Over the last decade marketplace startups and network effect businesses have gained strong investor interest due to their value.
Last year, marketplace startups raised $56 billion in venture capital funding, just behind fintech startups that collectively raised approximately $65 billion.
However, while marketplaces garnered the second largest portion of VC funding in the tech industry, funding for marketplaces in 2022 was down 50% year-over-year, mirroring the overall decline in venture funding.
In the current climate, fundraising is difficult for startup founders across industries. But if you ask serial entrepreneur and investor Fabrice Grinda, the current climate also presents opportunities.
“I would argue, this is the very best moment to found a company,” Fabrice says. “The posers and the people that were in it for the quick buck, the consultants and bankers and lawyers and doctors who had no business being founders, basically have been weaned out and left.”
Fabrice is among the world’s leading Internet entrepreneurs and investors. He has more than 300 exits on 1000 angel investments, and has served as CEO for three multinational companies. Today, he serves as the founding partner of FJ Labs, a VC firm focused on marketplaces and network effect businesses.
On December 12, he’ll lead a Founders Network webinar to provide insights on startup fundraising in the current economic climate. The event will also serve as a masterclass on marketplace startups and will cover:
- How investors evaluate marketplace founders
- How to build marketplaces
- Latest marketplace trends
Here’s a sneak peek.
Despite the challenges the current climate presents for startup fundraising, Fabrice says the benefit is that it forces startups to be lean. This includes a heightened emphasis on monitoring cash burn and meticulously scrutinizing unit economics, which can ultimately lead to greater success.
“Yes, it is hard to raise funds,” Fabrice says. “You’re going to raise money at a lower valuation. When and if you exit, it’s going to be at a lower multiple. But now you’re building a way more sound business. Right now is an amazing time to be a founder, even though it’s harder to raise.”
Research indicates startups thrive in recessions. According to data from StartupGenome, during the 2008-2009 downturn, specifically, a number of tech unicorns were created at a total value of $150 billion. Part of the reason Fabrice believes startups are able to thrive in tough economic conditions is because there’s less competition.
“In 2021, when you were building a company, you had like 50 people doing the exact same thing, all with great teams, all well funded. Now you’re one of two or three,” Fabrice says. “So this is not the moment to lose hope. This is the moment to actually go and build something. The very best companies of the 2010s were built in ‘08 and ‘09. Uber, WhatsApp, Slack, Instagram, all came in that time period. I suspect that the very best companies of the 2020s will have been created in ‘23.”
Despite the current decline in funding, marketplace startups and network effect businesses have a strong track record of success. According to Dealroom, 70% of the value created in tech over the past 24 years comes from network effects. Five out of ten of the most valuable companies in the world are built on top of strong network effects. And 63% of newly established unicorns are platforms.
This value is what attracted Fabrice to marketplace startups in the first place. Before founding FJ Labs, he’d already funded 150 startups as an angel investor and most of them were marketplace startups.
“Marketplaces are amazing companies,” Fabrice says. “The core underlying business is reasonably capital efficient. They’re established business models and they’re great businesses. It’s a winner takes all market.”