NFX Founder Room Ep. 1: Growing a Marketplace into a Market Network

By James Currier. James is a Managing Partner at NFX, a seed and series A venture firm based in San Francisco. NFX also builds free software tools for Founders, like Signal - the fastest way Founders find their intro paths to top VCs.

The marketplace landscape has changed. The rise of what we call Market Networks (like Honeybook) have altered the pure, two-way marketplace playbooks of the 2000s (like eBay and Uber). This new class of powerful marketplaces will dominate the next 10 years. And while we've shared playbooks for overcoming the chicken-or-egg problem, the reality is that every marketplace is different. It isn't always clear to Founders exactly how to kickstart their market network, let alone how to unlock its true potential.

NFX Founder Room is a new experiment from NFX where we answer questions about all-things network effects & growth for the entire Founder community–not just our portfolio. In our first episode, Jack Shannon (Co-Founder and CEO, Recess) asks NFX Partner & 5-time entrepreneur James Currier for advice on take rates, customer positioning, & more.

In this episode, we cover:

  • More Than Just Lead Gen: Why unlocking value in marketplaces often means becoming a "market network"
  • Take Rates in Market Networks: How early-stage Founders should think about take rates in the era of market networks
  • The Psychology of Value: Why pitching a customer on "saving money" or "looking cool" is always better than "saving time" + more

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We invited Founders to fill out The NFX Marketplace Scorecard and a Company Brief to have the chance to meet with James Currier on NFX Founder Room. We had over 600 applicants for the last batch. Apply to be featured on the next episode here.
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James Currier: Hey Jack, good to see you man. Thanks for calling up.

Jack Shannon: Yeah, thanks for meeting James.

Currier: I've had a chance to read your Company Brief so I know a bunch about the company, and I saw your Marketplace Scorecard. Just quickly for those watching: what does Recess do?

Shannon: Absolutely. Recess helps brands harness the power of live events by making sponsorship easy, efficient, and stress-free for brands and event organizers. So we do that by allowing our customers to discover, contract, pay in advance with thousands of event organizers – all in one place. It's, you know, Airbnb for sponsorships.

Currier: So, how can I be helpful today?

Shannon: So first off, one of the things we've been considering as a company is lowering our take rate or removing it entirely for our suppliers as an incentive for them to drive the buyers onto our platform that they're doing deals directly. So we want to incentivize them to bring that onto our marketplace. One of the things we've been debating is obviously it'd be great as a growth opportunity to generate new leads, but is that going to create too much competition between us and our suppliers? And if so, you know, is going down to zero appropriate? Or should we be taking 1-3%, somewhere in there, to be able to cover credit card feeds?

Currier: So your supply is the event organizer?

Shannon: Exactly.

Currier: And then the demand are the sponsors who want to give the money to the supply in order in order to get advertising in their events?

Shannon: Yep. Yeah. Yeah.

Currier: So this is this is a good question. The question is about take rates with the suppliers. This question comes up a bunch because we've moved from the world in the 2000s of pure marketplaces – supply and demand, like an eBay or Craigslist – into a world where it's often software mediated. So building a SaaS tool for your suppliers that allows them to manage all of their sponsors and maybe even some of their ticketing – any of the revenue that's coming in and giving them that software perhaps for free, perhaps for a very small amount; 10 bucks a month, 50 bucks a month, 250 dollars a month, something like that. Just enough cost so that they realize they should be using it all the time. And they had to actually decide to implement it inside the organization. If you give the software away for free, they just often don't end up using it. So there needs to be some sort of a price on it. But then that software allows them to manage all the different revenue sources they're getting, including the sources that come from you. And so you could charge them 15-25% for any sources you bring them, you bring them the leads on that, and they would be fine with that because they were going to get zero if you didn't bring them to them. And then your question is, "well, what about all the other ones"? If I'm them, I don't want to share any revenue with us just for giving me software. We found that you can charge a small rake, even on deals that they bring. But you're right, it needs to be closer to 1% or 2%. It needs to maybe help them with the credit card fee or with the bank processing, which was going to charge them 3% anyway, so maybe you charge them 2.9%, you pay the payment processor 1.8%, you get 1.1% rake on that. And it does add up, and you get them used to the idea that everything needs to flow through your software. But you've got to figure out how to build that SaaS software and that's often really different types of software and different service-level agreements that you need to have with your customers. Then it's just a general lead gen marketplace, which is probably where you started so I would say charge–see if you can have the capability in your team to actually build a good SaaS software that they use all day, everyday for everybody. And if you can, and you can figure out what the two or three or four or five features are that they need to get going with that is, I would try that because if you can be that portal through which all the money comes through and only take a little bit when they bring them in and a bunch when you bring them in we've seen that work with a company like Incredible Health, which is doing that with hospitals and hiring people. We've seen that with Outdoorsy in the RV space. We've seen that with JetInsight doing jet planes. So a lot of people are using the software-mediated marketplace stuff, and I think it's a great way to go, actually, because you want to be the workflow software for these event planners.

