  • Stitch Fix (*) is a leading provider of personalized clothing services that was founded by Katrina Lake in 2011. While the company is not primarily a marketplace, each order is hand-curated by a work-at-home “stylist” who works part-time on their own schedule from the comfort of their own home. Stitch Fix’s algorithms match the perfect stylist with each and every customer to help ensure the optimal outcome for each client. As of the end of 2018, Stitch Fix has paid out well over $100 million to their stylists.
  • Swing Education was founded in 2015 with the objective of creating a marketplace for substitute teachers. While it is still early in the company’s journey, they have already established themselves as the leader in the U.S. market. Swing is now at over 1,200 school partners and has filled over 115,000 teacher absence days. They have helped 2,000 substitute teachers get in the classroom in 2018, including 400 educators who earned permits, which Swing willingly financed. While it seems obvious in retrospect, having all substitutes on a single platform creates massive efficiency in a market where previously every single school had to keep their own list and make last minute calls when they had vacancies. And their subs just have to deal with one Swing setup process to get access to subbing opportunities at dozens of local schools and districts.
  • RigUp was founded by Xuan Yong and Mike Witte in Austin, Texas in March of 2014. RigUp is a leading labor marketplace focused on the oilfield services industry. “The company’s platform offers a large network of qualified, insured and compliant contractors and service providers across all upstream, midstream and downstream operations in every oil and gas basin, enabling companies to hire quickly, track contractor compliance, and minimize administrative work.” According to the company, GMV for 2017 was an impressive $150 million, followed by an astounding $600 million in 2018. Often, investors miss out on vertically focused companies like RigUp as they find themselves overly anxious about TAM (total available market). As you can see, that can be a big mistake.
  • VIPKid, which was founded in 2013 by Cindy Mi, is a truly amazing story. The idea is simple and simultaneously brilliant. VIPKid links students in China who want to learn English with native English speaking tutors in the United States and Canada. All sessions are done over the Internet, once again epitomizing Friedman’s very flat world. In November of 2018, the company reported having 60,000 teachers contracted to teach over 500,000 students. Many people believe the company is now well north of a US$1B run rate, which implies that around $1B will pass hands from Chinese parents to western teachers in 2019. That is quite a bit of supplemental income for U.S.-based teachers.

These vertical labor marketplaces are to LinkedIn what companies like Zillow, Expedia, and GrubHub are to Google search. Through a deeper understanding of a particular vertical, a much richer perspective on the quality and differentiation of the participants, and the enablement of transactions — you create an evolved service that has much more value to both sides of the transaction. And for those professionals participating in these markets, your reputation on the vertical service matters way more than your profile on LinkedIn.

NEW EMERGING MARKETPLACES

Having been a fortunate investor in many of the previously mentioned companies (*), Benchmark remains extremely excited about future marketplace opportunities that will unlock wealth on the Internet. Here are an example of two such companies that we have funded in the past few years.

The New York Times describes Hipcamp as “The Sharing Economy Visits the Backcountry.” Hipcamp(*) was founded in 2013 by Alyssa Ravasio as an engine to search across the dozens and dozens of State and National park websites for campsite availability. As Hipcamp gained traction with campers, landowners with land near many of the National and State parks started to reach out to Hipcamp asking if they could list their land on Hipcamp too. Hipcamp now offers access to more than 350k campsites across public and private land, and their most active private land hosts make over $100,000 per year hosting campers. This is a pretty amazing value proposition for both land owners and campers. If you are a rural landowner, here is a way to create “money out of nowhere” with very little capital expenditures. And if you are a camper, what could be better than to camp at a unique, bespoke campsite in your favorite location.

Instawork(*) is an on-demand staffing app for gig workers (professionals) and hospitality businesses (partners). These working professionals seek economic freedom and a better life, and Instawork gives them both — an opportunity to work as much as they like, but on their own terms with regard to when and where. On the business partner side, small business owners/managers/chefs do not have access to reliable sources to help them with talent sourcing and high turnover, and products like  LinkedIn are more focused on white-collar workers. Instawork was cofounded by Sumir Meghani in San Franciso and was a member of the 2015 Y-Combinator class. 2018 was a break-out year for Instawork with 10X revenue growth and 12X growth in Professionals on the platform. The average Instawork Professional is highly engaged on the platform, and typically opens the Instawork app ten times a day. This results in 97% of gigs being matched in less than 24 hours — which is powerfully important to both sides of the network. Also noteworthy, the Professionals on Instawork average 150% of minimum wage, significantly higher than many other labor marketplaces. This higher income allows Instawork Professionals like Jose, to begin to accomplish their dreams.

The Power of These Platforms

As you can see, these numerous marketplaces are a direct extension of the productivity enhancers first uncovered by Adam Smith and David Ricardo. Free trade, specialization, and comparative advantage are all enhanced when we can increase the matching of supply and demand of goods and services as well as eliminate inefficiency and waste caused by misinformation or distance. As a result, productivity naturally improves.

Specific benefits of global internet marketplaces:

    1. Increase wealth distribution (all examples)
    2. Unlock wasted potential of assets (Uber, AirBNB, Rover, and Hipcamp)
    3. Better match of specific workers with specific opportunities (Upwork, WyzAnt, RigUp, VIPKid, Instawork)
    4. Make specific assets reachable and findable (Ebay, Etsy, 1stDibs, Poshmark, GOAT)
    5. Allow for increased specialization (Etsy, Upwork, RigUp)
    6. Enhance supplemental labor opportunities (Uber, Stitch Fix, SwingEducation, Instawork, VIPKid), where the worker is in control of when and where they work
    7. Reduces forfeiture by enhancing utilization (mortgages, car loans, etc) (Uber, AirBnb, Rover, Hipcamp)

If you are a founder who is excited about starting a new marketplace, there are two caveats that are important to remember. First, you will need to find industries where the opportunity to improve the efficiency in the ways noted above is evident. If the network does not create true economic leverage, you will find it hard to be successful. Second, for any marketplace to be successful, the conditions in that given market must be optimal for a new marketplace entrant. Please check out our previous post, All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces, for a list of factors that help distinguish a great opportunity. If after taking in these considerations you think you have found such an opportunity, we would love to talk to you about potentially partnering together. Please send us an email to unlockingwealth@benchmark.com.

(*) Benchmark either is or was an investor in companies labeled with the asterisk.

Interested in “Unlocking Wealth” Yourself?

Money Out of Nowhere: How Internet Marketplaces Unlock Economic Wealth


This post is by bgurley from Above the Crowd

(*) Benchmark is/was an investor in companies labeled with the asterisk.

In 1776, Adam Smith released his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, in which he outlined his fundamental economic theories. Front and center in the book — in fact in Book 1, Chapter 1 — is his realization of the productivity improvements made possible through the “Division of Labour”:

It is the great multiplication of the production of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of society.

Smith identified that when men and women specialize their skills, and also importantly “trade” with one another, the end result is a rise in productivity and standard of living for everyone. In 1817, David Ricardo published On the Principles of Political Economy and Taxation where he expanded upon Smith’s work in developing the theory of Comparative Advantage. What Ricardo proved mathematically, is that if one country has simply a comparative advantage (not even an absolute one), it still is in everyone’s best interest to embrace specialization and free trade. In the end, everyone ends up in a better place.

There are two key requirements for these mechanisms to take force. First and foremost, you need free and open trade. It is quite bizarre to see modern day politicians throw caution to the wind and ignore these fundamental tenants of economic science. Time and time again, the fact patterns show that when countries open borders and freely trade, the end result is increased economic prosperity. The second, and less discussed, requirement is for the two parties that should trade to be aware of one another’s goods or services. Unfortunately, either information asymmetry or physical distances and the resulting distribution costs can both cut against the economic advantages that would otherwise arise for all.

Fortunately, the rise of the Internet, and specifically Internet marketplace models, act as accelerants to the productivity benefits of the division of labour AND comparative advantage by reducing information asymmetry and increasing the likelihood of a perfect match with regard to the exchange of goods or services. In his 2005 book, The World Is Flat, Thomas Friedman recognizes that the Internet has the ability to create a “level playing field” for all participants, and one where geographic distances become less relevant. The core reason that Internet marketplaces are so powerful is because in connecting economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist. In other words, they literally create “money out of nowhere.”

Exchange of Goods Marketplaces

Any discussion of Internet marketplaces begins with the first quintessential marketplace, ebay(*). Pierre Omidyar founded AuctionWeb in September of 1995, and its rise to fame is legendary. What started as a web site to trade laser pointers and Beanie Babies (the Pez dispenser start is quite literally a legend), today enables transactions of approximately $100B per year. Over its twenty-plus year lifetime, just over one trillion dollars in goods have traded hands across eBay’s servers. These transactions, and the profits realized by the sellers, were truly “unlocked” by eBay’s matching and auction services.

In 1999, Jack Ma created Alibaba, a Chinese-based B2B marketplace for connecting small and medium enterprise with potential export opportunities. Four years later, in May of 2003, they launched Taobao Marketplace, Alibaba’s answer to eBay. By aggressively launching a free to use service, Alibaba’s Taobao quickly became the leading person-to-person trading site in China. In 2018, Taobao GMV (Gross Merchandise Value) was a staggering RMB2,689 billion, which equates to $428 billion in US dollars.

There have been many other successful goods marketplaces that have launched post eBay & Taobao — all providing a similar service of matching those who own or produce goods with a distributed set of buyers who are particularly interested in what they have to offer. In many cases, a deeper focus on a particular category or vertical allows these marketplaces to distinguish themselves from broader marketplaces like eBay.

  • In 2000, Eric Baker and Jeff Fluhr founded StubHub, a secondary ticket exchange marketplace. The company was acquired by ebay in January 2007. In its most recent quarter, StubHub’s GMV reached $1.4B, and for the entire year 2018, StubHub had GMV of $4.8B.
  • Launched in 2005, Etsy is a leading marketplaces for the exchange of vintage and handmade items. In its most recent quarter, the company processed the exchange of $923 million of sales, which equates to a $3.6B annual GMV.
  • Founded by Michael Bruno in Paris in 2001, 1stdibs(*) is the world’s largest online marketplace for luxury one-of-a-kind antiques, high-end modern furniture, vintage fashion, jewelry, and fine art. In November 2011, David Rosenblatt took over as CEO and has been scaling the company ever since. Over the past few years dealers, galleries, and makers have matched billions of dollars in merchandise to trade buyers and consumer buyers on the platform.
  • Poshmark was founded by Manish Chandra in 2011. The website, which is an exchange for new and used clothing, has been remarkably successful. Over 4 million sellers have earned over $1 billion transacting on the site.
  • Julie Wainwright founded The Real Real in 2011. The company is an online marketplace for authenticated luxury consignment. In 2017, the company reported sales of over $500 million.
  • In 2015, Eddy Lu and Daishin Sugano launched GOAT, a marketplace for the exchange of sneakers. Despite this narrow focus, the company has been remarkably successful. The estimated annual GMV of GOAT and its leading competitor Stock X is already over $1B per year (on a combined basis).

SHARING ECONOMY MARKETPLACES

With the launch of Airbnb in 2008 and Uber (*) in 2009, these two companies established a new category of marketplaces known as the “sharing economy.” Homes and automobiles are the two most expensive items that people own, and in many cases the ability to own the asset is made possible through debt — mortgages on houses and car loans or leases for automobiles. Despite this financial exposure, for many people these assets are materially underutilized. Many extra rooms and second homes are vacant most of the year, and the average car is used less than 5% of the time. Sharing economy marketplaces allow owners to “unlock” earning opportunities from these underutilized assets.

Airbnb was founded by Joe Gebbia and Brian Chesky in 2008. Today there are over 5 million Airbnb listings in 81,000 cities. Over two million people stay in an Airbnb each night. In November of this year, the company announced that it had achieved “substantially” more than $1B in revenue in the third quarter. Assuming a marketplace rake of something like 11%, this would imply gross room revenue of over $9B for the quarter — which would be $36B annualized. As the company is still growing, we can easily guess that in 2019-2020 time frame, Airbnb will be delivering around $50B per year to home-owners who were previously sitting on highly underutilized assets. This is a major “unlocking.”

When Garrett Camp and Travis Kalanick founded Uber in 2009, they hatched the industry now known as ride-sharing. Today over 3 million people around the world use their time and their underutilized automobiles to generate extra income. Without the proper technology to match people who wanted a ride with people who could provide that service, taxi and chauffeur companies were drastically underserving the potential market. As an example, we estimate that ride-sharing revenues in San Francisco are well north of 10X what taxis and black cars were providing prior to the launch of ride-sharing. These numbers will go even higher as people increasingly forgo the notion of car ownership altogether. We estimate that the global GMV for ride sharing was over $100B in 2018 (including Uber, Didi, Grab, Lyft, Yandex, etc) and still growing handsomely. Assuming a 20% rake, this equates to over $80B that went into the hands of ride-sharing drivers in a single year — and this is an industry that did not exist 10 years ago. The matching made possible with today’s GPS and Internet-enabled smart phones is a massive unlocking of wealth and value.

While it is a lesser known category, using your own backyard and home to host dog guests as an alternative to a kennel is a large and growing business. Once again, this is an asset against which the marginal cost to host a dog is near zero. By combining their time with this otherwise unused asset, dog sitters are able to offer a service that is quite compelling for consumers. Rover.com (*) in Seattle, which was founded by Greg Gottesman and Aaron Easterly in 2011, is the leading player in this market. (Benchmark is an investor in Rover through a merger with DogVacay in 2017). You may be surprised to learn that this is already a massive industry. In less than a decade since the company started, Rover has already paid out of half a billion dollars to hosts that participate on the platform.

Exchange of LABOR Marketplaces

While not as well known as the goods exchanges or sharing economy marketplaces, there is a growing and exciting increase in the number of marketplaces that help match specifically skilled labor with key opportunities to monetize their skills. The most noteworthy of these is likely Upwork(*), a company that formed from the merger of Elance and Odesk. Upwork is a global freelancing platform where businesses and independent professionals can connect and collaborate remotely. Popular categories include web developers, mobile developers, designers, writers, and accountants. In the 12 months ended June 30, 2018, the Upwork platform enabled $1.56 billion of GSV (gross services revenue) across 2.0 million projects between approximately 375,000 freelancers and 475,000 clients in over 180 countries. These labor matches represent the exact “world is flat” reality outlined in Friedman’s book.

