When I first started building Trulia I quickly learned that, for marketplace startups, it’s a race against time to achieve liquidity in the marketplace before competitors or incumbents do — and your resources are very limited. So it’s key early on to identify the few fundamental lessons of marketplace leverage and have a laser focus on those fundamentals.
I recently had a conversation with Thumbtack Co-Founder and CEO Marco Zappocosta and discussed one big question – what are the highest leverage lessons you wish you’d known earlier about building marketplaces?
Here are the key takeaways:
Listen to the full podcast on SoundCloud, Apple Podcasts, Spotify, or Google Play or see the full transcript below.
In our essay 19 Tactics to Solve the Chicken-or-Egg Problem, we wrote about tactics you can use to help overcome the paradox of starting a 2-sided marketplace: how do you attract supply-side users without any demand, and vice versa?
When I asked Marco how he solved the chicken-or-egg problem for Thumbtack, he said that he asked himself this question:
How can we create network-independent value? How can we create value for our Pros, the supply side, before we had any network of customers? (2:47)
Thumbtack needed to ask themselves how they could create a single-player product with what economist S.J. Liebowitz calls autarky value that didn’t rely on the size of the user base.
Thumbtack’s solution was number 7 in our list of 19 tactics — build a SaaS tool.
What we built was a very easy tool for them to create a Thumbtack profile, and then with one click republish that onto Craigslist, importing all the pictures and reviews and metadata with a great sort of HTML layout, which they weren’t either interested or capable of doing themselves and was instantly valuable to them. (3:19)
Thumbtack built this tool to attract supply-side users. They knew that if they could get a critical mass of professionals, demand would follow on its own, similar to what OpenTable did (for example) to bootstrap their network, in their case creating a SaaS reservation software for restaurants.
Creating a free tool like this lets you offer a single-player product with “network-independent value” to supply-side users. Also, by publishing to Craigslist, Thumbtack was leveraging the classic growth technique of finding a scale destination and figuring out a way to help add supply so that they could later siphon off demand.
One of the themes Marco and I discussed was the challenges of maintaining a horizontal platform against disruption by vertical competitors.
The benefit of being horizontal is that you’re leveraging a single product experience across a large customer set or audience, and you’re able to make that single experience really, really good. The generalized experience combined with the ability to cross-promote traffic can be a better experience than a vertically-focused marketplace can provide with a lack of brand awareness and low traffic/liquidity resulting from a smaller network size or network density.
But on the other hand, if you’re building a marketplace going after a highly monetizable vertical, you can spend enough money on customer acquisition to acquire that network density, and this can be a problem for horizontal players.
For Craigslist, all the high-value categories are being picked off one by one, and what remains are things like resale furniture, free stuff, apartment rentals, etc. They lost the home sale category very early on but were able to retain rentals for a longer period of time because it’s much harder to monetize as a vertical.
The lesson to draw from this is that the lowest-hanging fruit for vertical players to disrupt will be those that are easier to monetize or are more effectively monetized via an alternative business model or product experience. NFX portfolio company Incredible Health, a verticalized recruiting marketplace for healthcare, is a good example of this because healthcare is an industry with sufficient complexity as to merit a differentiated product experience for recruiting.
And as Marco shared, continuing to innovate and push forward on the overall product experience as a horizontal platform is the best way to stay ahead of vertical competitors.
Between going after short-term goals and long-term, it’s a constant balance as a marketplace startup.
The reason to not ignore the short term is that you have to walk before you can run, and sometimes you have to do things that don’t scale. The MVP mindset of building a skateboard, then a bike, then finally a car applies to goal-setting.
The best form of financing as a startup is revenue. Even if it’s not going to be optimal in the long-term, to survive you may have to do things that don’t scale in order to get revenue or acquire users so that you can fight another day. Furthermore, if you’re able to get customers to pay, it demonstrates you may have some degree of product-market fit.
The other thing is that you don’t always know what the optimal long term goal is. If it’s too far off, you don’t necessarily know what you’re trying to build. You may have an idea of what a car should look like, but you don’t try and built that car on day one. You take baby steps.
On the other hand, it’s important to have goals and metrics for the long term especially with things that compound. As Marco mentioned during our conversation, he regretted not focusing on PR enough early on because it has a compounding effect so it’s harder to make up for early negligence of it later on. Marco shared that he thought Thumbtack lost out on a lot of brand-building opportunities because of that early lack of focus on PR, and brand in particular something that compounds tremendously over time, so focusing on it early can be a key competitive advantage.
Introduction: This is Christen O’Brien, Managing Editor at NFX, and you’re listening to the NFX Podcast. We’re talking about how to build a $ billion marketplace in this episode with Marco Zappacosta and Pete Flint. Pete is a partner at NFX and the founder and former CEO of Trulia, the real estate marketplace that merged with Zillow in a $3.2 billion transaction. And Marco is the co-founder and CEO of Thumbtack, a marketplace that matches customers with local professionals now valued at more than $1.7 billion. Today we’re at the NFX headquarters in San Francisco, California to uncover what it takes to build an iconic marketplace.
Pete Flint: Today we’re talking about marketplaces, we’re talking about Thumbtack. Maybe just as a way to introduce the story. Why don’t you tell us about Thumbtack and really the origin. How did you get going? How did you solve that critical cold star problem from zero to something?
Marco Zappacosta: So, all the way back.
Pete Flint: All the way back.
