In 1776, Adam Smith released his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, in which he outlined his fundamental economic theories. Front and center in the book — in fact in Book 1, Chapter 1 — is his realization of the productivity improvements made possible through the “Division of Labour”:
It is the great multiplication of the production of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of society.
Smith identified that when men and women specialize their skills, and also importantly “trade” with one another, the end result is a rise in productivity and standard of living for everyone. In 1817, David Ricardo published On the Principles of Political Economy and Taxation where he expanded upon Smith’s work in developing the theory of Comparative Advantage. What Ricardo proved mathematically, is that if one country has simply a comparative advantage (not even an absolute one), it still is in everyone’s best interest to embrace specialization and free trade. In the end, everyone ends up in a better place.
There are two key requirements for these mechanisms to take force. First and foremost, you need free and open trade. It is quite bizarre to see modern day politicians throw caution to the wind and ignore these fundamental tenants of economic science. Time and time again, the fact patterns show that when countries open borders and freely trade, the end result is increased economic prosperity. The second, and less discussed, requirement is for the two parties that should trade to be aware of one another’s goods or services. Unfortunately, either information asymmetry or physical distances and the resulting distribution costs can both cut against the economic advantages that would otherwise arise for all.
Fortunately, the rise of the Internet, and specifically Internet marketplace models, act as accelerants to the productivity benefits of the division of labour AND comparative advantage by reducing information asymmetry and increasing the likelihood of a perfect match with regard to the exchange of goods or services. In his 2005 book, The World Is Flat, Thomas Friedman recognizes that the Internet has the ability to create a “level playing field” for all participants, and one where geographic distances become less relevant. The core reason that Internet marketplaces are so powerful is because in connecting economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist. In other words, they literally create “money out of nowhere.”
Any discussion of Internet marketplaces begins with the first quintessential marketplace, ebay(*). Pierre Omidyarfounded AuctionWeb in September of 1995, and its rise to fame is legendary. What started as a web site to trade laser pointers and Beanie Babies (the Pez dispenser start is quite literally a legend), today enables transactions of approximately $100B per year. Over its twenty-plus year lifetime, just over one trillion dollars in goods have traded hands across eBay’s servers. These transactions, and the profits realized by the sellers, were truly “unlocked” by eBay’s matching and auction services.
In 1999, Jack Ma created Alibaba, a Chinese-based B2B marketplace for connecting small and medium enterprise with potential export opportunities. Four years later, in May of 2003, they launched Taobao Marketplace, Alibaba’s answer to eBay. By aggressively launching a free to use service, Alibaba’s Taobao quickly became the leading person-to-person trading site in China. In 2018, Taobao GMV (Gross Merchandise Value) was a staggering RMB2,689 billion, which equates to $428 billion in US dollars.
There have been many other successful goods marketplaces that have launched post eBay & Taobao — all providing a similar service of matching those who own or produce goods with a distributed set of buyers who are particularly interested in what they have to offer. In many cases, a deeper focus on a particular category or vertical allows these marketplaces to distinguish themselves from broader marketplaces like eBay.
With the launch of Airbnb in 2008 and Uber(*) in 2009, these two companies established a new category of marketplaces known as the “sharing economy.” Homes and automobiles are the two most expensive items that people own, and in many cases the ability to own the asset is made possible through debt — mortgages on houses and car loans or leases for automobiles. Despite this financial exposure, for many people these assets are materially underutilized. Many extra rooms and second homes are vacant most of the year, and the average car is used less than 5% of the time. Sharing economy marketplaces allow owners to “unlock” earning opportunities from these underutilized assets.
Airbnb was founded by Joe Gebbia and Brian Chesky in 2008. Today there are over 5 million Airbnb listings in 81,000 cities. Over two million people stay in an Airbnb each night. In November of this year, the company announced that it had achieved “substantially” more than $1B in revenue in the third quarter. Assuming a marketplace rake of something like 11%, this would imply gross room revenue of over $9B for the quarter — which would be $36B annualized. As the company is still growing, we can easily guess that in 2019-2020 time frame, Airbnb will be delivering around $50B per year to home-owners who were previously sitting on highly underutilized assets. This is a major “unlocking.”
When Garrett Camp and Travis Kalanick founded Uber in 2009, they hatched the industry now known as ride-sharing. Today over 3 million people around the world use their time and their underutilized automobiles to generate extra income. Without the proper technology to match people who wanted a ride with people who could provide that service, taxi and chauffeur companies were drastically underserving the potential market. As an example, we estimate that ride-sharing revenues in San Francisco are well north of 10X what taxis and black cars were providing prior to the launch of ride-sharing. These numbers will go even higher as people increasingly forgo the notion of car ownership altogether. We estimate that the global GMV for ride sharing was over $100B in 2018 (including Uber, Didi, Grab, Lyft, Yandex, etc) and still growing handsomely. Assuming a 20% rake, this equates to over $80B that went into the hands of ride-sharing drivers in a single year — and this is an industry that did not exist 10 years ago. The matching made possible with today’s GPS and Internet-enabled smart phones is a massive unlocking of wealth and value.
