On December 10, 2020, the rental housing marketplace Airbnb completed its initial public offering at a $47 billion valuation — one of the largest IPOs of the year. No less than 24 hours later, the company’s market cap shot north of $100 billion. Both were incredible milestones for a platform that, by design, predominantly just facilitates transactions — it owns virtually none of the services it helps its suppliers provide.
The success of Airbnb is not without precedent. Over the past 20 years, industries have been redefined by marketplace giants like eBay, Amazon, Uber, and Udemy that have upended the way we shop, travel, eat, work, and learn. But at the same time, even the most successful marketplace businesses don’t reach transformative scale. The question is: What are industry-changing marketplaces doing that others aren’t — and can those practices be replicated?
Clay Christensen’s seminal theory of disruptive innovation offers guidance. While many marketplace businesses simply organize and facilitate transactions among current market participants, disruptive marketplaces create new types of transactions that draw in buyers or sellers (or both) who weren’t already participating in the market.
For managers, entrepreneurs, and investors who are looking for the next disruptive marketplace opportunity, it’s essential to understand how these novel transactions can be identified and created. In this article, we provide a guide.
Disruption Meets Marketplaces
Many markets don’t work well. The costs of accessing the market and/or identifying and communicating with potential transaction partners can limit who participates or make it hard for participants to transact with each other. Asymmetric information about sellers’ offerings or buyers’ needs, meanwhile, can make parties less willing to transact, lest they end up being taken advantage of. Under such market failures, there are opportunities for beneficial exchange that are inevitably overlooked. Marketplaces address these problems by providing rules and infrastructure that facilitate and improve transactions, and mitigate market failures — creating value in the process.
But when is a marketplace disruptive?
A disruptive innovation underperforms on traditional measures that current market participants value, but is “good enough” for a different set of prospective consumers who value affordability, accessibility, and convenience. Disruptive innovations thus target those who were previously left out of existing markets — people Christensen referred to as nonconsumers.
In the marketplace context, we have found it useful to separate nonconsumers from what we call nonproducers, i.e., individuals or businesses that are constrained in their ability to offer supply in the market. For a marketplace to be disruptive, it must identify either new supply, new demand, or both — targeting individuals or businesses who were unable to profitably produce or consume goods and services in incumbent channels. And the most powerful disruptive marketplaces are often those that simultaneously connect nonconsumers with nonproducers.
For an example of a marketplace that is not disruptive, consider Angie’s List (as of recently, called Angi). Founded in 1995, it was built in response to the painstaking process homeowners endure to find, compare, and vet home service providers. Angie’s List cut through the time and effort this process required with a simple platform built on efficiency, trust, and simplicity. Existing providers list their services on Angie’s List in order to find new clients at a price point they are accustomed to, complementing the incumbent home services supplier network. The platform makes the market much more efficient.
Yet while incredibly valuable, Angie’s List does not change the structure of the home services market. It also does not make home services more affordable or accessible and does not find a way to turn nonconsumers into consumers.
By contrast, consider Outschool. It’s a marketplace of online courses for children that allows parents, educators, and others to create their own courses. Though certainly used by families who would otherwise be able to afford and access enrichment programs, Outschool’s business model also enables an entirely new population of families to take advantage of these opportunities. It not only enables new families to consume educational content, but enables a whole new population of educators to monetize their passions and expertise in algebra, ballet, or Pokémon arts and crafts through the platform.
Put another way, disruptive marketplaces make good on famed Silicon Valley investor Bill Gurley’s observation that internet marketplaces “literally create ‘money out of nowhere’” because “in connecting economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist.” When nonproducers and nonconsumers come together, tremendous opportunity awaits.
Bundles, Trust Wrappers, and New Ways of Transacting
Many marketplaces target existing supply and demand in a more efficient or trusted way — they improve existing transactions. Disruptive marketplaces, however, expand market participation by creating new types of transaction altogether. After examining what venture capital firm Andreessen Horowitz identified as the top 100 marketplace startups in 2020 (plus a number of our own favorite marketplaces), we have identified four novel transaction types that can unlock disruptive potential.
These novel transaction types are not mutually exclusive. In fact, because nonconsumption often derives from many distinct sources, marketplace disruption often entails creating new transactions along several dimensions at once.
