Bringing buyers and sellers together to create investment opportunity

Digital Marketplaces: Ones to Watch 2024

Digital marketplaces have been an area of consistent investor interest in recent years given their growth profile, defensibility, and profitability.

Across markets, digital marketplaces:

Create a single destination for buyers to browse, compare, select and/ or buy from providers based on specific requirements and by providing sellers with a large audience of potential buyers with a measurable RoI
Benefit from positive long term market tailwinds, including an ongoing structural shift to online across the shopper journey - both in terms of spend and advertising as well as the increasing complexity of the digital landscape
Create strong and defendable niches, with 1-2 marketplaces often holding 50%+ market share, reinforced by a virtuous circle/ flywheel effect as buyers and/ or sellers scale
Are profitable through scale – larger, mature operators generate 25-50%+ EBITDA, albeit marketing spend does vary (e.g. price comparison websites tend to require higher marketing spend vs. classifieds)
Are often defensible vs. new entrants as well as encroachment from international brands and marketplaces in adjacent sectors due to limited brand stretch
Have common value creation levers that enable an investor to enhance value during the hold period
Offer high deal flow, particularly in the mid-market, creating opportunities for investment.

What is a digital marketplace?

Digital marketplaces share a common core purpose of connecting a fragmented seller and/ or buyer base through an online platform. However, there are seven distinctive operating models that most digital marketplaces leverage to achieve this. Each model has its own form of monetisation, levers to drive value creation, and P&L structure. These models include

Classifieds

Classifieds are advertisement services that allow individuals and businesses to list products or services
Classifieds tend to be most popular in highly fragmented sectors with heterogeneous, often second-hand items (e.g. automotive, real estate).
Classifieds enable buyers to browse and compare across multiple criteria, enhancing the user experience and success rate of transactions
In many instances, the sale will take place offline. As a result, few classifieds engage in the actual sale of the item but monetise primarily through listing fees, with the potential to capture value through premium/ tiered listings, advertising and data

Price Comparison Websites (PCWs)

PCWs are online platforms that aggregate and compare the prices/ key information for similar products or services from different providers, allowing customers to identify the best deals to suit their needs.
PCWs are particularly effective in industries such as insurance and utilities where there are low/mid teens sellers (vs. hundreds/ thousands of sellers in other marketplaces) and products are standardised with clearly defined differentiators (e.g. price)
PCWs typically monetise on a performance basis (i.e. Cost Per Acquisition), enabling them to demonstrate clear value to sellers and are able to generate high traffic volumes, driving scale to suppliers and enabling data collection/ insights. Increasingly, PCWs are also extending into transactions execution, leveraging their strong UX/UI capabilities

Sales platforms and aggregators

Sales platforms and aggregators compile products and services from a wide range of suppliers (including in some instances owned stock), allowing customers to compare and purchase items/ services from a single site/ location. The sale typically takes place on the marketplace and the marketplace often also offers logistics/ shipping to fulfill the sale
Sales platforms and aggregators are particularly effective in industries such as retail and food delivery where the products/ categories have core product features that are relatively standardised but there are a wide range of potential providers
Sales platforms and aggregators typically take a commission on sales generated as well as listing fees and advertising

Affiliates and lead generators

Affiliates and lead generators promote products or services for a business, typically earning a commission for each lead or sale generated. They connect potential customers with businesses, leveraging various marketing channels to drive traffic and conversion
Affiliates and lead generators are particularly effective in industries where customers are hard to reach or convert. Affiliates and lead generators are able to effectively engage and educate potential customers (e.g. through content, discounts, ratings) across a wide range of industries and services
The performance nature of spend drives clear ROI for brands and often exposes the advertiser to different customer segments

Auctioneers

Auctions play a key role in enabling fast, transparent sales of unique goods and are typically most successful for heterogeneous products or in some instances, where the item is perishable. As a result, they tend to be most successful in markets where there is a large second hand marketplace (e.g. industrial and commercial, arts and antiques)
Most auctioneers take a commission on the sale achieved from both the seller and the buyer and some also offer a range of broader services to encourage buyer engagement and bidding intensity

Peer to Peer sites (P2P)

P2P sites facilitate transactions between individuals. P2P sites are more common for enabling the exchange of a service (e.g. accommodation) rather than a product and typically require high levels of liquidity to be successful
P2P sites take a commission of sales generated through the site and can benefit from significant network effects

Tech/ services into marketplaces

Tech/ services into marketplaces are digital tools, software, and wider services that integrate into online marketplaces to enhance functionality, user experience, or marketplace efficiency, often leading to increased engagement, higher transaction volumes, and additional revenue streams.
These are prevalent across all marketplace categories and play a key role in enabling the marketplace ecosystem to be successful. In some instances, marketplace leaders will sell their technology as a white label service to drive ancillary revenue

Proven marketplace categories

Across Europe, there are a number of ‘proven’ categories with clearly associated marketplace models.

Automotive classifieds (e.g. Auto Trader in the UK)
Real estate classifieds (e.g. Rightmove)
Recruitment classifieds (e.g. Indeed)
Horizontal classifieds (e.g. Gumtree)
Finance/ utility price comparison websites (e.g. Comparethemarket)
Consumer retail platforms (e.g. Amazon)
Online travel agencies / aggregators (e.g. Booking)
Food delivery platforms (e.g. Deliveroo)
Taxis platforms (e.g. Uber)
Peer to peer travel (e.g. Airbnb)

The scale of ‘proven’ categories in large European countries means that the most attractive pockets of opportunity for an investor are proven categories in smaller European countries and Specialist categories in larger European countries.

Investment opportunities

Proven categories in smaller European countries

Whilst there are a number of products and services that support global marketplaces, many digital marketplaces have relatively limited geographical brand stretch. As a result, there is significant variation in the leading digital marketplaces for proven categories across Europe, with a number of local specialists holding #1 or #2 position in proven marketplace categories in smaller European countries. Because of the limited brand stretch, assets in this space also tend to be defensible and profitable. Combined with fewer Private Equity/ investment rounds, this creates further opportunities to drive value (e.g. increasing the proportion of digital transactions, expansion into adjacencies across the value chain).

Due to the addressable market size in these countries, assets in these geographies also tend to be smaller, meaning valuations are more accessible to a mid-market investor. Acquiring one of these marketplaces therefore presents an opportunity for mid-market investors to benefit from similar growth and performance seen in these categories in larger European countries over the past few years.

Specialist categories in larger European countries

Digital marketplaces exist far beyond the ‘proven’ categories outlined above. In categories such as B2B logistics, industrial machinery, procurement, business directories, and more, digital marketplaces play the same, essential role in bringing together a fragmented set of buyers and/ or sellers. As a result, businesses in these categories also benefit from the attractive elements outlined above; they are fast growing, defensible and profitable.

Because businesses in these sectors tend to be smaller than those in the ‘proven’ categories, valuations of assets in these markets are generally more accessible to a mid-market investor. Beyond this, there are also more potential primary deals in the space as well as, in some instances, greater opportunity for value creation.

However, whilst there is strong support for the investment thesis, a combination of (i) challenges identifying the right specialisms, (ii) backing the right winners and (iii) the speed of the flywheel effect means that many investors end up being more reactive than proactive in their investment strategy, with exciting, relevant businesses often outgrowing a fund’s cheque size within a short window.

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As a result, we actively track key themes and specialist marketplaces that we believe investors should be watching and tracking today but are likely to be slightly longer-term investment opportunities in our Ones to Watch report.

We are pleased to announce that the latest edition of the report is now available. Please get in touch with one of the team to receive a copy of the report.