If there were a list of tech and VC articles that was a hallowed ground, NFX’s “The Next Ten Years Will be About Market Networks” would surely make it. It is undoubtedly a tempting idea to see a new breed successful startups that combine the best of SaaS with marketplace businesses (“the powerful network effects, defensibility, and scalability”) and the best of both (the “strong network effects, scalability and scalability”)
This post will cover what I know about the business model, its success attributes and whether investors (including James Currier from NFX) still believe that the next six-years will be all about market networks. It was published four years ago.
Market Networks: What is it and why should we be excited?
You get a market network when you combine a marketplace and social network. Let’s take a look at Good Monday* to make the concept clearer. Good Monday is a SaaS platform for office management. It also offers a marketplace with all the service providers (from cleaning to catering to office perks and beyond).
James will continue to say: “A market network is often built by offering a SaaS platform to professionals that allows them to perform critical tasks. The same SaaS tool also allows the professional to connect with their network offline. . . Many people who make up these professional networks have been communicating with one another for many years via fax, checks and overnight packages. A market network allows professionals to make it easier to run their businesses and to provide better service to clients by transferring these connections and transactions to software.
Net negative churn is a measure that sums up the strengths of the business model compared to other SaaS companies or marketplaces. This metric measures high stickiness, customer satisfaction and low leakage. It also indicates that cohorts are increasing in value rather than decreasing over time. Because the work tool is integral to professionals’ day-to-day lives, it makes market networks more resilient than other marketplaces. It also prevents disintermediation by making transacting parties’ lives simpler.
Although the strengths of this business model are numerous, they also have their challenges. The main challenge lies in managing all the competing KPIs within the business model market network. This includes figuring out how products can be built to serve each set of KPIs for SaaS, networks and transactional markets. We’re finding that once one part of the business is working, the teams will index the other. James says that they move the company from the full market network and make it a SaaS business with a transactional bit or a marketplace with embedded SaaS software.
Is there a solution? Mik Stroyberg, the founder of Good Monday, emphasizes that it is important to communicate internally the goal to create a Market Network. This will ensure discussions about product development and KPIs align with the long-term vision, rather than optimizing for short-term KPIs. He says that the Market Network is not something that can be built in a single day. Therefore, the dynamics of competing dynamic must be constantly reexamined and managed. Mik stresses the importance to pay attention to metrics related platform activity, such as the number interactions (even within the exact same customer group), as these are indicators that the network is moving in the right direction.
Considering all the information we have today about the strengths of each business model, does VCs still believe that “the next ten year will be about Market Networks?”? James definitely believes so. James does. NFX has made a variety of market network investments in recent years. James also helps his portfolio of SaaS businesses and marketplaces to develop the other parts of what makes a market system. A set of principles and approaches that can help build larger, more resilient businesses is one way to better understand a market network. It is at the intersection between several business models and product experiences that have been traditionally separate. James says that understanding how they work will help you migrate your business or product to a better place.”
Market networks should be sector-specific, rather than general-purpose. This is a trend that is growing at the moment. Menlo Ventures’ Matt Murphy tells Business Insider that many of today’s most successful enterprise-software companies have created all-purpose software that can be used in many fields by corporations. . “The next wave will be all about specialization.” Vertical Specific SaaS and market networks may merge to create a wave with even greater amplitude.
Market Networks’ excitement stems from the possibility of combining the three most popular business models in the tech industry to maximize revenue potential. It seems that the price you have to pay is three times as complex.
The Updated Market Network Player: Success Attributes
Below are the seven characteristics that make a Market Network successful, as well as the lessons I have learned over the past couple years.
1. Markets networks target complex services, and not an on-demand quick fix.James believes that market networks should be built around services that are high in value, subjectively judged, involved, and long term.
I added: A fragmented supplier network and the need for demand side interaction with multiple suppliers to achieve desired results. Markets with high transaction costs are also great places to build a market network.
2. The supply side of the equation is not commoditized.
Currier claims that marketplaces such as Uber are a good example of this.
The supply side is commodityized, and drivers can be interchangeable. Market networks are for markets in which suppliers are valued for their uniqueness.
I also add:A market network that allows for the commoditization of the supply side might be a good fit. Suppliers may feel that the incumbent market has robbed them their uniqueness and have closed them down. This is what we saw with Floom, our portfolio company – Market Network for florists – which was able attract florists from incumbent Interflora because of this.
3. Collaboration occurs around a project. ‘Multiple professionals collaborate with clients and among themselves, with the SaaS as the center, on projects that take days or years to complete.
I’d like to add:It would be great if the project was ongoing, as in the case with office management on Good Monday. As long as the “project”, is constantly evolving, it cannot be solved once and forgotten about.
4. The profiles of the people involved are unique and should better capture their identity than any other online.
I also add:This is the area James has seen most companies fail in since he wrote the article. He shares that few of the market networks he works with were able to create new profiles for their verticals in the face of LinkedIn. The hard part of creating profiles is half the job. The magic happens when people behind them interact on a network. Professionals can use the platform to help them better present themselves. This is especially true for those in areas that are either slow in digital and inefficient in marketing and sales, or where professionals cannot effectively showcase their skills on existing networks because of the nature of their work. Creatives who require the platform to support audio/video.
5. They are able to build long-lasting relationships by bringing together professional connections online and leveraging them for commerce promotion.
I added: Monday’s net positive churn, with each cohort growing in value over the time – is a testament to market networks stickiness & how they help create long-term relationships. Why is it that both parties prefer transactions to take place on the platform? Good Monday is good for both the supplier and client. It ensures prompt payment, simplifies billing, and increases communication with clients, which leads to better retention. Good Monday is a time-saver for the office manager. It means that all office activities can be consolidated into one tool.
6. Referrals flow freely: Market network software was designed to make referrals easy and more frequent.
I say: The holy grail of professional development is to create a tool that makes it so easy for professionals that they only want to do business with those who use your tool. To have clients turn suppliers into clients and to have suppliers convert clients to you.
7. They improve transaction velocity and customer satisfaction through software.a Market Network “increases close rate on proposals, and speeds up payments. Software also improves customer satisfaction, reduces miscommunication and makes work pleasant and beautiful.
I added:Market networks can use market networks to build productivity tools on the supply side. These include automating invoicing, prenegotiating contracts and quotes, building productivity tools to streamline transactions, and moving communication away from fragmented platforms that don’t capture data to an intelligent platform that learns. James said recently that “there is no better way to get into the heart and soul of a professional than to help him make more money.”
A market network is a SaaS-based tool that is specific to a particular sector. It also has an integrated marketplace. However, it is difficult to build products that meet all three sets of KPIs. The key to success, whether you are trying to create a Market Network or gradually building one over time as your business grows, is to focus everything around a feature that professionals use daily.
Are VCs still assuming that the next six-years will be all about Market Networks, or do they not? As Vertical Specific SaaS companies emerge, the Market Network trend will likely gain momentum. New Market Network companies will be born in the new decade. Existing Marketplaces, SaaS businesses, and Networks will continue to adopt features from each other to create more viable vertical businesses.
*Disclosure: Clara serves as Good Monday’s board member and firstminute capital is an investor.