Other noteworthy and emerging labor marketplaces:

  • HackerOne(*) is the leading global marketplace that coordinates the world’s largest corporate “bug bounty” programs with a network of the world’s leading hackers. The company was founded in 2012 by Michiel Prins, Jobert Abma, Alex Rice and Merijn Terheggen, and today serves the needs of over 1,000 corporate bug bounty programs. On top of that, the HackerOne network of over 300,000 hackers (adding 600 more each day) has resolved over 100K confirmed vulnerabilities which resulted in over $46 million in awards to these individuals. There is an obvious network effect at work when you bring together the world’s leading programs and the world’s leading hackers on a single platform. The Fortune 500 is quickly learning that having a bug bounty program is an essential step in fighting cyber crime, and that HackerOne is the best place to host their program.
  • Wyzant is a leading Chicago-based marketplace that connects tutors with students around the country. The company was founded by Andrew Geant and Mike Weishuhn in 2005. The company has over 80,000 tutors on its platform and has paid out over $300 million to these professionals. The company started matching students with tutors for in-person sessions, but increasingly these are done “virtually” over the Internet.
  • Stitch Fix (*) is a leading provider of personalized clothing services that was founded by Katrina Lake in 2011. While the company is not primarily a marketplace, each order is hand-curated by a work-at-home “stylist” who works part-time on their own schedule from the comfort of their own home. Stitch Fix’s algorithms match the perfect stylist with each and every customer to help ensure the optimal outcome for each client. As of the end of 2018, Stitch Fix has paid out well over $100 million to their stylists.
  • Swing Education was founded in 2015 with the objective of creating a marketplace for substitute teachers. While it is still early in the company’s journey, they have already established themselves as the leader in the U.S. market. Swing is now at over 1,200 school partners and has filled over 115,000 teacher absence days. They have helped 2,000 substitute teachers get in the classroom in 2018, including 400 educators who earned permits, which Swing willingly financed. While it seems obvious in retrospect, having all substitutes on a single platform creates massive efficiency in a market where previously every single school had to keep their own list and make last minute calls when they had vacancies. And their subs just have to deal with one Swing setup process to get access to subbing opportunities at dozens of local schools and districts.
  • RigUp was founded by Xuan Yong and Mike Witte in Austin, Texas in March of 2014. RigUp is a leading labor marketplace focused on the oilfield services industry. “The company’s platform offers a large network of qualified, insured and compliant contractors and service providers across all upstream, midstream and downstream operations in every oil and gas basin, enabling companies to hire quickly, track contractor compliance, and minimize administrative work.” According to the company, GMV for 2017 was an impressive $150 million, followed by an astounding $600 million in 2018. Often, investors miss out on vertically focused companies like RigUp as they find themselves overly anxious about TAM (total available market). As you can see, that can be a big mistake.
  • VIPKid, which was founded in 2013 by Cindy Mi, is a truly amazing story. The idea is simple and simultaneously brilliant. VIPKid links students in China who want to learn English with native English speaking tutors in the United States and Canada. All sessions are done over the Internet, once again epitomizing Friedman’s very flat world. In November of 2018, the company reported having 60,000 teachers contracted to teach over 500,000 students. Many people believe the company is now well north of a US$1B run rate, which implies that around $1B will pass hands from Chinese parents to western teachers in 2019. That is quite a bit of supplemental income for U.S.-based teachers.

These vertical labor marketplaces are to LinkedIn what companies like Zillow, Expedia, and GrubHub are to Google search. Through a deeper understanding of a particular vertical, a much richer perspective on the quality and differentiation of the participants, and the enablement of transactions — you create an evolved service that has much more value to both sides of the transaction. And for those professionals participating in these markets, your reputation on the vertical service matters way more than your profile on LinkedIn.

NEW EMERGING MARKETPLACES

Having been a fortunate investor in many of the previously mentioned companies (*), Benchmark remains extremely excited about future marketplace opportunities that will unlock wealth on the Internet. Here are an example of two such companies that we have funded in the past few years.

The New York Times describes Hipcamp as “The Sharing Economy Visits the Backcountry.” Hipcamp(*) was founded in 2013 by Alyssa Ravasio as an engine to search across the dozens and dozens of State and National park websites for campsite availability. As Hipcamp gained traction with campers, landowners with land near many of the National and State parks started to reach out to Hipcamp asking if they could list their land on Hipcamp too. Hipcamp now offers access to more than 350k campsites across public and private land, and their most active private land hosts make over $100,000 per year hosting campers. This is a pretty amazing value proposition for both land owners and campers. If you are a rural landowner, here is a way to create “money out of nowhere” with very little capital expenditures. And if you are a camper, what could be better than to camp at a unique, bespoke campsite in your favorite location.

Instawork(*) is an on-demand staffing app for gig workers (professionals) and hospitality businesses (partners). These working professionals seek economic freedom and a better life, and Instawork gives them both — an opportunity to work as much as they like, but on their own terms with regard to when and where. On the business partner side, small business owners/managers/chefs do not have access to reliable sources to help them with talent sourcing and high turnover, and products like  LinkedIn are more focused on white-collar workers. Instawork was cofounded by Sumir Meghani in San Franciso and was a member of the 2015 Y-Combinator class. 2018 was a break-out year for Instawork with 10X revenue growth and 12X growth in Professionals on the platform. The average Instawork Professional is highly engaged on the platform, and typically opens the Instawork app ten times a day. This results in 97% of gigs being matched in less than 24 hours — which is powerfully important to both sides of the network. Also noteworthy, the Professionals on Instawork average 150% of minimum wage, significantly higher than many other labor marketplaces. This higher income allows Instawork Professionals like Jose, to begin to accomplish their dreams.

The Power of These Platforms

As you can see, these numerous marketplaces are a direct extension of the productivity enhancers first uncovered by Adam Smith and David Ricardo. Free trade, specialization, and comparative advantage are all enhanced when we can increase the matching of supply and demand of goods and services as well as eliminate inefficiency and waste caused by misinformation or distance. As a result, productivity naturally improves.

Specific benefits of global internet marketplaces:

    1. Increase wealth distribution (all examples)
    2. Unlock wasted potential of assets (Uber, AirBNB, Rover, and Hipcamp)
    3. Better match of specific workers with specific opportunities (Upwork, WyzAnt, RigUp, VIPKid, Instawork)
    4. Make specific assets reachable and findable (Ebay, Etsy, 1stDibs, Poshmark, GOAT)
    5. Allow for increased specialization (Etsy, Upwork, RigUp)
    6. Enhance supplemental labor opportunities (Uber, Stitch Fix, SwingEducation, Instawork, VIPKid), where the worker is in control of when and where they work
    7. Reduces forfeiture by enhancing utilization (mortgages, car loans, etc) (Uber, AirBnb, Rover, Hipcamp)

If you are a founder who is excited about starting a new marketplace, there are two caveats that are important to remember. First, you will need to find industries where the opportunity to improve the efficiency in the ways noted above is evident. If the network does not create true economic leverage, you will find it hard to be successful. Second, for any marketplace to be successful, the conditions in that given market must be optimal for a new marketplace entrant. Please check out our previous post, All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces, for a list of factors that help distinguish a great opportunity. If after taking in these considerations you think you have found such an opportunity, we would love to talk to you about potentially partnering together. Please send us an email to unlockingwealth@benchmark.com.

(*) Benchmark either is or was an investor in companies labeled with the asterisk.

Interested in “Unlocking Wealth” Yourself?

Money Out of Nowhere: How Internet Marketplaces Unlock Economic Wealth


This post is by bgurley from Above the Crowd

(*) Benchmark is/was an investor in companies labeled with the asterisk.

In 1776, Adam Smith released his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, in which he outlined his fundamental economic theories. Front and center in the book — in fact in Book 1, Chapter 1 — is his realization of the productivity improvements made possible through the “Division of Labour”:

It is the great multiplication of the production of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of society.

Smith identified that when men and women specialize their skills, and also importantly “trade” with one another, the end result is a rise in productivity and standard of living for everyone. In 1817, David Ricardo published On the Principles of Political Economy and Taxation where he expanded upon Smith’s work in developing the theory of Comparative Advantage. What Ricardo proved mathematically, is that if one country has simply a comparative advantage (not even an absolute one), it still is in everyone’s best interest to embrace specialization and free trade. In the end, everyone ends up in a better place.

There are two key requirements for these mechanisms to take force. First and foremost, you need free and open trade. It is quite bizarre to see modern day politicians throw caution to the wind and ignore these fundamental tenants of economic science. Time and time again, the fact patterns show that when countries open borders and freely trade, the end result is increased economic prosperity. The second, and less discussed, requirement is for the two parties that should trade to be aware of one another’s goods or services. Unfortunately, either information asymmetry or physical distances and the resulting distribution costs can both cut against the economic advantages that would otherwise arise for all.

Fortunately, the rise of the Internet, and specifically Internet marketplace models, act as accelerants to the productivity benefits of the division of labour AND comparative advantage by reducing information asymmetry and increasing the likelihood of a perfect match with regard to the exchange of goods or services. In his 2005 book, The World Is Flat, Thomas Friedman recognizes that the Internet has the ability to create a “level playing field” for all participants, and one where geographic distances become less relevant. The core reason that Internet marketplaces are so powerful is because in connecting economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist. In other words, they literally create “money out of nowhere.”

Exchange of Goods Marketplaces

Any discussion of Internet marketplaces begins with the first quintessential marketplace, ebay(*). Pierre Omidyar founded AuctionWeb in September of 1995, and its rise to fame is legendary. What started as a web site to trade laser pointers and Beanie Babies (the Pez dispenser start is quite literally a legend), today enables transactions of approximately $100B per year. Over its twenty-plus year lifetime, just over one trillion dollars in goods have traded hands across eBay’s servers. These transactions, and the profits realized by the sellers, were truly “unlocked” by eBay’s matching and auction services.

In 1999, Jack Ma created Alibaba, a Chinese-based B2B marketplace for connecting small and medium enterprise with potential export opportunities. Four years later, in May of 2003, they launched Taobao Marketplace, Alibaba’s answer to eBay. By aggressively launching a free to use service, Alibaba’s Taobao quickly became the leading person-to-person trading site in China. In 2018, Taobao GMV (Gross Merchandise Value) was a staggering RMB2,689 billion, which equates to $428 billion in US dollars.

There have been many other successful goods marketplaces that have launched post eBay & Taobao — all providing a similar service of matching those who own or produce goods with a distributed set of buyers who are particularly interested in what they have to offer. In many cases, a deeper focus on a particular category or vertical allows these marketplaces to distinguish themselves from broader marketplaces like eBay.

  • In 2000, Eric Baker and Jeff Fluhr founded StubHub, a secondary ticket exchange marketplace. The company was acquired by ebay in January 2007. In its most recent quarter, StubHub’s GMV reached $1.4B, and for the entire year 2018, StubHub had GMV of $4.8B.
  • Launched in 2005, Etsy is a leading marketplaces for the exchange of vintage and handmade items. In its most recent quarter, the company processed the exchange of $923 million of sales, which equates to a $3.6B annual GMV.
  • Founded by Michael Bruno in Paris in 2001, 1stdibs(*) is the world’s largest online marketplace for luxury one-of-a-kind antiques, high-end modern furniture, vintage fashion, jewelry, and fine art. In November 2011, David Rosenblatt took over as CEO and has been scaling the company ever since. Over the past few years dealers, galleries, and makers have matched billions of dollars in merchandise to trade buyers and consumer buyers on the platform.
  • Poshmark was founded by Manish Chandra in 2011. The website, which is an exchange for new and used clothing, has been remarkably successful. Over 4 million sellers have earned over $1 billion transacting on the site.
  • Julie Wainwright founded The Real Real in 2011. The company is an online marketplace for authenticated luxury consignment. In 2017, the company reported sales of over $500 million.
  • In 2015, Eddy Lu and Daishin Sugano launched GOAT, a marketplace for the exchange of sneakers. Despite this narrow focus, the company has been remarkably successful. The estimated annual GMV of GOAT and its leading competitor Stock X is already over $1B per year (on a combined basis).

SHARING ECONOMY MARKETPLACES

With the launch of Airbnb in 2008 and Uber (*) in 2009, these two companies established a new category of marketplaces known as the “sharing economy.” Homes and automobiles are the two most expensive items that people own, and in many cases the ability to own the asset is made possible through debt — mortgages on houses and car loans or leases for automobiles. Despite this financial exposure, for many people these assets are materially underutilized. Many extra rooms and second homes are vacant most of the year, and the average car is used less than 5% of the time. Sharing economy marketplaces allow owners to “unlock” earning opportunities from these underutilized assets.

Airbnb was founded by Joe Gebbia and Brian Chesky in 2008. Today there are over 5 million Airbnb listings in 81,000 cities. Over two million people stay in an Airbnb each night. In November of this year, the company announced that it had achieved “substantially” more than $1B in revenue in the third quarter. Assuming a marketplace rake of something like 11%, this would imply gross room revenue of over $9B for the quarter — which would be $36B annualized. As the company is still growing, we can easily guess that in 2019-2020 time frame, Airbnb will be delivering around $50B per year to home-owners who were previously sitting on highly underutilized assets. This is a major “unlocking.”

When Garrett Camp and Travis Kalanick founded Uber in 2009, they hatched the industry now known as ride-sharing. Today over 3 million people around the world use their time and their underutilized automobiles to generate extra income. Without the proper technology to match people who wanted a ride with people who could provide that service, taxi and chauffeur companies were drastically underserving the potential market. As an example, we estimate that ride-sharing revenues in San Francisco are well north of 10X what taxis and black cars were providing prior to the launch of ride-sharing. These numbers will go even higher as people increasingly forgo the notion of car ownership altogether. We estimate that the global GMV for ride sharing was over $100B in 2018 (including Uber, Didi, Grab, Lyft, Yandex, etc) and still growing handsomely. Assuming a 20% rake, this equates to over $80B that went into the hands of ride-sharing drivers in a single year — and this is an industry that did not exist 10 years ago. The matching made possible with today’s GPS and Internet-enabled smart phones is a massive unlocking of wealth and value.

While it is a lesser known category, using your own backyard and home to host dog guests as an alternative to a kennel is a large and growing business. Once again, this is an asset against which the marginal cost to host a dog is near zero. By combining their time with this otherwise unused asset, dog sitters are able to offer a service that is quite compelling for consumers. Rover.com (*) in Seattle, which was founded by Greg Gottesman and Aaron Easterly in 2011, is the leading player in this market. (Benchmark is an investor in Rover through a merger with DogVacay in 2017). You may be surprised to learn that this is already a massive industry. In less than a decade since the company started, Rover has already paid out of half a billion dollars to hosts that participate on the platform.