Marco Zappacosta: So, in many ways we did what you’re not supposed to do at the beginning, and decide to start a business and then go hunting for an idea. I’m happy to speak to the merits of that approach, which I think is undersold in Silicon Valley. But really the heuristic we took was, what is the biggest problem that we can think of that will inevitably be solved? And the observation that led to the last 10 years of work was why is it so hard to hire a plumber? We weren’t homeowners at the time, we were still in college.
Marco Zappacosta: But when we sort of realized this and started thinking, and it’s not just home services, it’s really all local services. It’s very rare for you to have to work so hard to spend money. All of capitalism is about enabling sort of your laziness to get what you want easily. And yet here was a category where people had the budget, had the desire, had the intent, and struggled to spend their money. And as we dug into that, it wasn’t because there was a lack of labor or lack of supply. There are millions of great professionals out there who would love to find that work and do a great job for you. It was a marketplace failure. It was a matching problem.
Pete Flint: So, how did you kickstart that? Because obviously the business today makes sense. But small company, no customers, no demands on their supply side. What was the sort of… Typically there’s a technique you employ to get going.
Marco Zappacosta: So, we actually went very broad, and in fact that was something that focused our thinking because it forced us to find solutions to drive liquidity that we’re sort of category independent and geographically independent. And you know this super dorky phrase that we told ourselves early on was: how can we create network-independent value? How can we create value for our pros, the supply side, before we had any network of customers that would ultimately be the the draw, and they want, you just don’t have that. So, that sort of hack or sort of a growth tactic that early on let us get going was we looked for where these pros were and where they were already hunting for customers. And at the time, 2009, 2010, that was Craigslist.
Marco Zappacosta: And so what we built was a very easy tool for them to create a Thumbtack profile, and then with one click to republish that onto Craigslist, importing all the pictures and reviews and metadata with a great sort of HTML layout, which they weren’t either interested or capable of doing themselves and was instantly valuable to them. Because we could say, “Hey, you’re on Craigslist or it looks like you want to be on Craigslist. We have this great tool. Just come fill out a profile.”
Pete Flint: A free tool?
Marco Zappacosta: Free tool.
Pete Flint: Yeah.
Marco Zappacosta: And what that did was attract pros who were motivated to use the internet to find customers. It was exactly who we needed. And two, it also gave us a relationship with them from the get-go. So unlike a typical directory, which has a ton of content about millions and millions of entities that has no relationship with, Thumbtack from the very beginning and still to this day has a relationship with every pro that you find on our marketplace.
Marco Zappacosta: Because we want to connect you with a person, with a pro, not simply with information about a pro. So, that was the early sort of growth tactic that got it all going.
Pete Flint: So, sort of classic growth technique of finding a scale destination that is attracting a similar level of demand and supply and then figuring out a way to add value to that to the sort of… On the positive side is symbiotic relationship on the negative side is sort of siphon off that demand.
Marco Zappacosta: Well, there was only an opportunity because they weren’t doing a better job.
Pete Flint: And it’s very hard as a horizontal platform to really excel in these vertical domains.
Marco Zappacosta: They are very unique. Craigslist could be this incredible juggernaut and it chose not to be and that left the door open to Thumbtack, Airbnb, all the personal sites could have been them. It’s incredible that they could have built that but chose not to.
Pete Flint: And then there was I imagine a fair amount of SEO work as well. I know, from my experience, we similarly employed kind of SEO in the early days. Back in 2009 and 2010 it was a viable strategy to kind of scale.
Marco Zappacosta: And we used that as well. And the benefit we had was because pros were coming to create profiles that they were going to use to represent themselves on other platforms like Craigslist, they’re very motivated to create a great looking profile and to give it a lot of unique content. And for a long time early on and even today we have shockingly little overlap with the other platforms that are out there. So, think of a Google of Facebook, a Yelp, this is a very long tail category that is very fragmented, that is still very opaque to sort of the internet writ large.
Marco Zappacosta: And our approach not only got us sort of high quality intentful relationships, but gave us sort of content that nobody else has, which for SEO is gold and is what it takes.
Pete Flint: I’m curious your experiences. Often what we see in startups is growth is a series of S-curves.
Marco Zappacosta: Yep.
Pete Flint: And that you sort of capture one opportunity and you leverage that. And then you’ve really, it’s sort of surfing a wave of kind of various different S-curves and finding distribution opportunities, and the bigger you are often the more opportunities open up. Over the last 10 years, how have those sort of S-curves evolved and perhaps how do you think also about platform risk? Obviously building a company off Craigslist. Craigslist end up shutting down a lot those kind of widgets.
Marco Zappacosta: Sure.
Pete Flint: How do you think about platform risk alongside that?
Marco Zappacosta: Well, day one you don’t, because you have nothing to risk and so you’re very happy to leverage some other platform to get going. And even with SEO early on our thinking was, oh man, this is a zero marginal cost platform to attract customers looking for exactly what we offer, which in our case was uniquely well-suited because we are a search engine at the end of the day. We are a place to find and hire pros, which is a search problem. So, it was a phenomenal fit in terms of channel. Now, there was no doubt that there was risk to it, which we are very well aware of, but the ultimate hedge against that is to create something that has the stickiness, that has the retention and the repeat usage such that even if sort of one channel in the early days is the dominant source of new customers, as you built up your base of existing customers over time that overtakes and becomes the dominant channel.
Marco Zappacosta: And that’s true for us. And I think that’s why we are at this point don’t fear that problem. But it took years and years to get there. But they won, that’s okay. And now we build our own direct relationship with these customers and word of mouth and that becomes the most important channel that we have to be able to keep growing.