Smaller supply units.
Before the advent of marketplaces such as Airbnb and Getaround, most people’s homes, apartments, and cars were nonproductive assets: spare couches and bedrooms earned no rents and cars were parked most of the time. The new platforms, however, allowed those assets to be monetized. They made it possible to carve homes up into smaller rental units and enabled vehicles to be rented over short time horizons, selling a bite-sized unit of supply.
These “smaller supply unit” transactions are often disruptive because they come at a lower price, which makes the product affordable to a new group of people. This also produces a transaction type that incumbents are unable to copy because their business model is optimized for larger-unit (and therefore higher value) transactions.
Bundles.
Other marketplaces have created new transactions by aggregating rather than carving up supply — and in some cases, aggregating demand. Classpass bundles excess supply of exercise class slots into a “membership” that customers could buy to access classes across multiple fitness studios. Individuals could sign up for classes flexibly and frictionlessly according to their interests, whereas previously they would have had to buy classes or memberships at individual studios.
As a corollary to the smaller supply unit transaction type, bundles are generally inconsistent with incumbent business models. Though gyms, for example, offered individual classes before the advent of Classpass, the prices were so high that prospective customers were effectively forced into monthly memberships. Thus, for someone who previously couldn’t afford a monthly membership, a bundle of class units across gyms can offer a “good enough” whole that is greater than the sum of its parts, creating demand for a new transaction entirely.
New suppliers.
One of the simplest ways marketplaces can create new transactions is by building infrastructure that enables new suppliers to enter the market. Countless would-be online sellers, for example, have been held back by the sheer complexity of the web design, fulfillment, and inventory management skills required to run an ecommerce business. Amazon Marketplace lowers each of those barriers significantly, enabling millions to operate their own online stores. Similarly, Substack (an online platform for writers), Patreon (a membership platform for creatives), and other platforms have made it substantially easier for writers, artists, and others to market and monetize their expertise and skills, unlocking a new talent pool.
Reducing supply barriers presents disruptive opportunities in two ways: First, building a platform that turns nonproducers into producers creates competition, which ultimately lowers the price relative to existing market offerings. Second, matching new supply and new demand enables a degree of personalization that incumbents simply cannot match at a comparable price point.
Trust wrappers.
Certain transactions don’t exist (or are highly constrained) because a trust barrier prevents demand from engaging with supply. Health care data, for example, is highly sensitive and thus difficult to share in a trusted way — much less exchange or sell. But blockchain solutions make it possible for health providers to share data in a trusted fashion without need for intermediaries. The “wrapper” in this case is cryptographic technology that enables a publicly verifiable transaction ledger that records where data has been sent. Such trust wrappers create opportunities for disruption by facilitating transactions among parties who would otherwise be unable to access the market.
Applying the Framework: Residential Real Estate
Our taxonomy of new transaction types offers a powerful set of lenses for any investor, entrepreneur, or manager looking to identify truly disruptive marketplace opportunities. To see how this can work, consider the residential real estate industry.
Smaller supply units.
Many prospective home buyers are unable to purchase because they face a chicken-and-egg problem: they do not have the resources (i.e., a down payment and/or sufficient credit opportunities) to buy a house outright, yet without the appreciation of home equity, they may never be able to. This suggests a potential smaller supply unit marketplace strategy: Rather than buy homes outright, could an entrepreneur make it possible for residential buyers or investors to instead buy smaller home equity units?
Real estate startups Unison, Noah, and Point already enable homeowners to sell portions of their home equity, and it’s not hard to imagine these sorts of transactions being made available to prospective home buyers as well. For example, a would-be homebuyer could invest a small amount of money into the equity of one or more homes which they are confident will appreciate. When the home is sold (or when the homeowner pays back the equity financing), the prospective buyer gains from the appreciation, which improves their ability to afford a larger down payment in the future. This type of marketplace would directly target nonconsumption, and potentially tap into nonproduction, by allowing homeowners capitalize on their home’s equity without having to sell the entire home. This offering would also be completely orthogonal to traditional lending and real estate brokerages, who profit on the sale of entire home units.
Bundles.