Exchange of LABOR Marketplaces

While not as well known as the goods exchanges or sharing economy marketplaces, there is a growing and exciting increase in the number of marketplaces that help match specifically skilled labor with key opportunities to monetize their skills. The most noteworthy of these is likely Upwork(*), a company that formed from the merger of Elance and Odesk. Upwork is a global freelancing platform where businesses and independent professionals can connect and collaborate remotely. Popular categories include web developers, mobile developers, designers, writers, and accountants. In the 12 months ended June 30, 2018, the Upwork platform enabled $1.56 billion of GSV (gross services revenue) across 2.0 million projects between approximately 375,000 freelancers and 475,000 clients in over 180 countries. These labor matches represent the exact “world is flat” reality outlined in Friedman’s book.

Other noteworthy and emerging labor marketplaces:

  • HackerOne(*) is the leading global marketplace that coordinates the world’s largest corporate “bug bounty” programs with a network of the world’s leading hackers. The company was founded in 2012 by Michiel Prins, Jobert Abma, Alex Rice and Merijn Terheggen, and today serves the needs of over 1,000 corporate bug bounty programs. On top of that, the HackerOne network of over 300,000 hackers (adding 600 more each day) has resolved over 100K confirmed vulnerabilities which resulted in over $46 million in awards to these individuals. There is an obvious network effect at work when you bring together the world’s leading programs and the world’s leading hackers on a single platform. The Fortune 500 is quickly learning that having a bug bounty program is an essential step in fighting cyber crime, and that HackerOne is the best place to host their program.
  • Wyzant is a leading Chicago-based marketplace that connects tutors with students around the country. The company was founded by Andrew Geant and Mike Weishuhn in 2005. The company has over 80,000 tutors on its platform and has paid out over $300 million to these professionals. The company started matching students with tutors for in-person sessions, but increasingly these are done “virtually” over the Internet.
  • Stitch Fix (*) is a leading provider of personalized clothing services that was founded by Katrina Lake in 2011. While the company is not primarily a marketplace, each order is hand-curated by a work-at-home “stylist” who works part-time on their own schedule from the comfort of their own home. Stitch Fix’s algorithms match the perfect stylist with each and every customer to help ensure the optimal outcome for each client. As of the end of 2018, Stitch Fix has paid out well over $100 million to their stylists.
  • Swing Education was founded in 2015 with the objective of creating a marketplace for substitute teachers. While it is still early in the company’s journey, they have already established themselves as the leader in the U.S. market. Swing is now at over 1,200 school partners and has filled over 115,000 teacher absence days. They have helped 2,000 substitute teachers get in the classroom in 2018, including 400 educators who earned permits, which Swing willingly financed. While it seems obvious in retrospect, having all substitutes on a single platform creates massive efficiency in a market where previously every single school had to keep their own list and make last minute calls when they had vacancies. And their subs just have to deal with one Swing setup process to get access to subbing opportunities at dozens of local schools and districts.
  • RigUp was founded by Xuan Yong and Mike Witte in Austin, Texas in March of 2014. RigUp is a leading labor marketplace focused on the oilfield services industry. “The company’s platform offers a large network of qualified, insured and compliant contractors and service providers across all upstream, midstream and downstream operations in every oil and gas basin, enabling companies to hire quickly, track contractor compliance, and minimize administrative work.” According to the company, GMV for 2017 was an impressive $150 million, followed by an astounding $600 million in 2018. Often, investors miss out on vertically focused companies like RigUp as they find themselves overly anxious about TAM (total available market). As you can see, that can be a big mistake.
  • VIPKid, which was founded in 2013 by Cindy Mi, is a truly amazing story. The idea is simple and simultaneously brilliant. VIPKid links students in China who want to learn English with native English speaking tutors in the United States and Canada. All sessions are done over the Internet, once again epitomizing Friedman’s very flat world. In November of 2018, the company reported having 60,000 teachers contracted to teach over 500,000 students. Many people believe the company is now well north of a US$1B run rate, which implies that around $1B will pass hands from Chinese parents to western teachers in 2019. That is quite a bit of supplemental income for U.S.-based teachers.

These vertical labor marketplaces are to LinkedIn what companies like Zillow, Expedia, and GrubHub are to Google search. Through a deeper understanding of a particular vertical, a much richer perspective on the quality and differentiation of the participants, and the enablement of transactions — you create an evolved service that has much more value to both sides of the transaction. And for those professionals participating in these markets, your reputation on the vertical service matters way more than your profile on LinkedIn.

NEW EMERGING MARKETPLACES

Having been a fortunate investor in many of the previously mentioned companies (*), Benchmark remains extremely excited about future marketplace opportunities that will unlock wealth on the Internet. Here are an example of two such companies that we have funded in the past few years.

The New York Times describes Hipcamp as “The Sharing Economy Visits the Backcountry.” Hipcamp(*) was founded in 2013 by Alyssa Ravasio as an engine to search across the dozens and dozens of State and National park websites for campsite availability. As Hipcamp gained traction with campers, landowners with land near many of the National and State parks started to reach out to Hipcamp asking if they could list their land on Hipcamp too. Hipcamp now offers access to more than 350k campsites across public and private land, and their most active private land hosts make over $100,000 per year hosting campers. This is a pretty amazing value proposition for both land owners and campers. If you are a rural landowner, here is a way to create “money out of nowhere” with very little capital expenditures. And if you are a camper, what could be better than to camp at a unique, bespoke campsite in your favorite location.

Instawork(*) is an on-demand staffing app for gig workers (professionals) and hospitality businesses (partners). These working professionals seek economic freedom and a better life, and Instawork gives them both — an opportunity to work as much as they like, but on their own terms with regard to when and where. On the business partner side, small business owners/managers/chefs do not have access to reliable sources to help them with talent sourcing and high turnover, and products like  LinkedIn are more focused on white-collar workers. Instawork was cofounded by Sumir Meghani in San Franciso and was a member of the 2015 Y-Combinator class. 2018 was a break-out year for Instawork with 10X revenue growth and 12X growth in Professionals on the platform. The average Instawork Professional is highly engaged on the platform, and typically opens the Instawork app ten times a day. This results in 97% of gigs being matched in less than 24 hours — which is powerfully important to both sides of the network. Also noteworthy, the Professionals on Instawork average 150% of minimum wage, significantly higher than many other labor marketplaces. This higher income allows Instawork Professionals like Jose, to begin to accomplish their dreams.

The Power of These Platforms

As you can see, these numerous marketplaces are a direct extension of the productivity enhancers first uncovered by Adam Smith and David Ricardo. Free trade, specialization, and comparative advantage are all enhanced when we can increase the matching of supply and demand of goods and services as well as eliminate inefficiency and waste caused by misinformation or distance. As a result, productivity naturally improves.

Specific benefits of global internet marketplaces:

    1. Increase wealth distribution (all examples)
    2. Unlock wasted potential of assets (Uber, AirBNB, Rover, and Hipcamp)
    3. Better match of specific workers with specific opportunities (Upwork, WyzAnt, RigUp, VIPKid, Instawork)
    4. Make specific assets reachable and findable (Ebay, Etsy, 1stDibs, Poshmark, GOAT)
    5. Allow for increased specialization (Etsy, Upwork, RigUp)
    6. Enhance supplemental labor opportunities (Uber, Stitch Fix, SwingEducation, Instawork, VIPKid), where the worker is in control of when and where they work
    7. Reduces forfeiture by enhancing utilization (mortgages, car loans, etc) (Uber, AirBnb, Rover, Hipcamp)

If you are a founder who is excited about starting a new marketplace, there are two caveats that are important to remember. First, you will need to find industries where the opportunity to improve the efficiency in the ways noted above is evident. If the network does not create true economic leverage, you will find it hard to be successful. Second, for any marketplace to be successful, the conditions in that given market must be optimal for a new marketplace entrant. Please check out our previous post, All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces, for a list of factors that help distinguish a great opportunity. If after taking in these considerations you think you have found such an opportunity, we would love to talk to you about potentially partnering together. Please send us an email to unlockingwealth@benchmark.com.

(*) Benchmark either is or was an investor in companies labeled with the asterisk.

Interested in “Unlocking Wealth” Yourself?

Money Out of Nowhere: How Internet Marketplaces Unlock Economic Wealth


This post is by bgurley from Above the Crowd

(*) Benchmark is/was an investor in companies labeled with the asterisk.

In 1776, Adam Smith released his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, in which he outlined his fundamental economic theories. Front and center in the book — in fact in Book 1, Chapter 1 — is his realization of the productivity improvements made possible through the “Division of Labour”:

It is the great multiplication of the production of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of society.

Smith identified that when men and women specialize their skills, and also importantly “trade” with one another, the end result is a rise in productivity and standard of living for everyone. In 1817, David Ricardo published On the Principles of Political Economy and Taxation where he expanded upon Smith’s work in developing the theory of Comparative Advantage. What Ricardo proved mathematically, is that if one country has simply a comparative advantage (not even an absolute one), it still is in everyone’s best interest to embrace specialization and free trade. In the end, everyone ends up in a better place.

There are two key requirements for these mechanisms to take force. First and foremost, you need free and open trade. It is quite bizarre to see modern day politicians throw caution to the wind and ignore these fundamental tenants of economic science. Time and time again, the fact patterns show that when countries open borders and freely trade, the end result is increased economic prosperity. The second, and less discussed, requirement is for the two parties that should trade to be aware of one another’s goods or services. Unfortunately, either information asymmetry or physical distances and the resulting distribution costs can both cut against the economic advantages that would otherwise arise for all.

Fortunately, the rise of the Internet, and specifically Internet marketplace models, act as accelerants to the productivity benefits of the division of labour AND comparative advantage by reducing information asymmetry and increasing the likelihood of a perfect match with regard to the exchange of goods or services. In his 2005 book, The World Is Flat, Thomas Friedman recognizes that the Internet has the ability to create a “level playing field” for all participants, and one where geographic distances become less relevant. The core reason that Internet marketplaces are so powerful is because in connecting economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist. In other words, they literally create “money out of nowhere.”

Exchange of Goods Marketplaces

Any discussion of Internet marketplaces begins with the first quintessential marketplace, ebay(*). Pierre Omidyar founded AuctionWeb in September of 1995, and its rise to fame is legendary. What started as a web site to trade laser pointers and Beanie Babies (the Pez dispenser start is quite literally a legend), today enables transactions of approximately $100B per year. Over its twenty-plus year lifetime, just over one trillion dollars in goods have traded hands across eBay’s servers. These transactions, and the profits realized by the sellers, were truly “unlocked” by eBay’s matching and auction services.

In 1999, Jack Ma created Alibaba, a Chinese-based B2B marketplace for connecting small and medium enterprise with potential export opportunities. Four years later, in May of 2003, they launched Taobao Marketplace, Alibaba’s answer to eBay. By aggressively launching a free to use service, Alibaba’s Taobao quickly became the leading person-to-person trading site in China. In 2018, Taobao GMV (Gross Merchandise Value) was a staggering RMB2,689 billion, which equates to $428 billion in US dollars.

There have been many other successful goods marketplaces that have launched post eBay & Taobao — all providing a similar service of matching those who own or produce goods with a distributed set of buyers who are particularly interested in what they have to offer. In many cases, a deeper focus on a particular category or vertical allows these marketplaces to distinguish themselves from broader marketplaces like eBay.

  • In 2000, Eric Baker and Jeff Fluhr founded StubHub, a secondary ticket exchange marketplace. The company was acquired by ebay in January 2007. In its most recent quarter, StubHub’s GMV reached $1.4B, and for the entire year 2018, StubHub had GMV of $4.8B.
  • Launched in 2005, Etsy is a leading marketplaces for the exchange of vintage and handmade items. In its most recent quarter, the company processed the exchange of $923 million of sales, which equates to a $3.6B annual GMV.
  • Founded by Michael Bruno in Paris in 2001, 1stdibs(*) is the world’s largest online marketplace for luxury one-of-a-kind antiques, high-end modern furniture, vintage fashion, jewelry, and fine art. In November 2011, David Rosenblatt took over as CEO and has been scaling the company ever since. Over the past few years dealers, galleries, and makers have matched billions of dollars in merchandise to trade buyers and consumer buyers on the platform.
  • Poshmark was founded by Manish Chandra in 2011. The website, which is an exchange for new and used clothing, has been remarkably successful. Over 4 million sellers have earned over $1 billion transacting on the site.
  • Julie Wainwright founded The Real Real in 2011. The company is an online marketplace for authenticated luxury consignment. In 2017, the company reported sales of over $500 million.
  • In 2015, Eddy Lu and Daishin Sugano launched GOAT, a marketplace for the exchange of sneakers. Despite this narrow focus, the company has been remarkably successful. The estimated annual GMV of GOAT and its leading competitor Stock X is already over $1B per year (on a combined basis).

SHARING ECONOMY MARKETPLACES

With the launch of Airbnb in 2008 and Uber (*) in 2009, these two companies established a new category of marketplaces known as the “sharing economy.” Homes and automobiles are the two most expensive items that people own, and in many cases the ability to own the asset is made possible through debt — mortgages on houses and car loans or leases for automobiles. Despite this financial exposure, for many people these assets are materially underutilized. Many extra rooms and second homes are vacant most of the year, and the average car is used less than 5% of the time. Sharing economy marketplaces allow owners to “unlock” earning opportunities from these underutilized assets.

Airbnb was founded by Joe Gebbia and Brian Chesky in 2008. Today there are over 5 million Airbnb listings in 81,000 cities. Over two million people stay in an Airbnb each night. In November of this year, the company announced that it had achieved “substantially” more than $1B in revenue in the third quarter. Assuming a marketplace rake of something like 11%, this would imply gross room revenue of over $9B for the quarter — which would be $36B annualized. As the company is still growing, we can easily guess that in 2019-2020 time frame, Airbnb will be delivering around $50B per year to home-owners who were previously sitting on highly underutilized assets. This is a major “unlocking.”

When Garrett Camp and Travis Kalanick founded Uber in 2009, they hatched the industry now known as ride-sharing. Today over 3 million people around the world use their time and their underutilized automobiles to generate extra income. Without the proper technology to match people who wanted a ride with people who could provide that service, taxi and chauffeur companies were drastically underserving the potential market. As an example, we estimate that ride-sharing revenues in San Francisco are well north of 10X what taxis and black cars were providing prior to the launch of ride-sharing. These numbers will go even higher as people increasingly forgo the notion of car ownership altogether. We estimate that the global GMV for ride sharing was over $100B in 2018 (including Uber, Didi, Grab, Lyft, Yandex, etc) and still growing handsomely. Assuming a 20% rake, this equates to over $80B that went into the hands of ride-sharing drivers in a single year — and this is an industry that did not exist 10 years ago. The matching made possible with today’s GPS and Internet-enabled smart phones is a massive unlocking of wealth and value.