Pete Flint: And it’s been fascinating to watch Craigslist, ’cause that has been a kind of a source of many, many startups. But it’s also a sort of classic kind of innovators dilemma for kind of want of a better phrase. They’ve been driven by the community, but that they failed their community because they’ve really been a slave to that and haven’t really innovated on top of that. And we’ll touch on this, but how do you not fall into that trap that many companies don’t? And we’ll talk about reinventing Thumbtack. But what have you learned from watching Craigslist all these years about what they haven’t done?
Marco Zappacosta: Well, I’ll speak to my own category, which is the one I know best. And I think the one important positive takeaway, which I think is not sort of emphasized enough is the value of liquidity. It’s absolutely mind boggling how big and important Craigslist, even to this day it still is. For a long time Uber and Lyft were getting the vast majority of their drivers off of Craigslist. The biggest sort of margin, accretive player in the gig economy space was Craigslist. And that’s incredible. And why were they going? It’s not ’cause it’s safe. It’s not ’cause it’s easy to use. It’s not ’cause it’s beautiful and well-designed. It’s because it has liquidity and it just shows how critical that is for a marketplace to both succeed and thrive.
Marco Zappacosta: And that was very clear to us. Look, at the end of the day we’re a matchmaker and if you can’t come and get matched with the right pro each and every time, you’re going to go elsewhere. And that has been the sort of overriding objective function to basically everything we’ve done. That said, and this is sort of what we think about ourselves, you can’t get trapped in a current way of doing things if you want to expect to survive sort of for the long term, especially in the consumer arena where sort of preferences are evolving and sort of the tools available to both sides are sort of always getting better and better. You have to keep pushing that ball forward. And I think it’s something I’m very proud of that Thumbtack has done sort of multiple times and sort of very critically over the last few years. But you can’t stand still, you got to keep running.
Pete Flint: The experience that I’ve seen from Craigslist in seeing on the housing side intimately, they lost the for sale category very early on and retained the for rent category for a long period of time. And now it appears they’ve lost it, at least the recent data I’ve seen, but it is truly remarkable.
Marco Zappacosta: But it lasted what, 20 plus years?
Pete Flint: Exactly. It’s truly remarkable that the liquidity has been there and particularly the fragmentation facilitates that liquidity rather than sort of professionally managed property managed marketing in terms of real estate versus more long-tail landlords is that that liquidity is highly persistent. There’s network effects are very, very hard to break, and once you have them, you’re in a very strong position.
Marco Zappacosta: I think our category was very well suited to be disrupted because when you think about what does well in a medium where the inventory is sort of expiring, it’s perishable inventory.
Marco Zappacosta: So, rental markets being a perfect example of that. Service professionals though are not that. A plumber is a plumber today and tomorrow and next week. And in fact, by denying them a permanent presence, you’re denying them the ability to accrue reputation and through that compete, not just on costs but on quality. And that’s the number one thing that pros hate about Craigslist. They say, “Hey, I love being able to access customers but I don’t want to have to compete just on price.” And that makes sense when you’re selling your table, fine, you care about price and that’s it. But when you’re selling your time and your labor and you are a true craftsperson, you want to be able to showcase that craft. And we really think of our pros as skilled professionals. They’re making on average almost $70 an hour in aggregate across the platform because they’re providing a sort of quality, unique custom service.
Marco Zappacosta: And that’s exciting. But what they don’t want is have to waste their time on marketing, and online marketing in particular, which is new and ever changing and sort of very technically demanding and increasingly this sort of like back office. So, our ambition for these pros is to let them focus on what they do best, serving their clients, plying their trade, and abstracting away the rest such that we can empower them to turn their time and talent into money.
Pete Flint: So, looking back, what would you have done differently? Going back nine years ago, what advice would you give your former self back in the formative years?
Marco Zappacosta: So, I have a tactical answer and then a more philosophical answer. My tactical one is I would’ve focused on PR earlier, and that seems narrow and trite, but the point here is that it is a channel that can compound that you have to invest in. And that takes deliberate effort just like any other marketing channel that you have. And I didn’t appreciate that and I underinvested in it for too long, early on. And I think TaskRabbit took the opposite approach, did a great job of investing in that and I think became the sort of labor story in the sharing economy. That could have and should have been us, and that is something that I think we neglected and lost out on a lot of brand building opportunities because of that. And I just thought about it wrong, so it was just a regret that I have.
Marco Zappacosta: The more philosophical answer is we didn’t understand the relative prioritization of what our customers and pros needed deeply enough such that we truly focused our development efforts. We had this vision early on that we had to obviously make the introduction, but then facilitate scheduling and payments and all the steps between sort of not knowing who to hire and a job well done. And look, those are absolutely the right things to have on the roadmap, but you don’t need to do all of them day one.
Marco Zappacosta: And in fact the reason that we were not focused deeply enough on the matchmaking is just we didn’t appreciate that was the core need. So far and above everything else, that’s where we should have focused longer and harder earlier. And I think we probably could have accelerated our path by a year or two had we had that clarity early on.
Pete Flint: Interest in the matchmaking because often in the sort of the quality matching might mean deterioration in short term metrics, but ultimately you’ll see it in retention metrics further down the line.
Marco Zappacosta: That’s absolutely the case.
Pete Flint: When you’re studying the kind of metrics on a day to day basis, you’re just focused on making the numbers go up today or next week, but you’re not necessarily thinking about a year or six months time when they’re looking at it as a second transaction.
Marco Zappacosta: And this is something that I think we came to appreciate and then ultimately bet the company on.
