Local offline-to-online marketplaces are just beginning to impact the lives of individuals and small businesses, enabling them to save time and money and generate new revenue streams. Where there was previously friction, opacity or scarcity, local marketplaces are providing convenience, transparency and abundance. Homebrew is focused on supporting seed stage companies like these that are building the Bottom Up Economy. Our prior experience working with and investing in companies such as OpenTable, Angie’s List and several less successful marketplaces has helped inform how we evaluate and support investments in this segment. Here are some of the other key things we look for in startups employing a local marketplace model.

Focused use case: We believe that scale is the outgrowth of doing one thing really well. Accordingly, we prefer to see local marketplaces that nail a specific, focused use case rather than take a broad platform approach from the outset. Homejoy is a great example of a company that has had relentless focus on a single use case, cleaning your home. An early competitor, Exec, offered a platform where all kinds of services, including home cleaning, could be requested but suffered as a result. One of the primary benefits of focusing on a narrow use case is that customers don’t need to think about how or why to use the marketplace. Focus makes that abundantly clear.

Premium experience for sub-premium price: Great local marketplaces enable customers to have a new experience that is magnitudes better than the old. But the best marketplaces deliver that new, better (i.e., premium) experience for a sub-premium price. Uber and Lyft are the prime examples of delivering infinitely better experiences than hailing taxis and typically at only modestly greater costs (even cheaper in an increasing number of cases). One of our Homebrew family companies, Shyp, is similar in that it delivers an incredible shipping experience at standard retail rates.

Necessities over luxuries: There are local marketplaces for all kinds of products and services, but we prefer marketplaces that are focused on necessities rather than luxuries. Necessities tend to have higher transaction frequency, greater word-of-mouth and less susceptibility to economic downturns. Everyone needs to eat, wash their clothes and get to work. But not everyone needs to fly in a private jet, rent a yacht or hire a Michelin star-winning chef. Those can be wonderful services and they can be delivered in compelling ways, but our view is that products and services that are truly need-based lead to more vibrant. liquid marketplaces.

Organic distribution: Word of mouth is the best marketing. But there are other forms of organic distribution that can be just as powerful and cost effective. For example, when Uber launched, taking a ride with a friend introduced many others to the experience. When Shyp sends a package, the recipient is exposed to the delightfulness of the service. Many of the most compelling local marketplaces have dynamics where the same person can be both customer and supplier over time. Dog owners on DogVacay can be hosts in one transaction and customers in the next. We love to see marketplaces that have these types of organic distribution opportunities embedded in their services.

Few emerging replacements: While we always tell startups not to fixate on competitors, in today’s world where switching costs and barriers to entry are often low, we prefer to invest in local marketplace startups that are solving problems that few others are addressing with new solutions. For example, for better or worse, we’ve avoided investments in the various types of food delivery companies because while frequency is high, there are many replacement products available. This makes it hard to to acquire customers cost effectively, to protect margins and to maintain significant market share over the long term. Many markets have room for more than one “winner” but very few have room for more than two or three.

The above characteristics may be unique to Homebrew, but we also like to see things that others have recognized as important to marketplace businesses. Many of these are well-documented by Bill Gurley in his excellent posts on marketplaces and platform transaction fees. In the past year, we’ve seen local marketplace startups in countless areas, including tech support, parking, home services, cleaning, laundry, food, labor, property rental and transportation. We’ve made investments in several verticals, including shipping with Shyp, legal services with UpCounsel and property management with an unannounced investment. But we believe that there are many more use cases for which compelling products and services can be delivered via a marketplace model. If you’re starting a local marketplace company, especially in specific labor verticals or providing B2B services, please contact me at satya at homebrew.co.

Additional posts on Homebrew investment themes:

Bottom Up Economy

Vertical Software