While it is a lesser known category, using your own backyard and home to host dog guests as an alternative to a kennel is a large and growing business. Once again, this is an asset against which the marginal cost to host a dog is near zero. By combining their time with this otherwise unused asset, dog sitters are able to offer a service that is quite compelling for consumers. Rover.com (*) in Seattle, which was founded by Greg Gottesman and Aaron Easterly in 2011, is the leading player in this market. (Benchmark is an investor in Rover through a merger with DogVacay in 2017). You may be surprised to learn that this is already a massive industry. In less than a decade since the company started, Rover has already paid out of half a billion dollars to hosts that participate on the platform.

Exchange of LABOR Marketplaces

While not as well known as the goods exchanges or sharing economy marketplaces, there is a growing and exciting increase in the number of marketplaces that help match specifically skilled labor with key opportunities to monetize their skills. The most noteworthy of these is likely Upwork(*), a company that formed from the merger of Elance and Odesk. Upwork is a global freelancing platform where businesses and independent professionals can connect and collaborate remotely. Popular categories include web developers, mobile developers, designers, writers, and accountants. In the 12 months ended June 30, 2018, the Upwork platform enabled $1.56 billion of GSV (gross services revenue) across 2.0 million projects between approximately 375,000 freelancers and 475,000 clients in over 180 countries. These labor matches represent the exact “world is flat” reality outlined in Friedman’s book.

Other noteworthy and emerging labor marketplaces:

  • HackerOne(*) is the leading global marketplace that coordinates the world’s largest corporate “bug bounty” programs with a network of the world’s leading hackers. The company was founded in 2012 by Michiel Prins, Jobert Abma, Alex Rice and Merijn Terheggen, and today serves the needs of over 1,000 corporate bug bounty programs. On top of that, the HackerOne network of over 300,000 hackers (adding 600 more each day) has resolved over 100K confirmed vulnerabilities which resulted in over $46 million in awards to these individuals. There is an obvious network effect at work when you bring together the world’s leading programs and the world’s leading hackers on a single platform. The Fortune 500 is quickly learning that having a bug bounty program is an essential step in fighting cyber crime, and that HackerOne is the best place to host their program.
  • Wyzant is a leading Chicago-based marketplace that connects tutors with students around the country. The company was founded by Andrew Geant and Mike Weishuhn in 2005. The company has over 80,000 tutors on its platform and has paid out over $300 million to these professionals. The company started matching students with tutors for in-person sessions, but increasingly these are done “virtually” over the Internet.
  • Stitch Fix (*) is a leading provider of personalized clothing services that was founded by Katrina Lake in 2011. While the company is not primarily a marketplace, each order is hand-curated by a work-at-home “stylist” who works part-time on their own schedule from the comfort of their own home. Stitch Fix’s algorithms match the perfect stylist with each and every customer to help ensure the optimal outcome for each client. As of the end of 2018, Stitch Fix has paid out well over $100 million to their stylists.
  • Swing Education was founded in 2015 with the objective of creating a marketplace for substitute teachers. While it is still early in the company’s journey, they have already established themselves as the leader in the U.S. market. Swing is now at over 1,200 school partners and has filled over 115,000 teacher absence days. They have helped 2,000 substitute teachers get in the classroom in 2018, including 400 educators who earned permits, which Swing willingly financed. While it seems obvious in retrospect, having all substitutes on a single platform creates massive efficiency in a market where previously every single school had to keep their own list and make last minute calls when they had vacancies. And their subs just have to deal with one Swing setup process to get access to subbing opportunities at dozens of local schools and districts.
  • RigUp was founded by Xuan Yong and Mike Witte in Austin, Texas in March of 2014. RigUp is a leading labor marketplace focused on the oilfield services industry. “The company’s platform offers a large network of qualified, insured and compliant contractors and service providers across all upstream, midstream and downstream operations in every oil and gas basin, enabling companies to hire quickly, track contractor compliance, and minimize administrative work.” According to the company, GMV for 2017 was an impressive $150 million, followed by an astounding $600 million in 2018. Often, investors miss out on vertically focused companies like RigUp as they find themselves overly anxious about TAM (total available market). As you can see, that can be a big mistake.
  • VIPKid, which was founded in 2013 by Cindy Mi, is a truly amazing story. The idea is simple and simultaneously brilliant. VIPKid links students in China who want to learn English with native English speaking tutors in the United States and Canada. All sessions are done over the Internet, once again epitomizing Friedman’s very flat world. In November of 2018, the company reported having 60,000 teachers contracted to teach over 500,000 students. Many people believe the company is now well north of a US$1B run rate, which implies that around $1B will pass hands from Chinese parents to western teachers in 2019. That is quite a bit of supplemental income for U.S.-based teachers.

These vertical labor marketplaces are to LinkedIn what companies like Zillow, Expedia, and GrubHub are to Google search. Through a deeper understanding of a particular vertical, a much richer perspective on the quality and differentiation of the participants, and the enablement of transactions — you create an evolved service that has much more value to both sides of the transaction. And for those professionals participating in these markets, your reputation on the vertical service matters way more than your profile on LinkedIn.

NEW EMERGING MARKETPLACES

Having been a fortunate investor in many of the previously mentioned companies (*), Benchmark remains extremely excited about future marketplace opportunities that will unlock wealth on the Internet. Here are an example of two such companies that we have funded in the past few years.

The New York Times describes Hipcamp as “The Sharing Economy Visits the Backcountry.” Hipcamp(*) was founded in 2013 by Alyssa Ravasio as an engine to search across the dozens and dozens of State and National park websites for campsite availability. As Hipcamp gained traction with campers, landowners with land near many of the National and State parks started to reach out to Hipcamp asking if they could list their land on Hipcamp too. Hipcamp now offers access to more than 350k campsites across public and private land, and their most active private land hosts make over $100,000 per year hosting campers. This is a pretty amazing value proposition for both land owners and campers. If you are a rural landowner, here is a way to create “money out of nowhere” with very little capital expenditures. And if you are a camper, what could be better than to camp at a unique, bespoke campsite in your favorite location.

Instawork(*) is an on-demand staffing app for gig workers (professionals) and hospitality businesses (partners). These working professionals seek economic freedom and a better life, and Instawork gives them both — an opportunity to work as much as they like, but on their own terms with regard to when and where. On the business partner side, small business owners/managers/chefs do not have access to reliable sources to help them with talent sourcing and high turnover, and products like  LinkedIn are more focused on white-collar workers. Instawork was cofounded by Sumir Meghani in San Franciso and was a member of the 2015 Y-Combinator class. 2018 was a break-out year for Instawork with 10X revenue growth and 12X growth in Professionals on the platform. The average Instawork Professional is highly engaged on the platform, and typically opens the Instawork app ten times a day. This results in 97% of gigs being matched in less than 24 hours — which is powerfully important to both sides of the network. Also noteworthy, the Professionals on Instawork average 150% of minimum wage, significantly higher than many other labor marketplaces. This higher income allows Instawork Professionals like Jose, to begin to accomplish their dreams.

The Power of These Platforms

As you can see, these numerous marketplaces are a direct extension of the productivity enhancers first uncovered by Adam Smith and David Ricardo. Free trade, specialization, and comparative advantage are all enhanced when we can increase the matching of supply and demand of goods and services as well as eliminate inefficiency and waste caused by misinformation or distance. As a result, productivity naturally improves.

Specific benefits of global internet marketplaces:

    1. Increase wealth distribution (all examples)
    2. Unlock wasted potential of assets (Uber, AirBNB, Rover, and Hipcamp)
    3. Better match of specific workers with specific opportunities (Upwork, WyzAnt, RigUp, VIPKid, Instawork)
    4. Make specific assets reachable and findable (Ebay, Etsy, 1stDibs, Poshmark, GOAT)
    5. Allow for increased specialization (Etsy, Upwork, RigUp)
    6. Enhance supplemental labor opportunities (Uber, Stitch Fix, SwingEducation, Instawork, VIPKid), where the worker is in control of when and where they work
    7. Reduces forfeiture by enhancing utilization (mortgages, car loans, etc) (Uber, AirBnb, Rover, Hipcamp)

If you are a founder who is excited about starting a new marketplace, there are two caveats that are important to remember. First, you will need to find industries where the opportunity to improve the efficiency in the ways noted above is evident. If the network does not create true economic leverage, you will find it hard to be successful. Second, for any marketplace to be successful, the conditions in that given market must be optimal for a new marketplace entrant. Please check out our previous post, All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces, for a list of factors that help distinguish a great opportunity. If after taking in these considerations you think you have found such an opportunity, we would love to talk to you about potentially partnering together. Please send us an email to unlockingwealth@benchmark.com.

(*) Benchmark either is or was an investor in companies labeled with the asterisk.

Interested in “Unlocking Wealth” Yourself?

Benchmark’s Newest General Partner Chetan Puttagunta


This post is by bgurley from Above the Crowd

The partners at Benchmark are pleased to announce Chetan Puttagunta has joined the firm as our newest General Partner.

As early-stage investors, we are acutely aware of the work of other venture capitalists on the boards of the companies we serve. Nearly 15 years ago one of Benchmark’s founding partners, Kevin Harvey, saw the skills of a young Peter Fenton on a board they shared. Peter’s work so impressed Kevin that he recruited Peter to join Benchmark.

More recently, Peter encountered a once-in-a-generation venture capitalist on the board of Elastic, Chetan Puttagunta. In every way, from how Chetan discovered the Elastic opportunity by downloading the product and using it, to how he built a deep trusting relationship with the team, he demonstrated the qualities that define Benchmark and our aspirations to serve entrepreneurs. Chetan’s energy and devotion, his capacity to listen and to provide crisp, well reasoned advice set him apart in that elusive way that leads him to be a CEO’s first phone call.

In addition to Elastic, Chetan, at just 32 years of age, has developed a foundation of successful investments and relationships in the software ecosystem. He led the investment in Mulesoft (acquired by Salesforce for $6.5B) and MongoDB (NASDAQ: MDB). Those founders and CEOs called Chetan “the MVP of our board” and said that, “despite being nearly 20 years younger than everyone else, Chetan managed to deliver insights no one else had.” As the Benchmark partners got to know Chetan better, it became clear that his infectious curiosity, analytical rigor, and boundless energy to serve entrepreneurs fit perfectly with our culture. And Benchmark’s structure – now seven equal partners – means Chetan joins with the same authority, responsibility and ownership as the current partners. We believe Chetan will invest in many of the best enterprise companies of the next decade. And perhaps, he, like Kevin and Peter before him, will spot a future Benchmark partner on one of those company boards.

Our job, as early-stage venture capitalists, does not scale. It is defined by service to entrepreneurs and the teams they build, helping them to realize their vision and the potential of their companies. Whether it is recruiting a key executive, making a strategic decision, or taking a company public, productive and honest dialog between a CEO and a board member can contribute considerably to outcomes. While many venture firms have adopted a stage-agnostic approach, or have hired junior or role-defined staff to help source and support their investments, Benchmark continues to focus on and take pride in the craft of early-stage venture investing. To us, there is no substitute for an active and informed general partner on the board, working side by side with the ambitious, insightful, and often strong-willed entrepreneurs we aspire to serve. We have found a kindred spirit in Chetan as we continue on this mission.

Bill, Eric, Matt, Mitch, Peter, and Sarah

Benchmark’s Newest General Partner Chetan Puttagunta


This post is by bgurley from Above the Crowd

The partners at Benchmark are pleased to announce Chetan Puttagunta has joined the firm as our newest General Partner.

As early-stage investors, we are acutely aware of the work of other venture capitalists on the boards of the companies we serve. Nearly 15 years ago one of Benchmark’s founding partners, Kevin Harvey, saw the skills of a young Peter Fenton on a board they shared. Peter’s work so impressed Kevin that he recruited Peter to join Benchmark.

More recently, Peter encountered a once-in-a-generation venture capitalist on the board of Elastic, Chetan Puttagunta. In every way, from how Chetan discovered the Elastic opportunity by downloading the product and using it, to how he built a deep trusting relationship with the team, he demonstrated the qualities that define Benchmark and our aspirations to serve entrepreneurs. Chetan’s energy and devotion, his capacity to listen and to provide crisp, well reasoned advice set him apart in that elusive way that leads him to be a CEO’s first phone call.

In addition to Elastic, Chetan, at just 32 years of age, has developed a foundation of successful investments and relationships in the software ecosystem. He led the investment in Mulesoft (acquired by Salesforce for $6.5B) and MongoDB (NASDAQ: MDB). Those founders and CEOs called Chetan “the MVP of our board” and said that, “despite being nearly 20 years younger than everyone else, Chetan managed to deliver insights no one else had.” As the Benchmark partners got to know Chetan better, it became clear that his infectious curiosity, analytical rigor, and boundless energy to serve entrepreneurs fit perfectly with our culture. And Benchmark’s structure – now seven equal partners – means Chetan joins with the same authority, responsibility and ownership as the current partners. We believe Chetan will invest in many of the best enterprise companies of the next decade. And perhaps, he, like Kevin and Peter before him, will spot a future Benchmark partner on one of those company boards.

Our job, as early-stage venture capitalists, does not scale. It is defined by service to entrepreneurs and the teams they build, helping them to realize their vision and the potential of their companies. Whether it is recruiting a key executive, making a strategic decision, or taking a company public, productive and honest dialog between a CEO and a board member can contribute considerably to outcomes. While many venture firms have adopted a stage-agnostic approach, or have hired junior or role-defined staff to help source and support their investments, Benchmark continues to focus on and take pride in the craft of early-stage venture investing. To us, there is no substitute for an active and informed general partner on the board, working side by side with the ambitious, insightful, and often strong-willed entrepreneurs we aspire to serve. We have found a kindred spirit in Chetan as we continue on this mission.

Bill, Eric, Matt, Mitch, Peter, and Sarah

Benchmark’s Newest General Partner Chetan Puttagunta


This post is by bgurley from Above the Crowd

The partners at Benchmark are pleased to announce Chetan Puttagunta has joined the firm as our newest General Partner.

As early-stage investors, we are acutely aware of the work of other venture capitalists on the boards of the companies we serve. Nearly 15 years ago one of Benchmark’s founding partners, Kevin Harvey, saw the skills of a young Peter Fenton on a board they shared. Peter’s work so impressed Kevin that he recruited Peter to join Benchmark.

More recently, Peter encountered a once-in-a-generation venture capitalist on the board of Elastic, Chetan Puttagunta. In every way, from how Chetan discovered the Elastic opportunity by downloading the product and using it, to how he built a deep trusting relationship with the team, he demonstrated the qualities that define Benchmark and our aspirations to serve entrepreneurs. Chetan’s energy and devotion, his capacity to listen and to provide crisp, well reasoned advice set him apart in that elusive way that leads him to be a CEO’s first phone call.