Marco Zappacosta: So, now there’s sort of three areas of Thumbtack. The first area was when we were really just trying to find initial product market fit and early marketplace liquidity, building efforts. That’s from ’09 to sort of ’12 into ’13. Then starting in ’13, we really had something that we were able to scale very aggressively and from ’13 sort of into ’17 we were in that just scale, scale, scale, hold on. But by the sort of early ’17 we came to appreciate that the request for quote model that had powered our early years was not going to generate the experience necessary to build Thumbtack into the branded destination for hiring pros for whatever you need done for the simple reason that it wasn’t fast enough, which at this point in time everybody expected their online experiences to be immediate and instantaneous. Nor was it able to generate enough liquidity, enough supply.
Marco Zappacosta: And that was because to power request for quote experience, pros had to read and respond to every request as it came in, which was incredibly valuable for customers because they didn’t have to go out and search themselves and call down a list of numbers. They could simply wait for pros to send them responses, which they knew would be intentful, qualified, available, with a specific price. Basically everything that you need to evaluate whether that pro is right for you. But in asking the pro to read and respond to everyone, that’s a lot of burden. It’s a lot of effort. And so, in early ’17 we took the bet of saying, hey, the only way we make Thumbtack into this sort of amazing experience it needs to be to become a sort of world dominant brand is if we automate this part of the flow for pros.
Marco Zappacosta: Now keep in mind that we cover 500 different occupations and these vary from everything from a plumber to a wedding officiant to a math tutor. And we need to be able to generate estimates as well as pros generate them themselves, sort of programmatically. And it’s a very compelling thing to say and to put in a pitch deck and sell, it’s a much harder thing to build, harder than even we anticipated. But over the last couple of years pulled it off, which feels really, really good.
Pete Flint: So, this has been the big transition then for the company over the last, what, two years? Transitioning. So, just to clarify that, so moving from a lead generation marketplace to being really more of a transactional marketplace where you’re going to sort of almost instant booking.
Marco Zappacosta: Correct. But I don’t actually like the lead gen word. I think it’s a very misused word. And the reason I react that way is Google and Facebook are lead gen companies too, but they’re typically not thought of as lead gen. I think the traditional association with lead gen is that you’re a pass through, that you are an affiliate, that you buy low and sell high and have no enduring relationship with either side. Thumbtack is all about having a longterm enduring relationship with both sides. It’s true, we monetize customer contacts or introductions, which you could call a lead I think quite fairly. Like Google and Facebook, we think that’s the right point to introduce our monetization that actually makes the experience for both sides better. That doesn’t mean that a pure transactional model would somehow make this a marketplace in a way that we today are not.
Pete Flint: Yeah, it’s like saying Match.com is a lead generation service. You’re not going to perform the transaction.
Marco Zappacosta: You got it. That’s-
Pete Flint: Say, online…
Marco Zappacosta: That’s a great comparison.
Pete Flint: You’re providing a huge amount of value to facilitate an offline interaction initiated online.
Marco Zappacosta: Putting that payment friction makes the match better.
Pete Flint: Yeah.
Marco Zappacosta: Because…
Pete Flint: Increases the quality, and that sort of…
Marco Zappacosta: Exactly. Exactly right.
Pete Flint: … how serious someone is.
Marco Zappacosta: The thing that changed is, instead of Thumbtack being a asynchronous experience where you had to wait for responses, we made it instantaneous. Yet, we did that by working very, very hard to retain the same quality. That same intent that our matches had before. We have a sort of metric to track this, and we’re very proud of how far. We feel like we are now able to generate these sort of machine matches that have the same revealed appreciation by our customers, as well as humans these human pros were able to do it. It shows us that we were right, and that this was possible. Man, it’s a real grind.
Pete Flint: We’ll get into that, how you figured that out. Seen historically from speaking people at Airbnb, and eBay, that sort of addition of this instant booking, or buy it now that those sort of product enhancements offer preexisting service have made…
Marco Zappacosta: Enormous.
Pete Flint: … enormous benefits off a relatively simple on the surface, but always complex behind the scenes, and that sort of consumer desire for confidence, and convenience is overwhelming.
Marco Zappacosta: Evergreen. Even if I don’t know anything about your marketplace or your business, if it’s a consumer business I can almost always say something to the effect of, “Hey, if you make it easier and better for your customers, you will drive more engagement, and more retention.” In our case, it didn’t take a marketing genius to say, “Hey, customers want faster responses, and they want more responses that are equal or better quality.”
Pete Flint: Yeah.
Marco Zappacosta: A very simple point of view. It’s executing on it, and making it really happen, especially in our case. Some of the examples you cite, like eBay and AirBnB, where you have a hyper fragmented small business base. Think about what we had to change for these pros. We had to move from a request for quote world where they could read, and then deliberately choose to pay to respond to each and every request. They had total discretion, there were no minimums, they could just pay for what they wanted. Now, they’d give us their sort of targeting preferences; where they travel, what they do, how much they charge. We generate those estimates for them, and they pay when a customer contacts them back. Now, they have to trust us to represent them as well as they would themselves, and we are charging them for that. It was an enormous leap, enormous transition that required a big, big change in the amount of trust they had in us.
Pete Flint: I’d be interested in the transition. I’ve seen personally that evolution at Trulia, and then through the merger with Zillow there was several business models behind the scenes, on the back end, innovations that consumers don’t really see it. The pricing model changed a couple of times while I was running the company. Then, within Zillow it’s changed a couple of times again in big ways. These are, they are incredibly challenging to pull off in a kind of execution, but necessary because your consumers typically move on.
