AlbionVC Marketplaces

Our investment thesis for marketplaces has changed since we invested in booking.com many years ago. We recognise it is harder to scale rapidly - there is no inevitable winner-takes all network effect to rely on.

by Cat McDonald

booking.com took a huge chunk of the travel market by transforming the holiday-booking experience to be better suited for holiday go-ers. With e-ticket purchasing, broad choice, user reviews and rapid reservations, booking.com was able to gain strong traction despite substantially higher fees for hotels. Booking.com transformed a sub-optimal business model to meet customer needs and arguably remains Europe’s most successful start-up to date – and one we are proud to say was Albion’s first marketplace investment!

Since then, we have seen waves of online marketplaces transform the customer experience across verticals.

Andrew Parkers’ snapshot of craigslist’s unbundling (2010) captures this beautifully. Much like booking.com, these vertical marketplaces were commoditised and secured their “winner takes all” market position by establishing a strong network of customers and suppliers.

The remaining verticals on craigslist are more complex and cannot rely on network effects to solidify market leadership.

New marketplaces must go beyond the traditional model focussed on discovery and market liquidity (commoditised marketplaces) and bring demand and supply together under complex conditions.

As a result, these marketplaces tend to suffer from low liquidity at first due to the time and effort required by both sides to make things work. Uber is a classic example.

Uber achieved success by establishing structures and incentives to promote trust (brand) and reliability (execution).The fact that if you have a bad experience with your driver you expect remediation from Uber (not your driver) pays testament to this.

The next wave of exciting marketplaces will build on this trend of taking ownership of execution and ensuring trust.

However, this is hugely complex and a successful business must strike a delicate balance between managing greater risk and providing an efficient yet infallible service.

When we first met Koru Kids ahead of leading their seed round in 2017, we asked founder Rachel Carrell why the childcare market still didn’t have a dominant provider. “It is really hard”, was her valid response.

Yet childcare is one of the largest markets craving disruption. On average, working parents in the UK spend 34% of their incomes on childcare – more than on their mortgage! The industry is worth £11bn+ in the UK alone and $300bn across the OECD. Current childcare solutions are antiquated, expensive and fragmented. They require mothers to patch together multiple services and be experts in nanny recruitment i.e. spend hours wading through basic marketplaces (childcare.co.uk, sitters.co.uk), scouring Facebook groups or paying extortionate rates to agencies (Montessori, Norland). Payment, pensions and taxation are dealt with separately.

Koru Kids sources, vets and trains nannies (initially university students and more recently older people) and subsequently provides a full-service matching capability pairing nannies with families seeking childcare. Koru Kids makes the market significantly more efficient and solves the most acute pain points currently experienced by parents.

Portfolio company Healios is providing remote assessment and therapy sessions to a huge waitlist of underserved children suffering from poor mental health.

The premise of both Koru Kids and Healios is that a pure tech solution is not enough, and a full stack solution combining tech and traditional services is essential.

Koru Kids and Healios are examples of highly complex and heavily curated marketplaces that can be fast and continually improving, but by necessity, are delivered without compromising on trust.

Our investment thesis for marketplaces has changed since we invested in booking.com many years ago. We recognise it is harder to scale rapidly - there is no inevitable winner-takes all network effect to rely on.

We believe there are alternative and equally attractive barriers to entry for new disruptive marketplaces, namely: a brand (for trust) and first-class execution (for complexity).

Indeed, brand and execution can create excellent moats which can support long-term margins in a way that commodity marketplaces cannot. The next wave of marketplaces will embrace the opportunities that traditional marketplaces have not yet infiltrated – those with complex operational hurdles and a high bar for trust. Such marketplaces can take longer to scale but have a huge and sustainable impact on customers’ lives, creating considerable value.

This is why we are so excited to support companies such as Healios and Koru Kids, and hopefully many more!