While it is a lesser known category, using your own backyard and home to host dog guests as an alternative to a kennel is a large and growing business. Once again, this is an asset against which the marginal cost to host a dog is near zero. By combining their time with this otherwise unused asset, dog sitters are able to offer a service that is quite compelling for consumers. Rover.com (*) in Seattle, which was founded by Greg Gottesman and Aaron Easterly in 2011, is the leading player in this market. (Benchmark is an investor in Rover through a merger with DogVacay in 2017). You may be surprised to learn that this is already a massive industry. In less than a decade since the company started, Rover has already paid out of half a billion dollars to hosts that participate on the platform.
While not as well known as the goods exchanges or sharing economy marketplaces, there is a growing and exciting increase in the number of marketplaces that help match specifically skilled labor with key opportunities to monetize their skills. The most noteworthy of these is likely Upwork(*), a company that formed from the merger of Elance and Odesk. Upwork is a global freelancing platform where businesses and independent professionals can connect and collaborate remotely. Popular categories include web developers, mobile developers, designers, writers, and accountants. In the 12 months ended June 30, 2018, the Upwork platform enabled $1.56 billion of GSV (gross services revenue) across 2.0 million projects between approximately 375,000 freelancers and 475,000 clients in over 180 countries. These labor matches represent the exact “world is flat” reality outlined in Friedman’s book.
Other noteworthy and emerging labor marketplaces:
These vertical labor marketplaces are to LinkedIn what companies like Zillow, Expedia, and GrubHub are to Google search. Through a deeper understanding of a particular vertical, a much richer perspective on the quality and differentiation of the participants, and the enablement of transactions — you create an evolved service that has much more value to both sides of the transaction. And for those professionals participating in these markets, your reputation on the vertical service matters way more than your profile on LinkedIn.
Having been a fortunate investor in many of the previously mentioned companies (*), Benchmark remains extremely excited about future marketplace opportunities that will unlock wealth on the Internet. Here are an example of two such companies that we have funded in the past few years.
The New York Times describes Hipcamp as “The Sharing Economy Visits the Backcountry.” Hipcamp(*) was founded in 2013 by Alyssa Ravasio as an engine to search across the dozens and dozens of State and National park websites for campsite availability. As Hipcamp gained traction with campers, landowners with land near many of the National and State parks started to reach out to Hipcamp asking if they could list their land on Hipcamp too. Hipcamp now offers access to more than 350k campsites across public and private land, and their most active private land hosts make over $100,000 per year hosting campers. This is a pretty amazing value proposition for both land owners and campers. If you are a rural landowner, here is a way to create “money out of nowhere” with very little capital expenditures. And if you are a camper, what could be better than to camp at a unique, bespoke campsite in your favorite location.
Instawork(*) is an on-demand staffing app for gig workers (professionals) and hospitality businesses (partners). These working professionals seek economic freedom and a better life, and Instawork gives them both — an opportunity to work as much as they like, but on their own terms with regard to when and where. On the business partner side, small business owners/managers/chefs do not have access to reliable sources to help them with talent sourcing and high turnover, and products like LinkedIn are more focused on white-collar workers. Instawork was cofounded by Sumir Meghani in San Franciso and was a member of the 2015 Y-Combinator class. 2018 was a break-out year for Instawork with 10X revenue growth and 12X growth in Professionals on the platform. The average Instawork Professional is highly engaged on the platform, and typically opens the Instawork app ten times a day. This results in 97% of gigs being matched in less than 24 hours — which is powerfully important to both sides of the network. Also noteworthy, the Professionals on Instawork average 150% of minimum wage, significantly higher than many other labor marketplaces. This higher income allows Instawork Professionals like Jose, to begin to accomplish their dreams.
As you can see, these numerous marketplaces are a direct extension of the productivity enhancers first uncovered by Adam Smith and David Ricardo. Free trade, specialization, and comparative advantage are all enhanced when we can increase the matching of supply and demand of goods and services as well as eliminate inefficiency and waste caused by misinformation or distance. As a result, productivity naturally improves.
Specific benefits of global internet marketplaces:
Source : http://abovethecrowd.com/2019/02/27/money-out-of-nowhere-how-internet-marketplaces-unlock-economic-wealth/