Pete Flint: Your supply side typically has different expectations. If you are not enhanced in the consumer experience, then you’re inherently going to fail. Someone else is going to come up. I think we’ve seen, I guess particularly in your area, how there’s been probably a number of vertical specialists that are hoping perhaps to pick off, just in the way that companies picked off Craigslist back in the day.
Marco Zappacosta: Good luck.
Pete Flint: In certain verticals, they’re trying to pick off-
Marco Zappacosta: I would venture to say, having seen a lot of these verticalized companies, that particularly the ones that would call themselves a managed marketplace where the labor is often contracted, or subcontracted directly, that they will struggle to get to scale. Have not seen it work really at all in any vertical. We’ve talked to a lot of these folks. We think that we have more liquidity in any one of these categories than they do, and through that provide a better customer experience, even if the depth of the product experience does not match.
Marco Zappacosta: At the end of the day, the number one feature is, do you have a great pro available for me when I want it, for roughly the price that I’m willing to pay? That’s a very, very hard problem that we are able, with our scale, to solve more effectively than these tailored, verticalized companies. I think a lot of people over applied the Uber experience to this category thinking, “Oh wow, if I just abstract that away and make it a one-click experience, it’ll just be magical in the same way that ride sharing was.” I think they mis-appreciated how much nuance is in these local service categories, whereby ride sharing is really a commodity where you don’t care so that UX is appropriate.
Marco Zappacosta: When you’re talking about spending hundreds or thousands of dollars, when you’re talking about your home, or your wedding, or your child, there is a real need to be able to express your unique preference. Through that you need to reveal the true total availability of this marketplace. You can’t simply just dispatch whoever is at the top of the list.
Pete Flint: Yeah, I can of imagine that certainly it’s more challenging to facilitate liquidity in 2019, because the Craigslist, or SEO or the Facebook, the distribution channels are more challenging. At the same time I guess the product experiences are, from a consumer perspective, the part of the experience, your expectations have increased substantially over the last 10 years.
Marco Zappacosta: Absolutely.
Pete Flint: How do you think about facilitating a horizontal platform, which obviously has the benefits of scale across sending fitness trainers, to dog walkers, to other people at that scale? That’s clearly a kind of asset to the company, but trying to create vertically specific product experiences that over-deliver in those use cases. It must be an enormous challenge.
Marco Zappacosta: It’s a big prioritization challenge. While we are horizontal, we have to customize, and develop things that work for the specific occupations and categories that we do serve. Similarly, we want to push the envelope on our own experience. Basically, we typically have multiple things going on at once, where the vast majority of our effort is on moving the horizontal platform forward, releasing features that apply, if not to all categories, to most. At the same time, have a more hypothesis-driven, more experimental set of initiatives that we’re trying to push it forward for a much smaller subset of categories.
Marco Zappacosta: You’ll see that, and you’ll see us continue to do that. Now that we have this instant match ability, you can see us start to get to instant book. Then, through that, the ability to be relevant. Not just at the point of introduction and booking, but throughout the life cycle of that job. The dream is for us to be the end-to-end experience for all of these categories. I think we will get there faster than starting with one vertical all the way deep, and then trying to line up other verticals alongside of it. I don’t think you see any evidence of that working at all, rather than being able to layer in this functionality as we develop a deeper, and deeper understanding of how to pull it off.
Pete Flint: Again, thinking of your back in the early days, would you have done anything different? I think a thing about this in my own experience of going through these business model pivots, almost several times, that it’s hard to imagine doing something that different. You sort of need to put one foot in front of the other. You have finite capital, you have finite users, you need to how-
Marco Zappacosta: Finite knowledge.
Pete Flint: Finite knowledge. You need to start by solving a discrete problem, and then using that as a starting point to make the transition. Almost the only piece of knowledge or wish I had was, change is a constant, and if you’re not-
Marco Zappacosta: Buckle up.
Pete Flint: If you’re not innovating on your product experience, then you are almost failing because your consumer expectations have moved on during the period of two, three years since you’ve been [inaudible] their business. If your part of the experience has not moved on, and if you’re not able to innovate on that, there’s a degree of almost which these hard transitions are very painful for companies. Whereas, in the organization, if there is an expectation of incremental transition, or consistent transition, then you don’t have to almost rip the engine out as you’re flying. You’re just fixing the propeller, you’re fixing one wing, you’re fixing another wing as you’re flying.
Pete Flint: Tell me about, perhaps as you, as a CEO and founder, how have you managed that transition? Tell me, what are some of the lessons from that?
Marco Zappacosta: When I look back on this transition and think about the things I would do differently, they’re all about how we set expectations internally. Not necessarily the order in which we build things, or specific features that I wish we did or did not do, but much more about expectation setting. Which what you realize is the key to maintaining confidence, trust.
Marco Zappacosta: I think we should have been more honest with ourselves, first and foremost. Then, through that, the whole team about how big of a change this was. Through that, how much uncertainty, and speak to the steps that we knew were next and the mark of success of being through that. Then, when we had more visibility, add that in. It’s hard to know. In some ways it was a benefit knowing… Being naive early on, because it was like, “Well yeah, of course this is the right direction, so let’s go do it.” Then, you get into the muck and you’re like, “Oh my God,” but you’ve burned the bridges behind you so there’s only one direction to go. That’s helpful, but I think we could have communicated the magnitude, and through that the uncertainty more clearly. I think it’s a really hard thing to do as a leadership team, a leader. It’s hard being vulnerable with that uncertainty. I think the partners that you want on the journey, and the smart, thoughtful people, they’re going to see through it if you don’t own it. It’s better to just share that, and engage with it, and help people come to terms with it collectively than try and minimize it. That was a big learning.