In addition to Elastic, Chetan, at just 32 years of age, has developed a foundation of successful investments and relationships in the software ecosystem. He led the investment in Mulesoft (acquired by Salesforce for $6.5B) and MongoDB (NASDAQ: MDB). Those founders and CEOs called Chetan “the MVP of our board” and said that, “despite being nearly 20 years younger than everyone else, Chetan managed to deliver insights no one else had.” As the Benchmark partners got to know Chetan better, it became clear that his infectious curiosity, analytical rigor, and boundless energy to serve entrepreneurs fit perfectly with our culture. And Benchmark’s structure – now seven equal partners – means Chetan joins with the same authority, responsibility and ownership as the current partners. We believe Chetan will invest in many of the best enterprise companies of the next decade. And perhaps, he, like Kevin and Peter before him, will spot a future Benchmark partner on one of those company boards.

Our job, as early-stage venture capitalists, does not scale. It is defined by service to entrepreneurs and the teams they build, helping them to realize their vision and the potential of their companies. Whether it is recruiting a key executive, making a strategic decision, or taking a company public, productive and honest dialog between a CEO and a board member can contribute considerably to outcomes. While many venture firms have adopted a stage-agnostic approach, or have hired junior or role-defined staff to help source and support their investments, Benchmark continues to focus on and take pride in the craft of early-stage venture investing. To us, there is no substitute for an active and informed general partner on the board, working side by side with the ambitious, insightful, and often strong-willed entrepreneurs we aspire to serve. We have found a kindred spirit in Chetan as we continue on this mission.

Bill, Eric, Matt, Mitch, Peter, and Sarah

Benchmark’s Newest General Partner Chetan Puttagunta


This post is by bgurley from Above the Crowd

The partners at Benchmark are pleased to announce Chetan Puttagunta has joined the firm as our newest General Partner.

As early-stage investors, we are acutely aware of the work of other venture capitalists on the boards of the companies we serve. Nearly 15 years ago one of Benchmark’s founding partners, Kevin Harvey, saw the skills of a young Peter Fenton on a board they shared. Peter’s work so impressed Kevin that he recruited Peter to join Benchmark.

More recently, Peter encountered a once-in-a-generation venture capitalist on the board of Elastic, Chetan Puttagunta. In every way, from how Chetan discovered the Elastic opportunity by downloading the product and using it, to how he built a deep trusting relationship with the team, he demonstrated the qualities that define Benchmark and our aspirations to serve entrepreneurs. Chetan’s energy and devotion, his capacity to listen and to provide crisp, well reasoned advice set him apart in that elusive way that leads him to be a CEO’s first phone call.

In addition to Elastic, Chetan, at just 32 years of age, has developed a foundation of successful investments and relationships in the software ecosystem. He led the investment in Mulesoft (acquired by Salesforce for $6.5B) and MongoDB (NASDAQ: MDB). Those founders and CEOs called Chetan “the MVP of our board” and said that, “despite being nearly 20 years younger than everyone else, Chetan managed to deliver insights no one else had.” As the Benchmark partners got to know Chetan better, it became clear that his infectious curiosity, analytical rigor, and boundless energy to serve entrepreneurs fit perfectly with our culture. And Benchmark’s structure – now seven equal partners – means Chetan joins with the same authority, responsibility and ownership as the current partners. We believe Chetan will invest in many of the best enterprise companies of the next decade. And perhaps, he, like Kevin and Peter before him, will spot a future Benchmark partner on one of those company boards.

Our job, as early-stage venture capitalists, does not scale. It is defined by service to entrepreneurs and the teams they build, helping them to realize their vision and the potential of their companies. Whether it is recruiting a key executive, making a strategic decision, or taking a company public, productive and honest dialog between a CEO and a board member can contribute considerably to outcomes. While many venture firms have adopted a stage-agnostic approach, or have hired junior or role-defined staff to help source and support their investments, Benchmark continues to focus on and take pride in the craft of early-stage venture investing. To us, there is no substitute for an active and informed general partner on the board, working side by side with the ambitious, insightful, and often strong-willed entrepreneurs we aspire to serve. We have found a kindred spirit in Chetan as we continue on this mission.

Bill, Eric, Matt, Mitch, Peter, and Sarah

Benchmark’s Newest General Partner Chetan Puttagunta


This post is by bgurley from Above the Crowd

The partners at Benchmark are pleased to announce Chetan Puttagunta has joined the firm as our newest General Partner.

As early-stage investors, we are acutely aware of the work of other venture capitalists on the boards of the companies we serve. Nearly 15 years ago one of Benchmark’s founding partners, Kevin Harvey, saw the skills of a young Peter Fenton on a board they shared. Peter’s work so impressed Kevin that he recruited Peter to join Benchmark.

More recently, Peter encountered a once-in-a-generation venture capitalist on the board of Elastic, Chetan Puttagunta. In every way, from how Chetan discovered the Elastic opportunity by downloading the product and using it, to how he built a deep trusting relationship with the team, he demonstrated the qualities that define Benchmark and our aspirations to serve entrepreneurs. Chetan’s energy and devotion, his capacity to listen and to provide crisp, well reasoned advice set him apart in that elusive way that leads him to be a CEO’s first phone call.

In addition to Elastic, Chetan, at just 32 years of age, has developed a foundation of successful investments and relationships in the software ecosystem. He led the investment in Mulesoft (acquired by Salesforce for $6.5B) and MongoDB (NASDAQ: MDB). Those founders and CEOs called Chetan “the MVP of our board” and said that, “despite being nearly 20 years younger than everyone else, Chetan managed to deliver insights no one else had.” As the Benchmark partners got to know Chetan better, it became clear that his infectious curiosity, analytical rigor, and boundless energy to serve entrepreneurs fit perfectly with our culture. And Benchmark’s structure – now seven equal partners – means Chetan joins with the same authority, responsibility and ownership as the current partners. We believe Chetan will invest in many of the best enterprise companies of the next decade. And perhaps, he, like Kevin and Peter before him, will spot a future Benchmark partner on one of those company boards.

Our job, as early-stage venture capitalists, does not scale. It is defined by service to entrepreneurs and the teams they build, helping them to realize their vision and the potential of their companies. Whether it is recruiting a key executive, making a strategic decision, or taking a company public, productive and honest dialog between a CEO and a board member can contribute considerably to outcomes. While many venture firms have adopted a stage-agnostic approach, or have hired junior or role-defined staff to help source and support their investments, Benchmark continues to focus on and take pride in the craft of early-stage venture investing. To us, there is no substitute for an active and informed general partner on the board, working side by side with the ambitious, insightful, and often strong-willed entrepreneurs we aspire to serve. We have found a kindred spirit in Chetan as we continue on this mission.

Bill, Eric, Matt, Mitch, Peter, and Sarah

The Thing I Love Most About Uber


This post is by bgurley from Above the Crowd

In spite of all the ink that journalists, analysts, and pundits have spilled on Uber over the years, no mainstream article has focused on what I consider to be the most elegant feature of this now ubiquitous, high growth global service — no driver-partner is ever told where or when to work. This is quite remarkable — an entire global network miraculously “level loads” on its own. Driver-partners unilaterally decide when they want to work and where they want to work. The flip side is also true — they have unlimited freedom to choose when they do NOT want to work. Despite the complete lack of a “driver-partner schedule” this system delivers pick-up times that are less than 5 minutes (in most US cities (with populations over 25K) and in 412 cities in 55 other countries. The Uber network, along with Mr. Smith’s invisible hand, is able to elegantly match supply and demand, without the “schedules” and “shifts” that are the norm in most every other industry.

Some have raised questions and concerns about the “gig” economy and the rise of these new independent and autonomous work types. Detractors frequently highlight that these work types lack some of the structured benefits that are frequently attached to traditional full time job offerings. However, what they fail to consider is that there is one critical and fundamental feature of the “gig” economy that is completely absent from traditional job types. That feature — worker autonomy of both time and place — simply does not exist in other industries. One cannot show up for work at Starbucks on a Monday and then decide not to work at all on Tuesday, and for only 2 hours on Wednesday. Oh yeah, and then on Thursday let’s just “play it by ear.” One cannot get a job at Walmart or McDonalds or ironically even as a taxi cab driver without agreeing to some sort of shift or schedule. It is unheard of for an employee to say “I want to work 3 hours this week, 45 the next, and then take 2 weeks off.” This autonomy and freedom of the “gig” work type, which is highly valued by millions and millions of people, would be impossible to implement for the overwhelming majority of companies.

In November of 2014, the Morgan Stanley sell-side research team that focuses on the auto industry, headed by Adam Jonas, made a trip to Detroit to visit the big three automakers. In their own words, “the highlight of the trip, however, was three Uber trips we took between meetings.” They chronicled these three trips in a report they published titled, Confessions of an Uber Driver: Rollin in the ‘D. Interestingly, they encountered three different driver-partners that epitomize why the “where you want, when you want” autonomy of Uber is so fundamentally important. Each of these individuals has a life situation that is supplemented and improved as a result of this super unique flexibility. Included herein is a summary of each driver-partner profile. You will notice that a traditional 9-5 job would have been completely unhelpful to any of the three.

  • The VeteranShe’s a retired US Army Veteran (recently stationed in Germany) and a mother of 3 daughters, the youngest of which is still in middle school. Our driver wanted a job that offered flexibility so she could take her daughter to and from school without relying on the area’s bus system. All of the other jobs she considered made it impossible to be there for her daughter when she needed to be. Uber provides enough flexibility so that she can take jobs when and where she wants while providing substantial income to help make ends meet while her husband, an active member of the US Military, is on tour.
  • The StudentOur driver was a 30-something Jordanian-born student at Henry Ford College studying computer science with an emphasis on internet security and encryption. He’s supporting a family and wanted a job with flexible hours that could accommodate his class schedule and his familial responsibilities.
  • The DeanHere was a dean of students at a charter school in the area who ran into a cash flow deficit for many months while undertaking extensive construction/renovations to his residence. He began ‘Ubering’ last June to make extra cash and has since developed a steady level of business, making around $600 to $700 per week with flexible hours that worked around his time at the school.

In January of 2015, Uber partnered with Alan Krueger, a professor at Princeton University, to conduct the first comprehensive analysis of Uber’s driver-partners, based on both survey data and anonymized, aggregated administrative data. The results from this survey mirrored many of the points that Jonas uncovered and that McKinsey would later uncover. Here are a few key highlights:

  • 85% say they partner with Uber “to have more flexibility in my schedule and balance my work with my life and family”
  • 55% of drivers work less than 15 hours a week, highlighting that a majority of drivers use the service for supplemental income
  • Driver-partners do not turn to Uber out of desperation, only eight percent were unemployed just before they started working with the Uber
  • Two-thirds of these individuals reported that they had a full-time job
  • Reasons for partnering with Uber:
    • “to earn more income to better support myself or my family” (91%)
    • “to be my own boss and set my own schedule” (87%)
    • “to have more flexibility in my schedule and balance my work with my life and family” (85%)
    • “to help maintain a steady income because other sources of income are unstable/unpredictable” (74%)
  • When asked directly, “If both were available to you, at this point in your life, would you rather have a steady 9 to 5 job with some benefits and a set salary or a job where you choose your own schedule and be your own boss?” 73 percent chose the latter.

In October of 2016, McKinsey and Company (working with Uber) published a detailed research report titled, Independent Work: Choice, Necessity and the Gig Economy. The complete work, which is quite detailed and interesting, is publicly available. As the main report is quite lengthy at 138 pages, some readers may prefer the 18-page executive summary. Unsurprisingly, their findings were quite consistent with points already raised above — people value freedom and autonomy. Here is a subset of the relevant findings:

  • The size of the independent workforce is quite large — “up to 162mm individuals, engage in independent work.”
  • McKinsey identified the key feature mentioned above — “A high degree of autonomy: Independent workers have a high degree of control and flexibility in determining their workload and work portfolio.”
  • Supplemental income is a key driver — “More than half of them use independent work to supplement their income rather than earning the primary living from it.”
  • Independent by choice — “Most independent workers have actively chosen their working style and report high levels of satisfaction with it,” “Approximately 70 to 75 percent of independent earners are independent as a matter of preference.”
  • High levels of satisfaction —“Free agents report higher satisfaction than those who choose traditional jobs on 12 of the 14 dimensions we measured, and they are just as satisfied on the remaining two dimensions. Free agents cite higher satisfaction than traditional workers across issues ranging from the creativity they can express to opportunities for learning and recognition. They are happier with their overall level of income and are just as satisfied as traditional workers on income security and benefits. These observations hold regardless of gender, age, education level, or household income.”

Last year, on a trip to New Orleans, I met another driver in a similar situation to those profiled in the Morgan Stanley report. She was a single mother who worked during the week as a nurse. On Friday and Saturday nights, she would drive with Uber until she acquired $100 in earnings, then she would head home. This effort earned her over $800 a month in extra income that helped her support her family. There are no other supplemental job types that are as simple and consistent as Uber is for this single mother. And the impact to her life is real and meaningful.

Another reason Uber is such a great supplemental work type is that peaks in usage elegantly overlap with time windows that are convenient for traditional 9-5pm, Monday-Friday full-time workers. Friday and Saturday nights are simultaneously the consistent weekly peaks of (a) demand on the Uber system, and (b) spare time that is available for people with standard full-time jobs that want to pick up some incremental income (the chart to the right highlights this). The same thing happens with holidays and festivals. The need for rides (and therefore drivers) at music festivals or seasonal events or in a vacation town like Tahoe are bursty. That said, these same holiday weekends are when people searching for supplemental income are free from the primary occupation and can make the voluntary decision to earn more money. I have met drivers in Tahoe that came to town with their family (on vacation) and are earning while others are hiking or skiing. The matching of this excess supply with excess demand is both elegant and fortunate.

There is another incredible driver-partner benefit of the Uber system that is radically different from traditional work types. Uber pays the driver their money immediately when earned. While other employers have experimented with ways to do this from time to time, or once a month — Uber allows this up to 5 times a day. Normal employers are nowhere close on this dimension (most pay 2-3 weeks in arrears). Imagine how this can be helpful to someone who is living paycheck to paycheck in their primary occupation. Not only are the extra earnings in and of themselves useful, but the speed of delivery of the actual cash could mean avoiding nasty traps like usurious payday loans. In fact, based on an analysis of Federal Reserve data, 47 percent of Americans “can’t pay for an unexpected $400 expense through savings or credit cards, without selling something or borrowing money.” Now they have a much better option.