The financial barrier to developing an entire multi-family home or condominium complex is typically quite high; this results in nonproduction among individuals who can’t deploy sufficient capital to take on real estate development projects. But if we bundled the financing, several entities would be able to co-finance a building investment project in an attractive market. This bundle of supply may be well matched in a marketplace which bundles demand, becoming like a version of Kickstarter for real estate development. A group of investors could propose property types and locations, with prospective buyers or renters agreeing to move into the new units once they are completed.
This marketplace has the potential to expand access for both supply and demand that are constrained by capital and lending requirements. New developers, as well as those with ideas for properties in up-and-coming areas, could lower the cost of development by aggregating demand upfront, resulting in more affordable offerings.
New suppliers.
For decades, the residential real estate market in many countries has been fully intermediated by real estate agents who extract a significant share of the transaction price from sellers. Agents’ market power has come in large part from controlling access to the information and resources needed to buy and sell a home — property listings are often proprietary and can only be created or viewed by agents. But Redfin, Zillow, and other platforms are directly addressing this pain point, making listings publicly accessible and creating technology prospective sellers can use to list their homes directly. As a result, sellers are starting to cut out the intermediaries; in Zillow’s case, homes are now being purchased outright on the platform, a transaction which immediately taps into potential nonproducers (home sellers).
As supply barriers continue to come down, nonconsumers will participate in real estate markets that were previously inaccessible due to the sheer cost of brokers fees. Although 3% on an expensive home purchase may not make a significant difference to most prospective buyers, a one-to-two month broker’s fee on a rental property is prohibitive for many. Platforms that remove these expensive intermediaries will thus create opportunities for suppliers to transact with nonconsumers.
Trust wrappers.
Many prospective home buyers are constrained by a point-in-time debt-to-income analysis from their bank, which limits the available pool of homes that can be purchased. However, many individuals’ short and long-term income potential is significantly higher than what they earn today. Many universities recognize such an opportunity in their faculty members and provide home loan certifications that help banks see less risk than what a junior faculty salary may indicate. Imagine a platform that creates similar trust wrappers for homebuyers. By analyzing industry growth, firm market value, and an individual’s professional track record over the prior seven years, a platform could generate a stamp of approval that offers increased credit access to those seeking to purchase a home — particularly in markets where home prices continue to rise.
The impact of such a system on nonconsumers is straightforward: more individuals would have access to mortgages than previously possible. On the supply side, the trust wrapper might enable smaller banks and other entities to compete in a mortgage market that is currently dominated by large banks. While larger, more established financial institutions will be happy to continue serving their usual customer base, smaller, industry-focused, or regional banks can begin a disruptive march among customers traditional banks may be inclined to ignore.
…
These real estate examples illustrate how our framework can be used as a high-level roadmap for identifying marketplace opportunities in any given industry. And though of course none of the ideas suggested here are guaranteed successes, they serve as a starting point for entrepreneurs looking for ways to create disruptive growth.
And while marketplace businesses are complex to execute and manage, disrupting through marketplaces is paradoxically less daunting than it may seem. This is, in part, because marketplace disruption can take advantage of existing market forces.
Every market is already at work trying to achieve efficient outcomes among participants — who already have some desire to transact. Marketplace builders simply need to identify transactions the market would like to complete, but that are blocked because of some inherent friction. Once an entrepreneur figures out how to eliminate that barrier through marketplace design, the market quickly takes care of itself. And unlike in other innovation categories, a disruptive marketplace can often move up-market directly, because whatever transaction efficiencies it finds can be applied directly to improve transactions among pre-existing consumers and producers.
Moreover, disruptive marketplace transactions occur at a different level of abstraction from most incumbents, which leads to greater flexibility. For example, Marriot may think of itself as in the “hotel business” — as a result spending countless resources improving their properties and services. But for most Marriott guests, the high-level transaction is not “hotel services” but simply “travel housing.” Airbnb focused on that higher-level transaction unit and reduced barriers to participating in those transactions as much as it could — creating and capturing tremendous value along the way.
The past two decades have seen the rise of many valuable marketplace businesses, but the most iconic, category-creating ones have disrupted traditional value networks with the novel transaction types described here. Understanding such disruption helps us understand how those marketplaces succeeded — and provides a framework for innovators looking to identify the next big marketplace opportunities.
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What Makes an Online Marketplace Disruptive? - Harvard Business Review
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