Pete Flint: Maybe shifting gears a bit to the future of marketplaces. You’ve been in this industry for 10 years, and I’d love to get a sense of where you see marketplaces heading. There’s obviously enormous fertile ground here at NFX. We have our own kind of perspectives on that. We have a board, a thesis on so-called FinTech enabled marketplaces we’re starting to add a lot more traditional financial services, or FinTech component into that in addition, increase consumer experiences. What do you see as the next wave of interesting marketplace businesses?
Marco Zappacosta: One dimension that I think is not apparent to most folks is how much human capital is out there, and how hard it still is to find that and hire. Obviously, this speaks to Thumbtack’s category, but I would say it more broadly. We don’t touch education, or healthcare, or international remote work. If you look at the trend over the last 10 years in the sharing economy, really what you’ve seen is a capital assets, homes and cars being brought into marketplaces, and through that been able to offer enormous consumer surplus and value. These are capital assets. These are things. What we really have not seen at scale is the same for human capital. For the time, and talent that we all have that I think is ultimately the biggest resource this world has, and certainly this country has, and still the category that is most opaque.
Marco Zappacosta: I think we are in the very, very early days of labor, or service, or human capital marketplaces, however you want to think about it, to dramatically increasing the efficiency through which the two sides of that transaction can find each other. Through that, for human capital to find a market for itself, and bring itself to market. There is so much latent potential, and this gets to the broader view of tech as a force for good, just as much as it can be a force for bad. I think it’s a reflection of people’s narrow view of tech as a substitute for labor. While I think it can also be a compliment to labor.
Marco Zappacosta: What Thumbtack really does, and there are other platforms, we’re certainly not the only one, is it enables the amazing diversity of human talent that’s out there to find a broader audience for itself. Through that, earn more money and reach its own aspirations,` and also help all these end customers paint their homes, and cater their weddings, and tutor their kids. I think we are in day one, minute two of that. It is still so, so early, and I think people under-appreciate how big that’s going to be.
Pete Flint: It’s all just now about making the transition, and managing that transition and your own kind of vulnerability as a founder CEO, making that. Talk to other founders about how the benefit of vulnerability as a leader, and sharing the challenges that you face as an individual, and the and the challenges you face as a leader in the organization, and how you manage through that.
Marco Zappacosta: Yeah, so I think the tension comes about because, in many ways you are cheerleader in chief. When you sell new employees, when you retain current employees, when you’re selling investors, when you’re talking to the press, you are by definition out there selling, and putting out the story of the business and why it’s so great. Then, there are moments where that is not the mood that you have to be in. Instead, you have to be real-talk in chief. The fear, certainly my fear is, how do you do that? How do you balance those two things in the right way? The end goal is to have complete, and utter confidence that you will succeed, but admit every potential flaw, or thing that might get in your way and own it in a truly humble and intellectually honest way. That’s the ideal.
Pete Flint: Yeah, yeah.
Marco Zappacosta: Total confidence, and we are going to win no matter what, but holy shit, if we don’t fix these 11 things, we are screwed. I think leadership is ultimately an exercise in self-awareness, and coming to recognize yourself better, and through that, how you can then put yourself out into the world. One of my things that I’ve learned is, when I’m scared that’s usually actually a sign that I should lean into that, and share. If I’m scared then so are a ton of other people. Even if I’m not visibly scared, the thought that someone may think I am scared is something that will scare them, and worry them. Those are the exact moments to acknowledge that fear, and then unpack it for people like, “Hey, I am scared that this might not work. What we’re trying to do has never been done before. In our early experiments, we saw some clear opportunities for making this work, but also some challenges that are going to be really hard to surmount. But what gives me confidence is X, Y and Z, and that is scary and hard to do.
Pete Flint: Yeah, it is. Echoes a lot of my experience, and vividly, I’m kind of recalling back an experience in 2008. During the midst of the global financial collapse, there was running an online real estate company. It was like no one believed that we would survive, and the employers were kind of enthusiastic. And I was scared shitless, literally, and you feel you need to maintain the motivation, enthusiasm. But everyone is kind of in the headlines, and everyone knows what the [crosstalk 00:36:56]-
Marco Zappacosta: And they’re smart and thoughtful people.
Pete Flint: And they’re smart. And so if you are sort of hiding anything from them, then you will lose their trust and lose their respect. Frankly, a lightning bolt moment for me was when ended up having a very sort of candid conversation around the changes, the business, what we needed to achieve, and having faith in the team to live on that. And then seeing in a matter of weeks how the team had risen to the occasion, and started sort of creating incredible product plans and ideas and execution, which was… Realize that old adage of kind of problem shared is sometimes a problem halved, that the team was kind of bracing these things. It was truly a turning point for me as a leader, how that helped to turn things around. And I think you’re sort of respect as a leader is also magnified within the organization as well.
Marco Zappacosta: And I think another thing that I was certainly hung up on is, well, I know that there’s people who are worried. I don’t want this to push them the wrong way and have them say, “Hey, you know what? I don’t want to be part of this.” But actually in retrospect, I wish I had. First off, the vast majority of people were excited and did believe. And look, for those who didn’t, they deserve a handshake and a hug and a goodbye. We don’t need that around. We need believers. We need people with conviction. And these pivotal moments by definition are ones that not everybody’s going to agree to, and actually revealing that is a very powerful and cleansing thing for the organization, because those detractors are going to continue to detract in just more subtle ways. In the comments they leave in docs, or the questions they ask, or the way they push and prod. And some of that is healthy. You have to be intellectually honest with what’s not working. But if you’re truly not a believer, well then you should find somebody else.