There are many difficult situations in modern life where having a simple, flexible, and consistent form of supplemental income is quite beneficial:

  • A bridge while looking for a full-time job — In the above survey 32 percent of driver-partners indicated a major reason they partner with Uber is “to earn money while looking for a steady, full-time job.”
  • Extra income for a stay at home parent — Many parents are in positions where having a full-time 40-hour week job is incompatible with their duties and responsibilities to their children. Driving with Uber means they are able to have extra income without missing their children’s pick-ups, drop-offs, baseball games or theatre performances. And they can be home in the afternoons to help with homework.
  • Using it to fund their way through college — I have met many driver-partners who are attending college. College is expensive and student debt is extremely high. Students cannot work two days at McDonalds and then skip three days to study for your final — this is “not a thing” with a traditional scheduled job type. Moreover, studying and test schedules can be sporadic and unpredictable. Interestingly — the “elegant balance” characteristic applies here as well. Guess where there are lots of people that should be riding in Ubers instead of driving? College towns. Guess where there are lots of people with extra time that would love to have extra money?
  • Aiding in skills transition/retraining — The notion of skills displacement and digital disruption of certain jobs due to automation or robotics is a hot-button issue. It even comes up with regards to ride sharing as a result of the excitement generated around autonomous vehicles. If people are in need of learning new skills, they would be materially aided by the presence of a flexible and autonomous supplemental income opportunity as they retrain. Nursing school or a vocational training school have all the same issues as going to college. They cost money and demand time — which is super hard to do while maintaining a traditional 40-hour/week full time job.
  • Work your way out of debt — Many Americans are unfortunately saddled with debt — credit card debt and student loan debt. If you are simultaneously living paycheck to paycheck you have no way to “catch up,” and as a result the interest payments chew up the marginal income you would use to pay down the debt. It’s a real trap. Supplemental income — working extra hours while you need to in order to get past a problem like this can be very powerful.
  • Cover an unexpected expense — Sometimes life gives you lemons. You wreck your car. Your refrigerator or washing machine dies. You have an unforeseen medical expense. These are the exact moments where being an Uber driver-partner can get you over the hump. Not forever — just for a few weeks to cover the extra expense.
  • Do what you love — Many of life’s most interesting career pursuits can be the hardest from an earnings perspective. We all know the notions of a “struggling actor” or “struggling artist” or “struggling musician.” Over the years I have met many of Uber’s driver-partners who use the extra earnings power so that they can pursue their dreams. One musician I met would even drive while he was touring on the road — in every city along the way.

The McKinsey study also uncovered these broader societal benefits that come from scalable “independent work” earnings structures:

“Independent work could have benefits for the economy, cushioning unemployment, improving labor force participation, stimulating demand, and raising productivity. Consumers and organizations could benefit from the greater availability of services and improved matching that better fulfills their needs. Workers who choose to be independent value the autonomy and flexibility.”

One thing to note about most of the scenarios above is that they are “temporary.” There is not a desire or intention on the part of the driver-partner to do this as a lifelong career pursuit. Rather, they recognize that it is an amazingly convenient way to solve a temporary need or to help bridge through to another station in life. Some labor lobbyists argue we should turn ride-sharing driving into a scheduled, full-time affair, but in doing so, you would eliminate the key reasons that most people take to the road in the first place. You would also potentially eliminate the world’s premier supplemental work offering.

In just a few short years, over 3 million driver-partners have joined the Uber platform. To put that in perspective, Walmart has grown to 2.3 million employees over 55 years. I think it’s safe to say that over the past five years, no industry has created more new jobs and new income opportunities than ride-sharing. And keep in mind that approximately three-fourths of the industry revenue goes straight to the labor provider — which is higher than almost any other industry on the planet. As a result, in just a few short years, global ride-sharing driver-entrepreneurs have taken in approximately $75+ billion dollars (with industry lifetime revenues north of $100 billion dollars). And keep in mind that ride-sharing only represents around 1% of the miles driven in the United States. As more and more people reduce car usage and abandon car ownership — this number will most certainly go higher and higher.

One interesting thing to note about Uber’s 3 million driver-partners — they all “volunteered” to start driving with Uber. This articulation may sound unusual, but some detractors want you to believe that driving with Uber is equivalent to working in the steel mill in a small mid-western town, where it is the only opportunity for the individual. That is not the case — people are “choosing” to be driver-partners, and they are doing so in record numbers. You have to ignore over 200 years of microeconomic research to be able to contort your brain into believing that all of these people are voluntarily making poor life decisions for themselves.

In all the discussion about why independent work is different than a traditional full time occupation, all of the focus has been on the features and benefits that are absent relative to the historic and perhaps idyllic notion of “work type.” What is missing from the conversation is why this job type is so special and unique to so many millions of people. There is simply no way for the vast majority of employers in the world to offer a completely independent and autonomous work-schedule. They are unlikely to enable “instant payment” either. Yet these are the EXACT same features that show up over and over again in the research as to why people chose independent work in the first place. Independent work is undisputedly “different” from a traditional job type — which is exactly why it is so valuable to so many people.

Driving with Uber reverses the way we have been trained to think about labor. Instead of making labor conform to management’s notion of a ‘job,’ Uber hands control to the worker. You do not have to make your life fit the needs of your job; you can make the job fit the needs of your life. Just how revolutionary this notion is has not, in my opinion, been adequately understood.

The Thing I Love Most About Uber


This post is by bgurley from Above the Crowd

In spite of all the ink that journalists, analysts, and pundits have spilled on Uber over the years, no mainstream article has focused on what I consider to be the most elegant feature of this now ubiquitous, high growth global service — no driver-partner is ever told where or when to work. This is quite remarkable — an entire global network miraculously “level loads” on its own. Driver-partners unilaterally decide when they want to work and where they want to work. The flip side is also true — they have unlimited freedom to choose when they do NOT want to work. Despite the complete lack of a “driver-partner schedule” this system delivers pick-up times that are less than 5 minutes (in most US cities (with populations over 25K) and in 412 cities in 55 other countries. The Uber network, along with Mr. Smith’s invisible hand, is able to elegantly match supply and demand, without the “schedules” and “shifts” that are the norm in most every other industry.

Some have raised questions and concerns about the “gig” economy and the rise of these new independent and autonomous work types. Detractors frequently highlight that these work types lack some of the structured benefits that are frequently attached to traditional full time job offerings. However, what they fail to consider is that there is one critical and fundamental feature of the “gig” economy that is completely absent from traditional job types. That feature — worker autonomy of both time and place — simply does not exist in other industries. One cannot show up for work at Starbucks on a Monday and then decide not to work at all on Tuesday, and for only 2 hours on Wednesday. Oh yeah, and then on Thursday let’s just “play it by ear.” One cannot get a job at Walmart or McDonalds or ironically even as a taxi cab driver without agreeing to some sort of shift or schedule. It is unheard of for an employee to say “I want to work 3 hours this week, 45 the next, and then take 2 weeks off.” This autonomy and freedom of the “gig” work type, which is highly valued by millions and millions of people, would be impossible to implement for the overwhelming majority of companies.

In November of 2014, the Morgan Stanley sell-side research team that focuses on the auto industry, headed by Adam Jonas, made a trip to Detroit to visit the big three automakers. In their own words, “the highlight of the trip, however, was three Uber trips we took between meetings.” They chronicled these three trips in a report they published titled, Confessions of an Uber Driver: Rollin in the ‘D. Interestingly, they encountered three different driver-partners that epitomize why the “where you want, when you want” autonomy of Uber is so fundamentally important. Each of these individuals has a life situation that is supplemented and improved as a result of this super unique flexibility. Included herein is a summary of each driver-partner profile. You will notice that a traditional 9-5 job would have been completely unhelpful to any of the three.

  • The VeteranShe’s a retired US Army Veteran (recently stationed in Germany) and a mother of 3 daughters, the youngest of which is still in middle school. Our driver wanted a job that offered flexibility so she could take her daughter to and from school without relying on the area’s bus system. All of the other jobs she considered made it impossible to be there for her daughter when she needed to be. Uber provides enough flexibility so that she can take jobs when and where she wants while providing substantial income to help make ends meet while her husband, an active member of the US Military, is on tour.
  • The StudentOur driver was a 30-something Jordanian-born student at Henry Ford College studying computer science with an emphasis on internet security and encryption. He’s supporting a family and wanted a job with flexible hours that could accommodate his class schedule and his familial responsibilities.
  • The DeanHere was a dean of students at a charter school in the area who ran into a cash flow deficit for many months while undertaking extensive construction/renovations to his residence. He began ‘Ubering’ last June to make extra cash and has since developed a steady level of business, making around $600 to $700 per week with flexible hours that worked around his time at the school.

In January of 2015, Uber partnered with Alan Krueger, a professor at Princeton University, to conduct the first comprehensive analysis of Uber’s driver-partners, based on both survey data and anonymized, aggregated administrative data. The results from this survey mirrored many of the points that Jonas uncovered and that McKinsey would later uncover. Here are a few key highlights:

  • 85% say they partner with Uber “to have more flexibility in my schedule and balance my work with my life and family”
  • 55% of drivers work less than 15 hours a week, highlighting that a majority of drivers use the service for supplemental income
  • Driver-partners do not turn to Uber out of desperation, only eight percent were unemployed just before they started working with the Uber
  • Two-thirds of these individuals reported that they had a full-time job
  • Reasons for partnering with Uber:
    • “to earn more income to better support myself or my family” (91%)
    • “to be my own boss and set my own schedule” (87%)
    • “to have more flexibility in my schedule and balance my work with my life and family” (85%)
    • “to help maintain a steady income because other sources of income are unstable/unpredictable” (74%)
  • When asked directly, “If both were available to you, at this point in your life, would you rather have a steady 9 to 5 job with some benefits and a set salary or a job where you choose your own schedule and be your own boss?” 73 percent chose the latter.

In October of 2016, McKinsey and Company (working with Uber) published a detailed research report titled, Independent Work: Choice, Necessity and the Gig Economy. The complete work, which is quite detailed and interesting, is publicly available. As the main report is quite lengthy at 138 pages, some readers may prefer the 18-page executive summary. Unsurprisingly, their findings were quite consistent with points already raised above — people value freedom and autonomy. Here is a subset of the relevant findings:

  • The size of the independent workforce is quite large — “up to 162mm individuals, engage in independent work.”
  • McKinsey identified the key feature mentioned above — “A high degree of autonomy: Independent workers have a high degree of control and flexibility in determining their workload and work portfolio.”
  • Supplemental income is a key driver — “More than half of them use independent work to supplement their income rather than earning the primary living from it.”
  • Independent by choice — “Most independent workers have actively chosen their working style and report high levels of satisfaction with it,” “Approximately 70 to 75 percent of independent earners are independent as a matter of preference.”
  • High levels of satisfaction —“Free agents report higher satisfaction than those who choose traditional jobs on 12 of the 14 dimensions we measured, and they are just as satisfied on the remaining two dimensions. Free agents cite higher satisfaction than traditional workers across issues ranging from the creativity they can express to opportunities for learning and recognition. They are happier with their overall level of income and are just as satisfied as traditional workers on income security and benefits. These observations hold regardless of gender, age, education level, or household income.”

Last year, on a trip to New Orleans, I met another driver in a similar situation to those profiled in the Morgan Stanley report. She was a single mother who worked during the week as a nurse. On Friday and Saturday nights, she would drive with Uber until she acquired $100 in earnings, then she would head home. This effort earned her over $800 a month in extra income that helped her support her family. There are no other supplemental job types that are as simple and consistent as Uber is for this single mother. And the impact to her life is real and meaningful.

Another reason Uber is such a great supplemental work type is that peaks in usage elegantly overlap with time windows that are convenient for traditional 9-5pm, Monday-Friday full-time workers. Friday and Saturday nights are simultaneously the consistent weekly peaks of (a) demand on the Uber system, and (b) spare time that is available for people with standard full-time jobs that want to pick up some incremental income (the chart to the right highlights this). The same thing happens with holidays and festivals. The need for rides (and therefore drivers) at music festivals or seasonal events or in a vacation town like Tahoe are bursty. That said, these same holiday weekends are when people searching for supplemental income are free from the primary occupation and can make the voluntary decision to earn more money. I have met drivers in Tahoe that came to town with their family (on vacation) and are earning while others are hiking or skiing. The matching of this excess supply with excess demand is both elegant and fortunate.

There is another incredible driver-partner benefit of the Uber system that is radically different from traditional work types. Uber pays the driver their money immediately when earned. While other employers have experimented with ways to do this from time to time, or once a month — Uber allows this up to 5 times a day. Normal employers are nowhere close on this dimension (most pay 2-3 weeks in arrears). Imagine how this can be helpful to someone who is living paycheck to paycheck in their primary occupation. Not only are the extra earnings in and of themselves useful, but the speed of delivery of the actual cash could mean avoiding nasty traps like usurious payday loans. In fact, based on an analysis of Federal Reserve data, 47 percent of Americans “can’t pay for an unexpected $400 expense through savings or credit cards, without selling something or borrowing money.” Now they have a much better option.

There are many difficult situations in modern life where having a simple, flexible, and consistent form of supplemental income is quite beneficial:

  • A bridge while looking for a full-time job — In the above survey 32 percent of driver-partners indicated a major reason they partner with Uber is “to earn money while looking for a steady, full-time job.”
  • Extra income for a stay at home parent — Many parents are in positions where having a full-time 40-hour week job is incompatible with their duties and responsibilities to their children. Driving with Uber means they are able to have extra income without missing their children’s pick-ups, drop-offs, baseball games or theatre performances. And they can be home in the afternoons to help with homework.
  • Using it to fund their way through college — I have met many driver-partners who are attending college. College is expensive and student debt is extremely high. Students cannot work two days at McDonalds and then skip three days to study for your final — this is “not a thing” with a traditional scheduled job type. Moreover, studying and test schedules can be sporadic and unpredictable. Interestingly — the “elegant balance” characteristic applies here as well. Guess where there are lots of people that should be riding in Ubers instead of driving? College towns. Guess where there are lots of people with extra time that would love to have extra money?
  • Aiding in skills transition/retraining — The notion of skills displacement and digital disruption of certain jobs due to automation or robotics is a hot-button issue. It even comes up with regards to ride sharing as a result of the excitement generated around autonomous vehicles. If people are in need of learning new skills, they would be materially aided by the presence of a flexible and autonomous supplemental income opportunity as they retrain. Nursing school or a vocational training school have all the same issues as going to college. They cost money and demand time — which is super hard to do while maintaining a traditional 40-hour/week full time job.
  • Work your way out of debt — Many Americans are unfortunately saddled with debt — credit card debt and student loan debt. If you are simultaneously living paycheck to paycheck you have no way to “catch up,” and as a result the interest payments chew up the marginal income you would use to pay down the debt. It’s a real trap. Supplemental income — working extra hours while you need to in order to get past a problem like this can be very powerful.
  • Cover an unexpected expense — Sometimes life gives you lemons. You wreck your car. Your refrigerator or washing machine dies. You have an unforeseen medical expense. These are the exact moments where being an Uber driver-partner can get you over the hump. Not forever — just for a few weeks to cover the extra expense.
  • Do what you love — Many of life’s most interesting career pursuits can be the hardest from an earnings perspective. We all know the notions of a “struggling actor” or “struggling artist” or “struggling musician.” Over the years I have met many of Uber’s driver-partners who use the extra earnings power so that they can pursue their dreams. One musician I met would even drive while he was touring on the road — in every city along the way.

