Jim Cramer hosted Grubhub CEO Matt Maloney on Mad Money yesterday and asked him an entirely understandable question on competitive barriers – “What happens if Yelp decides to go allin against Grubhub…you have to worry that Yelp wants this business because it’s so fast growing…If I were the investment banker here, I would want Yelp, Grubhub, and Opentable all in one assembly. Would you be open to that kind of a thing?”
Matt’s answer was accurate but its underlying importance was likely misunderstood by the majority of viewers – “These are all great companies but they all do different things. Grubhub is a transaction between pickup and delivery, Opentable is the reservation, Yelp is for discovery…we all perform a specific function in our ecosystem and when you want delivery you have to use the Grubhub app.”
Nearly a year ago Andreeson-Horowitz General Partner Jeff Jordan noted in The Future of People Marketplaces that “our hypothesis is that the horizontal plays may suffer from a potential “paradox of choice”: Consumers could be getting overwhelmed by the seemingly infinite array of potential service options presented by horizontal platforms, but consumers can easily understand the highly specialized value proposition of a company offering services in one vertical.”
The fundamental misunderstanding of Cramer, many on Wall Street, and those who don’t actively study the tech ecosystem is that vertical specific marketplaces continue to refine their workflows, processes, and content thereby yielding increased consumer satisfaction, network effect, and frequency. The Yellow Pages – the quintessential horizontal marketplace – succeeded in a pre-internet environment, but still fails to allow users to transact, generate feedback, or efficiently discover content.
Further, there are significant data problems that each of these companies are solving. For Grubhub, the key is understanding menu data, dish ingredients, and relative pricing to enable them to better curate content to their users. For Opentable, their business succeeds through a focus on reservation management rather than specific menu items. While there may be synergies on the supply side (acquiring restaurant partners) the consumer expectations and competitive barriers are entirely different. Yelp has a similar angle – it is trying to make sense of a complex series of local activities – from haircuts to dog walking to entertainment. And local activities are extraordinary difficult to aggregate as any salon might have hundreds of unique menu options that make comparative search difficult. The data they are trying to structure looks very different from Grubhub’s food focused data.
At Chicago Ventures, we have invested in a number of vertical specific marketplaces: Kapow Events, BloomNation, Zipments, Shiftgig, and g2Crowd. We have seen firsthand how building workflows tailored to a specific industry can generate truly delightful experiences amongst users. It’s an area we love to invest in and only wish we’d be around five years earlier to have been able to partner with Matt and Grubhub as well.