Pete Flint: Yeah, move on. Yeah. I mean, there’s plenty of opportunities in Silicon Valley, and these sort of refounding events almost kind of create a sort of emotional commitment, which is critical for the next wave of execution and innovation. We talked a little bit about kind of internally, I’d love to get your perspective on fundraising, and kind of also board management, and obviously your private company, but managing the other constituents. And then any advice for founders who are fundraising right now. What are some of the lessons that you’ve learned?
Marco Zappacosta: I think the biggest lesson that I wish I knew early on, in my first sort of professional round that I went out to raise my Series A, was that you have to be very clear, not on just what this next investor is looking for, but the one after that. Because that’s what they have in mind, and they’re thinking of this investment as one that gets you to the proof points, to the de-risking events, to the numerical targets that then entice the next round investors. And really working backwards from that, such that the current round has confidence that, sure, you have to execute, but if you do and you deliver on the things that you say are going to deliver on, then they’re confident that the next round’s investors will see that as well and have confidence. And basically every round is a bridge round, and you have to recognize that and talk about and internalize what that next set of objectives is.
Marco Zappacosta: And I didn’t know that the first time around, and that made it harder than it needed to be.
Pete Flint: Being transparent post or during a fundraising event, being explicit around this capital will achieve these particular metrics or milestones to achieve what you think is going to be sufficient to kind of raise the next capital.
Marco Zappacosta: Yeah. Correct. Let’s make it more explicit. You’re raising your Series A, which is effectively your first growth round today, which is-
Pete Flint: It’s true, yeah.
Marco Zappacosta: It’s how it should be thought of. You guys are in the venture business. Everybody else is in the growth business. And so you don’t have product market fit yet. You probably don’t have much business model risk, though you probably have some. But it’s still sort of TBD how quickly and effectively you can scale. Knowing that your Series B at that point then really becomes a pure growth equity investment, you have to be able to tell the story to your Series A investor about, “Here are the key milestones and the things that I’m going to de-risk and accomplish. And if I do those, I know I will be set up to raise a Series B in 18 or 24 months.” The use of proceeds, the sort of goals, should map to what that Series B investor’s ultimately going to look for. And I don’t think you need to be explicit about it, and in fact I think it’s better if you’re not, but that Series A investor will certainly appreciate that.
Marco Zappacosta: And my version of that is public markets. In thinking about what people today need to see to have confidence that their investment will have a good a return is that we are set up to ultimately go public successfully, and the things that are required for that. And they need to see me speak to that to have the confidence that we’ve internalized that and our plans are going to reflect that.
Pete Flint: As you think about the market you’re in, as you think about the wave of competition, you’ve shared the belief that some of the vertical specialists are going to struggle. How do you think competition more broadly… Perhaps against the huge incumbents, Facebooks, Googles, which sort of seemingly permeating kind of almost every aspect of digital business these days.
Marco Zappacosta: Interestingly, you did not name our biggest competitor, which in my mind is word of mouth. The vast majority of these transactions are still sourced by you texting your neighbor, or knocking on somebody’s door, or asking a friend. Now, it’s true that some of that is now mediated through Facebook or through Nextdoor, but the search paradigm is via your social network. That’s ultimately what I’m competing with. 90, 95-plus percent of the GMV is transacted through social networks, not through a sort of marketplace like ours. And that’s really something I think a lot about, which is how can I be better than word of mouth? Well, one, I can be broader. I can give you more selection. Your neighbors have hired zero or one plumbers in the last few years, and the odds that their plumber is right for you is very, very low, but you go to them because of trust.
Marco Zappacosta: Can I accomplish the same sort of level of trust and confidence that this person is going to do a good job while giving you dramatically more selection? That’s, I think, my biggest motivation, because when I think about the defensibility that we have, it’s really the relationship with these hundreds of thousands of small business owners across the country in 500 different occupations. And not simply that we know each other, but that they’ve integrated with Thumbtack. They’ve told us all of their preferences and sort of targeting criteria, and I know they’ve done it more deeply with us than any other platform.
Pete Flint: I hear you. I think the sort of offline sort of non-digital component, the opportunity or market share is sort of de minimus versus the opportunity. But I’m going to push back a bit, because I think there’s… You’re a sophisticated CEO. You’re probably kind of running kind of half a dozen different analysis every time, looking at kind of different competitors in the space who have a similarly or smaller kind of market share. As a CEO running a company then, how much do you think about competition, and how much are you kind of monitoring activities from other people? And I think you’re probably acutely aware of what everyone’s doing at one time.
Marco Zappacosta: Certainly. And I care a lot about being acutely aware. Now, interestingly, historically and certainly at the start, it was driven from a fear, like somebody’s going to beat us and, “Oh my god. Who else is out there? What are they doing?” Now it’s from, “What can I learn? How can that sharpen my own point of view?” And to speak specifically to sort of the competitive set that you, I think, were actually asking about, you do have the giant internet companies, Facebook, Amazon, Google. Facebook was trying to do this inside of Marketplace and shut it down. They obviously could come back to it, but I think they have the tyranny of being so global and so broad, and local services is so market-specific that I struggle to believe it will be very high on their list to generate the type of return that they need to see over the near-term.
Marco Zappacosta: Google, I think this does not play well with their DNA in the same way that they did not win in e-commerce, because they don’t have the operational willingness to go deep with these pros and these small business owners. I don’t see any evidence of that, and so I would presume that the way it plays out is they develop an ad unit so that they can capture sort of a better take than what AdWords can do that’s specifically tailored. And one already exists in Google Home Services, but I don’t fear them doing it sort of themselves.