The McKinsey study also uncovered these broader societal benefits that come from scalable “independent work” earnings structures:

“Independent work could have benefits for the economy, cushioning unemployment, improving labor force participation, stimulating demand, and raising productivity. Consumers and organizations could benefit from the greater availability of services and improved matching that better fulfills their needs. Workers who choose to be independent value the autonomy and flexibility.”

One thing to note about most of the scenarios above is that they are “temporary.” There is not a desire or intention on the part of the driver-partner to do this as a lifelong career pursuit. Rather, they recognize that it is an amazingly convenient way to solve a temporary need or to help bridge through to another station in life. Some labor lobbyists argue we should turn ride-sharing driving into a scheduled, full-time affair, but in doing so, you would eliminate the key reasons that most people take to the road in the first place. You would also potentially eliminate the world’s premier supplemental work offering.

In just a few short years, over 3 million driver-partners have joined the Uber platform. To put that in perspective, Walmart has grown to 2.3 million employees over 55 years. I think it’s safe to say that over the past five years, no industry has created more new jobs and new income opportunities than ride-sharing. And keep in mind that approximately three-fourths of the industry revenue goes straight to the labor provider — which is higher than almost any other industry on the planet. As a result, in just a few short years, global ride-sharing driver-entrepreneurs have taken in approximately $75+ billion dollars (with industry lifetime revenues north of $100 billion dollars). And keep in mind that ride-sharing only represents around 1% of the miles driven in the United States. As more and more people reduce car usage and abandon car ownership — this number will most certainly go higher and higher.

One interesting thing to note about Uber’s 3 million driver-partners — they all “volunteered” to start driving with Uber. This articulation may sound unusual, but some detractors want you to believe that driving with Uber is equivalent to working in the steel mill in a small mid-western town, where it is the only opportunity for the individual. That is not the case — people are “choosing” to be driver-partners, and they are doing so in record numbers. You have to ignore over 200 years of microeconomic research to be able to contort your brain into believing that all of these people are voluntarily making poor life decisions for themselves.

In all the discussion about why independent work is different than a traditional full time occupation, all of the focus has been on the features and benefits that are absent relative to the historic and perhaps idyllic notion of “work type.” What is missing from the conversation is why this job type is so special and unique to so many millions of people. There is simply no way for the vast majority of employers in the world to offer a completely independent and autonomous work-schedule. They are unlikely to enable “instant payment” either. Yet these are the EXACT same features that show up over and over again in the research as to why people chose independent work in the first place. Independent work is undisputedly “different” from a traditional job type — which is exactly why it is so valuable to so many people.

Driving with Uber reverses the way we have been trained to think about labor. Instead of making labor conform to management’s notion of a ‘job,’ Uber hands control to the worker. You do not have to make your life fit the needs of your job; you can make the job fit the needs of your life. Just how revolutionary this notion is has not, in my opinion, been adequately understood.

The Thing I Love Most About Uber


This post is by bgurley from Above the Crowd

In spite of all the ink that journalists, analysts, and pundits have spilled on Uber over the years, no mainstream article has focused on what I consider to be the most elegant feature of this now ubiquitous, high growth global service — no driver-partner is ever told where or when to work. This is quite remarkable — an entire global network miraculously “level loads” on its own. Driver-partners unilaterally decide when they want to work and where they want to work. The flip side is also true — they have unlimited freedom to choose when they do NOT want to work. Despite the complete lack of a “driver-partner schedule” this system delivers pick-up times that are less than 5 minutes (in most US cities (with populations over 25K) and in 412 cities in 55 other countries. The Uber network, along with Mr. Smith’s invisible hand, is able to elegantly match supply and demand, without the “schedules” and “shifts” that are the norm in most every other industry.

Some have raised questions and concerns about the “gig” economy and the rise of these new independent and autonomous work types. Detractors frequently highlight that these work types lack some of the structured benefits that are frequently attached to traditional full time job offerings. However, what they fail to consider is that there is one critical and fundamental feature of the “gig” economy that is completely absent from traditional job types. That feature — worker autonomy of both time and place — simply does not exist in other industries. One cannot show up for work at Starbucks on a Monday and then decide not to work at all on Tuesday, and for only 2 hours on Wednesday. Oh yeah, and then on Thursday let’s just “play it by ear.” One cannot get a job at Walmart or McDonalds or ironically even as a taxi cab driver without agreeing to some sort of shift or schedule. It is unheard of for an employee to say “I want to work 3 hours this week, 45 the next, and then take 2 weeks off.” This autonomy and freedom of the “gig” work type, which is highly valued by millions and millions of people, would be impossible to implement for the overwhelming majority of companies.

In November of 2014, the Morgan Stanley sell-side research team that focuses on the auto industry, headed by Adam Jonas, made a trip to Detroit to visit the big three automakers. In their own words, “the highlight of the trip, however, was three Uber trips we took between meetings.” They chronicled these three trips in a report they published titled, Confessions of an Uber Driver: Rollin in the ‘D. Interestingly, they encountered three different driver-partners that epitomize why the “where you want, when you want” autonomy of Uber is so fundamentally important. Each of these individuals has a life situation that is supplemented and improved as a result of this super unique flexibility. Included herein is a summary of each driver-partner profile. You will notice that a traditional 9-5 job would have been completely unhelpful to any of the three.

  • The VeteranShe’s a retired US Army Veteran (recently stationed in Germany) and a mother of 3 daughters, the youngest of which is still in middle school. Our driver wanted a job that offered flexibility so she could take her daughter to and from school without relying on the area’s bus system. All of the other jobs she considered made it impossible to be there for her daughter when she needed to be. Uber provides enough flexibility so that she can take jobs when and where she wants while providing substantial income to help make ends meet while her husband, an active member of the US Military, is on tour.
  • The StudentOur driver was a 30-something Jordanian-born student at Henry Ford College studying computer science with an emphasis on internet security and encryption. He’s supporting a family and wanted a job with flexible hours that could accommodate his class schedule and his familial responsibilities.
  • The DeanHere was a dean of students at a charter school in the area who ran into a cash flow deficit for many months while undertaking extensive construction/renovations to his residence. He began ‘Ubering’ last June to make extra cash and has since developed a steady level of business, making around $600 to $700 per week with flexible hours that worked around his time at the school.

In January of 2015, Uber partnered with Alan Krueger, a professor at Princeton University, to conduct the first comprehensive analysis of Uber’s driver-partners, based on both survey data and anonymized, aggregated administrative data. The results from this survey mirrored many of the points that Jonas uncovered and that McKinsey would later uncover. Here are a few key highlights:

  • 85% say they partner with Uber “to have more flexibility in my schedule and balance my work with my life and family”
  • 55% of drivers work less than 15 hours a week, highlighting that a majority of drivers use the service for supplemental income
  • Driver-partners do not turn to Uber out of desperation, only eight percent were unemployed just before they started working with the Uber
  • Two-thirds of these individuals reported that they had a full-time job
  • Reasons for partnering with Uber:
    • “to earn more income to better support myself or my family” (91%)
    • “to be my own boss and set my own schedule” (87%)
    • “to have more flexibility in my schedule and balance my work with my life and family” (85%)
    • “to help maintain a steady income because other sources of income are unstable/unpredictable” (74%)
  • When asked directly, “If both were available to you, at this point in your life, would you rather have a steady 9 to 5 job with some benefits and a set salary or a job where you choose your own schedule and be your own boss?” 73 percent chose the latter.

In October of 2016, McKinsey and Company (working with Uber) published a detailed research report titled, Independent Work: Choice, Necessity and the Gig Economy. The complete work, which is quite detailed and interesting, is publicly available. As the main report is quite lengthy at 138 pages, some readers may prefer the 18-page executive summary. Unsurprisingly, their findings were quite consistent with points already raised above — people value freedom and autonomy. Here is a subset of the relevant findings:

  • The size of the independent workforce is quite large — “up to 162mm individuals, engage in independent work.”
  • McKinsey identified the key feature mentioned above — “A high degree of autonomy: Independent workers have a high degree of control and flexibility in determining their workload and work portfolio.”
  • Supplemental income is a key driver — “More than half of them use independent work to supplement their income rather than earning the primary living from it.”
  • Independent by choice — “Most independent workers have actively chosen their working style and report high levels of satisfaction with it,” “Approximately 70 to 75 percent of independent earners are independent as a matter of preference.”
  • High levels of satisfaction —“Free agents report higher satisfaction than those who choose traditional jobs on 12 of the 14 dimensions we measured, and they are just as satisfied on the remaining two dimensions. Free agents cite higher satisfaction than traditional workers across issues ranging from the creativity they can express to opportunities for learning and recognition. They are happier with their overall level of income and are just as satisfied as traditional workers on income security and benefits. These observations hold regardless of gender, age, education level, or household income.”

Last year, on a trip to New Orleans, I met another driver in a similar situation to those profiled in the Morgan Stanley report. She was a single mother who worked during the week as a nurse. On Friday and Saturday nights, she would drive with Uber until she acquired $100 in earnings, then she would head home. This effort earned her over $800 a month in extra income that helped her support her family. There are no other supplemental job types that are as simple and consistent as Uber is for this single mother. And the impact to her life is real and meaningful.

Another reason Uber is such a great supplemental work type is that peaks in usage elegantly overlap with time windows that are convenient for traditional 9-5pm, Monday-Friday full-time workers. Friday and Saturday nights are simultaneously the consistent weekly peaks of (a) demand on the Uber system, and (b) spare time that is available for people with standard full-time jobs that want to pick up some incremental income (the chart to the right highlights this). The same thing happens with holidays and festivals. The need for rides (and therefore drivers) at music festivals or seasonal events or in a vacation town like Tahoe are bursty. That said, these same holiday weekends are when people searching for supplemental income are free from the primary occupation and can make the voluntary decision to earn more money. I have met drivers in Tahoe that came to town with their family (on vacation) and are earning while others are hiking or skiing. The matching of this excess supply with excess demand is both elegant and fortunate.

There is another incredible driver-partner benefit of the Uber system that is radically different from traditional work types. Uber pays the driver their money immediately when earned. While other employers have experimented with ways to do this from time to time, or once a month — Uber allows this up to 5 times a day. Normal employers are nowhere close on this dimension (most pay 2-3 weeks in arrears). Imagine how this can be helpful to someone who is living paycheck to paycheck in their primary occupation. Not only are the extra earnings in and of themselves useful, but the speed of delivery of the actual cash could mean avoiding nasty traps like usurious payday loans. In fact, based on an analysis of Federal Reserve data, 47 percent of Americans “can’t pay for an unexpected $400 expense through savings or credit cards, without selling something or borrowing money.” Now they have a much better option.

There are many difficult situations in modern life where having a simple, flexible, and consistent form of supplemental income is quite beneficial:

  • A bridge while looking for a full-time job — In the above survey 32 percent of driver-partners indicated a major reason they partner with Uber is “to earn money while looking for a steady, full-time job.”
  • Extra income for a stay at home parent — Many parents are in positions where having a full-time 40-hour week job is incompatible with their duties and responsibilities to their children. Driving with Uber means they are able to have extra income without missing their children’s pick-ups, drop-offs, baseball games or theatre performances. And they can be home in the afternoons to help with homework.
  • Using it to fund their way through college — I have met many driver-partners who are attending college. College is expensive and student debt is extremely high. Students cannot work two days at McDonalds and then skip three days to study for your final — this is “not a thing” with a traditional scheduled job type. Moreover, studying and test schedules can be sporadic and unpredictable. Interestingly — the “elegant balance” characteristic applies here as well. Guess where there are lots of people that should be riding in Ubers instead of driving? College towns. Guess where there are lots of people with extra time that would love to have extra money?
  • Aiding in skills transition/retraining — The notion of skills displacement and digital disruption of certain jobs due to automation or robotics is a hot-button issue. It even comes up with regards to ride sharing as a result of the excitement generated around autonomous vehicles. If people are in need of learning new skills, they would be materially aided by the presence of a flexible and autonomous supplemental income opportunity as they retrain. Nursing school or a vocational training school have all the same issues as going to college. They cost money and demand time — which is super hard to do while maintaining a traditional 40-hour/week full time job.
  • Work your way out of debt — Many Americans are unfortunately saddled with debt — credit card debt and student loan debt. If you are simultaneously living paycheck to paycheck you have no way to “catch up,” and as a result the interest payments chew up the marginal income you would use to pay down the debt. It’s a real trap. Supplemental income — working extra hours while you need to in order to get past a problem like this can be very powerful.
  • Cover an unexpected expense — Sometimes life gives you lemons. You wreck your car. Your refrigerator or washing machine dies. You have an unforeseen medical expense. These are the exact moments where being an Uber driver-partner can get you over the hump. Not forever — just for a few weeks to cover the extra expense.
  • Do what you love — Many of life’s most interesting career pursuits can be the hardest from an earnings perspective. We all know the notions of a “struggling actor” or “struggling artist” or “struggling musician.” Over the years I have met many of Uber’s driver-partners who use the extra earnings power so that they can pursue their dreams. One musician I met would even drive while he was touring on the road — in every city along the way.

The McKinsey study also uncovered these broader societal benefits that come from scalable “independent work” earnings structures:

“Independent work could have benefits for the economy, cushioning unemployment, improving labor force participation, stimulating demand, and raising productivity. Consumers and organizations could benefit from the greater availability of services and improved matching that better fulfills their needs. Workers who choose to be independent value the autonomy and flexibility.”

One thing to note about most of the scenarios above is that they are “temporary.” There is not a desire or intention on the part of the driver-partner to do this as a lifelong career pursuit. Rather, they recognize that it is an amazingly convenient way to solve a temporary need or to help bridge through to another station in life. Some labor lobbyists argue we should turn ride-sharing driving into a scheduled, full-time affair, but in doing so, you would eliminate the key reasons that most people take to the road in the first place. You would also potentially eliminate the world’s premier supplemental work offering.