Shannon: Yeah. Absolutely. Yeah, I think for us to if, they're bringing somebody into our buyer pipeline, like a Coca-Cola or someone like that for a single event, that's helping us generate a new lead that we could potentially service across all the different event organizers.

Currier: That's right. You're getting their name and address and email and then those people have to sign up and have a profile to pay that person and to get reports back from that person. So think about all the things that your software can help the event planner do: they're going to be better for the sponsors' real-time video feeds or real-time Instagram updates about how their sponsorship is being seen, so that everyone in the sponsorship organization gets excited and then they start to love the Recess software because it just gives them a higher level of touch and service and data than they would have gotten before. And then they start to demand. Hey, you know both sides of the marketplace could end up demanding the other uses the software. And in that case you don't have to go to zero because everyone's getting value, you know. And you'll tell the event organizer, "Look dude if we've gotten Coke for you and you want to go get, you know, Southwest Airlines. Southwest Airlines is going to close at a higher rate because you're using our software to close. And report to them and give them tracking and everything that we do for you. So you're going to make money immediately. So, of course you want to give us a few percent."

Shannon: Yep.

Currier: Is your sales pitch to them more about saving time and effort, or is it about making more money or looking cooler?

Shannon: It's the former. So it's not that our events are any better than anything else that they're doing right now. It's that, for us, the pitch is aggregating all that inventory and making it possible. So. You have one contract one person to pay and one process in terms of how to communicate all the information that needs to go back and forth between the event organizer in the brand, so they know where to show up and where to go and all that stuff. So it's much more an efficiency thing. It's giving people half the time of their job back that they used to spend getting info from a PDF and getting it into a Word Doc, or Word Doc into an Excel file.

Currier: So if you pitch someone saving time, it's not as good as saving money. And if you create an economic value for both sides – sponsors are getting it for cheaper and and then the event planners are getting more revenue because they're getting more sponsors – both have an economic advantage. That's a much more sustainable and fast-growing marketplace than selling, sort of, workflow time savings. And then if you can pitch to them making more money, or you can pitch them you're going to look cooler (or if you don't use this, you will look really old). Right. So you sell by ego not by ROI but by E, G, O. By ego. Sell by ego. It's more effective to sell by ego and making more money than it is even saving money. So I think on the supply side, the event planners you can sell "make more money", "save money" or "look better". Or, make more money or get more customers or something. If you can move to that pitch, it might be even more effective than the one you found, which is already. Might be more effective.

Shannon: Yeah, that's interesting. And I'm wondering if the time does relate to dollar savings because we've heard from some brands that they said, "you know, I spend more money on my legal team redlining a contract than is the actual value of the sponsorship that they're buying." So it's trying to quantify that into a dollar value savings that it's, "you're paying no more money. You're paying the same but you're paying hidden costs associated with these transactions that is never been never been surfaced."

Currier: And of course, it's easier if you say you're making more money or you're getting a 10% discount. "Here's the discount you just got", and "here's how much money you saved by going through us and getting this event. And "the reason it was is because it wasn't just you. It was these other two sponsors who came in, so the event planner was better, you're better. More people came because they had more money to market their event". And so instead of hitting the 12,000 expected people it was 14,000 people came, or whatever. Give them – again, a lot of the advertising stuff is about the graphs and charts and the colors that you give to people and the reporting about what happened to them. It's part of what the product is.

Shannon: Yeah.

Currier: So, that's just a little bit of way to maybe start to think about how the pitch could be even more effective than it already is. I don't know. I'm not out there selling with you, but we've seen things like that make a real difference.

Shannon: I like it. Yeah that that's great point.

Currier: Exciting stuff. I'm excited for you.

Shannon: Well, yeah appreciate your time.

Currier: Recess is very cool. And I think that there's a big Market Network there to be unlocked. Let's just nail down the two sides first and standardize that and and then, after PDFs and phone calls doing everything manual, you'll see where the next node needs to be.

Shannon: Yeah.

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