Marco Zappacosta: And then finally, Amazon I think is from a DNA standpoint by far the best place. But what I’ve seen is that they have moved away from our approach because they weren’t able to make it work, and now tried to do it in a truly commodified way as a way of offering services to spur big ticket home good sales. If you’re buying a treadmill or a dishwasher or washing machine, most humans, myself included, need somebody to come set it up. And they know that to break into those categories, they need to offer that to you. But in these sort of more traditional or sort of more our bread and butter, like an interior painter, they don’t have any of that, and their attempts of it have failed. And it speaks to the fact that it’s fragmented. It’s also not organized. There’s no publicly available metadata, like skews that you can use to jumpstart your sort of ontology. Nor is there any point of aggregation, like a wholesaler or distributor, that you go and sign one deal with and instantly you have sports goods as a category is now available on your e-commerce site.
Marco Zappacosta: I think it’s uniquely fragmented and sort of opaque digitally, which makes it very hard to break into. And the competitors that we honestly look to the most are, on one hand, Angie’s Home Advisors, which is the sort of merger of Home Advisor and Angie’s List, which is our purest competitor. And then Yelp, which is thinking hard about this category and trying to monetize it better. And I think, yeah, happy to speak to both of those, but I listen to the earnings calls, or actually I read the transcripts, because earning calls are slow and boring. But I read them every quarter, and we have a team internally sort of in the finance team that catalogs it, that reads it, and we think about it. And we discuss it as a leadership team, because that is critical to stay abreast of and to learn from. Not to copy, not to sort of react to, but to learn from.
Pete Flint: Yeah. I wrote a piece most recently about hyper competitive battles and the sort of the classic battles that I experienced in Trulia versus Zillow, and you see Uber versus Lyft. It’s a kind of popular public narrative. And I think there’s one component in there which was more focused on sort of peer competition around what can be copied, often will be copied, and the importance of culture, and the importance of brand. Brand is just much harder to copy. And it sounds like this brand for you is, seeing the billboards around San Francisco, that’s increasingly a big push.
Marco Zappacosta: Oh, it’s a huge push.
Pete Flint: What is Thumbtack as a brand? What does that mean, and how does that manifest itself in the product experience as well?
Marco Zappacosta: I think at the end of the day, we need to be the most trusted place to hire the right pro for whatever you need done. That’s the aspiration, such that you can accomplish anything with Thumbtack. And people need to trust that, because first and foremost, it delivers. I think your product and the service that you deliver is the fundamental sort of arbiter of whether you can or can’t be or live up to your brand promise. But then also the personality of the brand needs to reinforce that point of view, such that it feels… I mean, the point that brand marketers rightfully make is that people remember feelings and emotions, not value propositions, not statistics, not facts. And so the way that your product or service makes people feel is going to be that key thing to generate a memory with them, and through that, drive retention and repeat usage. Fundamental, it’s something that I feel like-
Pete Flint: The product is the brand in digital businesses. It reinforces the brand and needs to create that kind of remarkable experience that you remember and you’ll return to. We talked about the future of marketplaces, and there are some schools of thought that things become increasingly online, increasingly digital. Certainly, I’ve seen that in kind of through the evolution over the last 20 years in marketplace businesses. How do you see that? How do you see the future of that online to offline interaction?
Marco Zappacosta: Oh, I think you’re right. I mean, the broad trend is towards digitization and digitally native sort of experiences mediating the exchange of goods, services, really everything. At the end of the day, what we facilitate is the exchange of time for money. You’re renting somebody’s time with dollars. And I think to take your point a little bit further, I think it’s about removing key points of frictions rather than taking the transaction online. I often talk to marketplace founders who are sort of obsessed with this notion of whether they should sort of be transactional and find a way to bring the transaction sort of within their sort of marketplace, and my first question to them always is, “Are you solving your problem or your customer’s problem?” And when you push on that, what you often hear is, “Well, I really want to be a commission-driven business model, and I think that sets me up for success. I think that’s what people want to see.” And I push, and they’re like, “Well yeah, for customers it’s not that bad.” It’s like, “Well, then why are you wasting your time doing that?”
Marco Zappacosta: In my case, you go talk to 10 homeowners, 10 busy moms, 10 potential customers of ours and ask them the most painful part of getting something done. 100 percent of the time, you will hear finding that pro, finding and trusting that they found the right pro. I have never heard paying for that pro. Now, I want to make paying magical and effortless, but not if it comes at the expense of making, finding, and hiring effortless, and that has to be the core. And once I’m sort of, not 100 percent, but further along than I am today, I will add in those other steps. But actually, from a motivation standpoint, in large part to fuel the matching, because it makes a better and better matching experience. Not because of something that I want as a business, be it the business model opportunity, or the ability to attract GMV more explicitly as such that I can put that as sort of the top line in my P&L.
Pete Flint: Yeah, but consumers don’t care about the end-to-end marketplace dynamic. They care about a successful transaction.
Marco Zappacosta: It doesn’t make their life better.
Pete Flint: Yeah.
Marco Zappacosta: And look, for something like ride sharing, payment was key. And it was, I think, a key way to make it… Booking was a big part of it, but being able to walk out that door and not worry was a big, big enhancement. But paying your painter? You spend very little mental energy worrying about or sort of… It doesn’t grate you. Now, we can make it better and we will, but it’s not my first order of concern.
Pete Flint: Marco, great to have you on the NFX podcast. Thanks for joining us today.
Marco Zappacosta: Pete, thanks for having me.
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