In just a few short years, over 3 million driver-partners have joined the Uber platform. To put that in perspective, Walmart has grown to 2.3 million employees over 55 years. I think it’s safe to say that over the past five years, no industry has created more new jobs and new income opportunities than ride-sharing. And keep in mind that approximately three-fourths of the industry revenue goes straight to the labor provider — which is higher than almost any other industry on the planet. As a result, in just a few short years, global ride-sharing driver-entrepreneurs have taken in approximately $75+ billion dollars (with industry lifetime revenues north of $100 billion dollars). And keep in mind that ride-sharing only represents around 1% of the miles driven in the United States. As more and more people reduce car usage and abandon car ownership — this number will most certainly go higher and higher.

One interesting thing to note about Uber’s 3 million driver-partners — they all “volunteered” to start driving with Uber. This articulation may sound unusual, but some detractors want you to believe that driving with Uber is equivalent to working in the steel mill in a small mid-western town, where it is the only opportunity for the individual. That is not the case — people are “choosing” to be driver-partners, and they are doing so in record numbers. You have to ignore over 200 years of microeconomic research to be able to contort your brain into believing that all of these people are voluntarily making poor life decisions for themselves.

In all the discussion about why independent work is different than a traditional full time occupation, all of the focus has been on the features and benefits that are absent relative to the historic and perhaps idyllic notion of “work type.” What is missing from the conversation is why this job type is so special and unique to so many millions of people. There is simply no way for the vast majority of employers in the world to offer a completely independent and autonomous work-schedule. They are unlikely to enable “instant payment” either. Yet these are the EXACT same features that show up over and over again in the research as to why people chose independent work in the first place. Independent work is undisputedly “different” from a traditional job type — which is exactly why it is so valuable to so many people.

Driving with Uber reverses the way we have been trained to think about labor. Instead of making labor conform to management’s notion of a ‘job,’ Uber hands control to the worker. You do not have to make your life fit the needs of your job; you can make the job fit the needs of your life. Just how revolutionary this notion is has not, in my opinion, been adequately understood.

The Thing I Love Most About Uber


This post is by bgurley from Above the Crowd

In spite of all the ink that journalists, analysts, and pundits have spilled on Uber over the years, no mainstream article has focused on what I consider to be the most elegant feature of this now ubiquitous, high growth global service — no driver-partner is ever told where or when to work. This is quite remarkable — an entire global network miraculously “level loads” on its own. Driver-partners unilaterally decide when they want to work and where they want to work. The flip side is also true — they have unlimited freedom to choose when they do NOT want to work. Despite the complete lack of a “driver-partner schedule” this system delivers pick-up times that are less than 5 minutes (in most US cities (with populations over 25K) and in 412 cities in 55 other countries. The Uber network, along with Mr. Smith’s invisible hand, is able to elegantly match supply and demand, without the “schedules” and “shifts” that are the norm in most every other industry.

Some have raised questions and concerns about the “gig” economy and the rise of these new independent and autonomous work types. Detractors frequently highlight that these work types lack some of the structured benefits that are frequently attached to traditional full time job offerings. However, what they fail to consider is that there is one critical and fundamental feature of the “gig” economy that is completely absent from traditional job types. That feature — worker autonomy of both time and place — simply does not exist in other industries. One cannot show up for work at Starbucks on a Monday and then decide not to work at all on Tuesday, and for only 2 hours on Wednesday. Oh yeah, and then on Thursday let’s just “play it by ear.” One cannot get a job at Walmart or McDonalds or ironically even as a taxi cab driver without agreeing to some sort of shift or schedule. It is unheard of for an employee to say “I want to work 3 hours this week, 45 the next, and then take 2 weeks off.” This autonomy and freedom of the “gig” work type, which is highly valued by millions and millions of people, would be impossible to implement for the overwhelming majority of companies.

In November of 2014, the Morgan Stanley sell-side research team that focuses on the auto industry, headed by Adam Jonas, made a trip to Detroit to visit the big three automakers. In their own words, “the highlight of the trip, however, was three Uber trips we took between meetings.” They chronicled these three trips in a report they published titled, Confessions of an Uber Driver: Rollin in the ‘D. Interestingly, they encountered three different driver-partners that epitomize why the “where you want, when you want” autonomy of Uber is so fundamentally important. Each of these individuals has a life situation that is supplemented and improved as a result of this super unique flexibility. Included herein is a summary of each driver-partner profile. You will notice that a traditional 9-5 job would have been completely unhelpful to any of the three.

  • The VeteranShe’s a retired US Army Veteran (recently stationed in Germany) and a mother of 3 daughters, the youngest of which is still in middle school. Our driver wanted a job that offered flexibility so she could take her daughter to and from school without relying on the area’s bus system. All of the other jobs she considered made it impossible to be there for her daughter when she needed to be. Uber provides enough flexibility so that she can take jobs when and where she wants while providing substantial income to help make ends meet while her husband, an active member of the US Military, is on tour.
  • The StudentOur driver was a 30-something Jordanian-born student at Henry Ford College studying computer science with an emphasis on internet security and encryption. He’s supporting a family and wanted a job with flexible hours that could accommodate his class schedule and his familial responsibilities.
  • The DeanHere was a dean of students at a charter school in the area who ran into a cash flow deficit for many months while undertaking extensive construction/renovations to his residence. He began ‘Ubering’ last June to make extra cash and has since developed a steady level of business, making around $600 to $700 per week with flexible hours that worked around his time at the school.

In January of 2015, Uber partnered with Alan Krueger, a professor at Princeton University, to conduct the first comprehensive analysis of Uber’s driver-partners, based on both survey data and anonymized, aggregated administrative data. The results from this survey mirrored many of the points that Jonas uncovered and that McKinsey would later uncover. Here are a few key highlights:

  • 85% say they partner with Uber “to have more flexibility in my schedule and balance my work with my life and family”
  • 55% of drivers work less than 15 hours a week, highlighting that a majority of drivers use the service for supplemental income
  • Driver-partners do not turn to Uber out of desperation, only eight percent were unemployed just before they started working with the Uber
  • Two-thirds of these individuals reported that they had a full-time job
  • Reasons for partnering with Uber:
    • “to earn more income to better support myself or my family” (91%)
    • “to be my own boss and set my own schedule” (87%)
    • “to have more flexibility in my schedule and balance my work with my life and family” (85%)
    • “to help maintain a steady income because other sources of income are unstable/unpredictable” (74%)
  • When asked directly, “If both were available to you, at this point in your life, would you rather have a steady 9 to 5 job with some benefits and a set salary or a job where you choose your own schedule and be your own boss?” 73 percent chose the latter.

In October of 2016, McKinsey and Company (working with Uber) published a detailed research report titled, Independent Work: Choice, Necessity and the Gig Economy. The complete work, which is quite detailed and interesting, is publicly available. As the main report is quite lengthy at 138 pages, some readers may prefer the 18-page executive summary. Unsurprisingly, their findings were quite consistent with points already raised above — people value freedom and autonomy. Here is a subset of the relevant findings:

  • The size of the independent workforce is quite large — “up to 162mm individuals, engage in independent work.”
  • McKinsey identified the key feature mentioned above — “A high degree of autonomy: Independent workers have a high degree of control and flexibility in determining their workload and work portfolio.”
  • Supplemental income is a key driver — “More than half of them use independent work to supplement their income rather than earning the primary living from it.”
  • Independent by choice — “Most independent workers have actively chosen their working style and report high levels of satisfaction with it,” “Approximately 70 to 75 percent of independent earners are independent as a matter of preference.”
  • High levels of satisfaction —“Free agents report higher satisfaction than those who choose traditional jobs on 12 of the 14 dimensions we measured, and they are just as satisfied on the remaining two dimensions. Free agents cite higher satisfaction than traditional workers across issues ranging from the creativity they can express to opportunities for learning and recognition. They are happier with their overall level of income and are just as satisfied as traditional workers on income security and benefits. These observations hold regardless of gender, age, education level, or household income.”

Last year, on a trip to New Orleans, I met another driver in a similar situation to those profiled in the Morgan Stanley report. She was a single mother who worked during the week as a nurse. On Friday and Saturday nights, she would drive with Uber until she acquired $100 in earnings, then she would head home. This effort earned her over $800 a month in extra income that helped her support her family. There are no other supplemental job types that are as simple and consistent as Uber is for this single mother. And the impact to her life is real and meaningful.

Another reason Uber is such a great supplemental work type is that peaks in usage elegantly overlap with time windows that are convenient for traditional 9-5pm, Monday-Friday full-time workers. Friday and Saturday nights are simultaneously the consistent weekly peaks of (a) demand on the Uber system, and (b) spare time that is available for people with standard full-time jobs that want to pick up some incremental income (the chart to the right highlights this). The same thing happens with holidays and festivals. The need for rides (and therefore drivers) at music festivals or seasonal events or in a vacation town like Tahoe are bursty. That said, these same holiday weekends are when people searching for supplemental income are free from the primary occupation and can make the voluntary decision to earn more money. I have met drivers in Tahoe that came to town with their family (on vacation) and are earning while others are hiking or skiing. The matching of this excess supply with excess demand is both elegant and fortunate.

There is another incredible driver-partner benefit of the Uber system that is radically different from traditional work types. Uber pays the driver their money immediately when earned. While other employers have experimented with ways to do this from time to time, or once a month — Uber allows this up to 5 times a day. Normal employers are nowhere close on this dimension (most pay 2-3 weeks in arrears). Imagine how this can be helpful to someone who is living paycheck to paycheck in their primary occupation. Not only are the extra earnings in and of themselves useful, but the speed of delivery of the actual cash could mean avoiding nasty traps like usurious payday loans. In fact, based on an analysis of Federal Reserve data, 47 percent of Americans “can’t pay for an unexpected $400 expense through savings or credit cards, without selling something or borrowing money.” Now they have a much better option.

There are many difficult situations in modern life where having a simple, flexible, and consistent form of supplemental income is quite beneficial:

  • A bridge while looking for a full-time job — In the above survey 32 percent of driver-partners indicated a major reason they partner with Uber is “to earn money while looking for a steady, full-time job.”
  • Extra income for a stay at home parent — Many parents are in positions where having a full-time 40-hour week job is incompatible with their duties and responsibilities to their children. Driving with Uber means they are able to have extra income without missing their children’s pick-ups, drop-offs, baseball games or theatre performances. And they can be home in the afternoons to help with homework.
  • Using it to fund their way through college — I have met many driver-partners who are attending college. College is expensive and student debt is extremely high. Students cannot work two days at McDonalds and then skip three days to study for your final — this is “not a thing” with a traditional scheduled job type. Moreover, studying and test schedules can be sporadic and unpredictable. Interestingly — the “elegant balance” characteristic applies here as well. Guess where there are lots of people that should be riding in Ubers instead of driving? College towns. Guess where there are lots of people with extra time that would love to have extra money?
  • Aiding in skills transition/retraining — The notion of skills displacement and digital disruption of certain jobs due to automation or robotics is a hot-button issue. It even comes up with regards to ride sharing as a result of the excitement generated around autonomous vehicles. If people are in need of learning new skills, they would be materially aided by the presence of a flexible and autonomous supplemental income opportunity as they retrain. Nursing school or a vocational training school have all the same issues as going to college. They cost money and demand time — which is super hard to do while maintaining a traditional 40-hour/week full time job.
  • Work your way out of debt — Many Americans are unfortunately saddled with debt — credit card debt and student loan debt. If you are simultaneously living paycheck to paycheck you have no way to “catch up,” and as a result the interest payments chew up the marginal income you would use to pay down the debt. It’s a real trap. Supplemental income — working extra hours while you need to in order to get past a problem like this can be very powerful.
  • Cover an unexpected expense — Sometimes life gives you lemons. You wreck your car. Your refrigerator or washing machine dies. You have an unforeseen medical expense. These are the exact moments where being an Uber driver-partner can get you over the hump. Not forever — just for a few weeks to cover the extra expense.
  • Do what you love — Many of life’s most interesting career pursuits can be the hardest from an earnings perspective. We all know the notions of a “struggling actor” or “struggling artist” or “struggling musician.” Over the years I have met many of Uber’s driver-partners who use the extra earnings power so that they can pursue their dreams. One musician I met would even drive while he was touring on the road — in every city along the way.

The McKinsey study also uncovered these broader societal benefits that come from scalable “independent work” earnings structures:

“Independent work could have benefits for the economy, cushioning unemployment, improving labor force participation, stimulating demand, and raising productivity. Consumers and organizations could benefit from the greater availability of services and improved matching that better fulfills their needs. Workers who choose to be independent value the autonomy and flexibility.”

One thing to note about most of the scenarios above is that they are “temporary.” There is not a desire or intention on the part of the driver-partner to do this as a lifelong career pursuit. Rather, they recognize that it is an amazingly convenient way to solve a temporary need or to help bridge through to another station in life. Some labor lobbyists argue we should turn ride-sharing driving into a scheduled, full-time affair, but in doing so, you would eliminate the key reasons that most people take to the road in the first place. You would also potentially eliminate the world’s premier supplemental work offering.

In just a few short years, over 3 million driver-partners have joined the Uber platform. To put that in perspective, Walmart has grown to 2.3 million employees over 55 years. I think it’s safe to say that over the past five years, no industry has created more new jobs and new income opportunities than ride-sharing. And keep in mind that approximately three-fourths of the industry revenue goes straight to the labor provider — which is higher than almost any other industry on the planet. As a result, in just a few short years, global ride-sharing driver-entrepreneurs have taken in approximately $75+ billion dollars (with industry lifetime revenues north of $100 billion dollars). And keep in mind that ride-sharing only represents around 1% of the miles driven in the United States. As more and more people reduce car usage and abandon car ownership — this number will most certainly go higher and higher.

One interesting thing to note about Uber’s 3 million driver-partners — they all “volunteered” to start driving with Uber. This articulation may sound unusual, but some detractors want you to believe that driving with Uber is equivalent to working in the steel mill in a small mid-western town, where it is the only opportunity for the individual. That is not the case — people are “choosing” to be driver-partners, and they are doing so in record numbers. You have to ignore over 200 years of microeconomic research to be able to contort your brain into believing that all of these people are voluntarily making poor life decisions for themselves.

In all the discussion about why independent work is different than a traditional full time occupation, all of the focus has been on the features and benefits that are absent relative to the historic and perhaps idyllic notion of “work type.” What is missing from the conversation is why this job type is so special and unique to so many millions of people. There is simply no way for the vast majority of employers in the world to offer a completely independent and autonomous work-schedule. They are unlikely to enable “instant payment” either. Yet these are the EXACT same features that show up over and over again in the research as to why people chose independent work in the first place. Independent work is undisputedly “different” from a traditional job type — which is exactly why it is so valuable to so many people.

Driving with Uber reverses the way we have been trained to think about labor. Instead of making labor conform to management’s notion of a ‘job,’ Uber hands control to the worker. You do not have to make your life fit the needs of your job; you can make the job fit the needs of your life. Just how revolutionary this notion is has not, in my opinion, been adequately understood.