When I entered the venture world in 2012 and started learning the ropes, one of the lessons that was repeated heavily was the importance of vertical specificity. Namely that consumers were becoming more demanding, expected lower friction and better workflows, and vertical focus was the only way to service these behavioral shifts.
From Andreessen-Horowitz partner Jeff Jordan’s seminal post at the time, “People Marketplaces”:
While many of the horizontal platforms are doing interesting things, we tend to think that the vertical approach is resonating more with consumers. Most of the companies that are showing early signs of breaking out tend to target one vertical. 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. When you use the Lyft app, for example, it’s immediately obvious that you can get a ride from where you are to where you want to be.
My partner Chris Dixon points out that vertical approaches have additional advantages. From a product perspective, the vertical apps can tailor their workflow to the unique characteristics of that vertical—the best way to find someone to clean your house is different than the best way to find a ride. And from a marketing perspective, a narrow focus on one vertical lets the company do things to potentially accelerate each side of the two-sided marketplace.
But sometime in 2014 or 2015, that started to change. Jeff Jordan, writing nearly 30 months later, about his investment in OfferUp, an unequivocally horizontal platform noted:
Yet one of the categories that has been resistant to disruption has been the “for sale” verticals — everything from bikes, boats, cars & trucks, computers, furniture, garage sale, motorcycles, musical instruments, RVs, camping equipment, baby clothes, cribs, sporting equipment, and so on. We believe OfferUp has the potential to truly be a category killer — in the existing category of buying and selling goods between people locally — by providing a trustworthy and easy mobile-first experience.
Let’s get real: “for sale” isn’t a vertical – unless eBay is a vertical. No – used kids clothes are a vertical. Furniture is a vertical (a big one). Electronics are a vertical. “For sale” is horizontal.
But it’s not just OfferUp. The once discussed opportunity for the unbundling of Reddit to build deeply vertical specific, transactional communities – well, that’s started to push horizontal and get rolled up too. Take Massdrop for example, the hyper fast growing digital transactional community, that initially focused on headphones, but now covers over a dozen topics – from its Series B announcement:
The company focuses on what it calls “community-driven commerce.” It allows people who are interested in things like high-quality audio, men’s fashion and quilting (yes, those are all actual Massdrop communities) to connect with other enthusiasts, discuss products, make purchases with group discounts and even help design new products.
Massdrop has already created communities in 11 categories. Co-founder and CEO Steve El-Hage (pictured above) said the oldest communities (namely, the ones for audiophiles and for fans of mechanical keyboards) are the most popular, if only because they’ve had a head start. Massdrop says it now has a registered user base of more than 1 million people.
El-Hage plans to launch four new communities before the end of the year, and then add a new community every month in 2016.
Josh Breinlinger, an early OfferUp investor, and Partner at Jackson Square Ventures actually noted this shift 9 months ago. Writing in Vertical or Horizontal, he tried to unpack the danger in funding every available vertical:
The high price vertical is dominated by marketplaces for cars and homes, e.g. Zillow, Redfin, Beepi. These are infrequent purchases with a very high ticket price. Consumers in these verticals care about price, selection, and service more than turnaround time and convenience…
Now, let’s look at a different vertical. Let’s take locksmiths. Does an “Uber for Locksmiths” make sense? I’m sure it would be a wonderful buyer experience to be able to push a button and have a locksmith show up in 5 minutes to fix a lock for $75. So, if somebody built this, would it be successful? I believe the answer is a resounding “no.” The economics of customer acquisition and usage patterns just don’t work because a consumer may only use a locksmith once every couple years and only pays a small amount of money…
The way to address this problem is to get horizontal usage. Let’s imagine that same locksmith marketplace also offers plumbers, gardeners, housecleaners, and carpet cleaners. Now a user can sign up to get a locksmith, but also use the service for every other home service.
What Josh is really saying, and what the public markets seem to be affirming is that TAM (Total Addressable Market) is becoming one of the major if not the absolute primary considerations in valuation and health of a business. Growth, in and of itself, isn’t the predictor of value it used to be because growth can be manipulated by heavy marketing spend AND will taper hard when companies try to pull unit economics in line IF the TAM or network effects are insufficient. Here’s a subset of the recent multiple contractions – Enterprise Value against TTM Net Revenue – across the tech/marketplace sector just over the past two quarters (Q2 of 2015 –> Q4 2015):
While its an imperfect analysis given that eBay and TripAdvisor – the two most stable companies in this sample – are materially more mature than the other comps, there remain some clear takeaways:
- For example, while Shutterstock is nearly as mature as TripAdvisor (founded in 2003 versus 2000) it is the biggest loser on a EV/Net Rev basis. It’s also has the smallest TAM of any company in the sample ($16 Billion).
- Etsy’s contraction is comparable which makes sense given that its TAM is arguably similar…I made the case back in Unpacking Etsy’s S1 that no one actually knows Etsy’s TAM but that their aggressive community policing and regulations have unquestionably constrained its potential.
- In spite of LendingClub’s hyper growth, one might have imagined that its multiple contraction would have at least been in line with its peer set, if not actually lower, given its dislocation. My belief is that $LC is still trading at a material premium to the market because its TAM as the premier marketplace for “lending” with potential expansion far beyond consumer and SMB loans is absolutely massive. Of course its 100% Y/Y growth helps, but its TAM is absolutely massive.
In summary: what I learned in 2012 still appears to hold true – consumers love vertical specific workflows. But investors love massive markets. And therein lies the dislocation. Heading into 2016’s bearish investor environment my belief is that startups targeting niche verticals (even those into the $billions) – without a clear story or understanding of how to expand horizontally, will be at a considerable disadvantage.