Digital Marketplaces: Ones to Watch 2024

Across markets, digital marketplaces:

1. Create a single destination for buyers to browse, compare, select and/ or buy from providers based on specific requirements and by providing sellers with a large audience of potential buyers with a measurable RoI
2. Benefit from positive long term market tailwinds, including an ongoing structural shift to online across the shopper journey - both in terms of spend and advertising as well as the increasing complexity of the digital landscape
3. Create strong and defendable niches, with 1-2 marketplaces often holding 50%+ market share, reinforced by a virtuous circle/ flywheel effect as buyers and/ or sellers scale
4. Are profitable through scale – larger, mature operators generate 25-50%+ EBITDA, albeit marketing spend does vary (e.g. price comparison websites tend to require higher marketing spend vs. classifieds)
5. Are often defensible vs. new entrants as well as encroachment from international brands and marketplaces in adjacent sectors due to limited brand stretch
6. Have common value creation levers that enable an investor to enhance value during the hold period
7. Offer high deal flow, particularly in the mid-market, creating opportunities for investment.
   

What is a digital marketplace?

Digital marketplaces share a common core purpose of connecting a fragmented seller and/ or buyer base through an online platform. However, there are seven distinctive operating models that most digital marketplaces leverage to achieve this. Each model has its own form of monetisation, levers to drive value creation, and P&L structure. These models include

Proven marketplace categories

Across Europe, there are a number of ‘proven’ categories with clearly associated marketplace models.

• Automotive classifieds (e.g. Auto Trader in the UK)
  
• Real estate classifieds (e.g. Rightmove)
  
• Recruitment classifieds (e.g. Indeed)
  
• Horizontal classifieds (e.g. Gumtree)
  
• Finance/ utility price comparison websites (e.g. Comparethemarket)
  
• Consumer retail platforms (e.g. Amazon)
  
• Online travel agencies / aggregators (e.g. Booking)
  
• Food delivery platforms (e.g. Deliveroo)
  
• Taxis platforms (e.g. Uber)
  
• Peer to peer travel (e.g. Airbnb)

The scale of ‘proven’ categories in large European countries means that the most attractive pockets of opportunity for an investor are proven categories in smaller European countries and Specialist categories in larger European countries.

Investment opportunities

Proven categories in smaller European countries

Whilst there are a number of products and services that support global marketplaces, many digital marketplaces have relatively limited geographical brand stretch. As a result, there is significant variation in the leading digital marketplaces for proven categories across Europe, with a number of local specialists holding #1 or #2 position in proven marketplace categories in smaller European countries. Because of the limited brand stretch, assets in this space also tend to be defensible and profitable. Combined with fewer Private Equity/ investment rounds, this creates further opportunities to drive value (e.g. increasing the proportion of digital transactions, expansion into adjacencies across the value chain).

Due to the addressable market size in these countries, assets in these geographies also tend to be smaller, meaning valuations are more accessible to a mid-market investor. Acquiring one of these marketplaces therefore presents an opportunity for mid-market investors to benefit from similar growth and performance seen in these categories in larger European countries over the past few years.

Specialist categories in larger European countries

Digital marketplaces exist far beyond the ‘proven’ categories outlined above. In categories such as B2B logistics, industrial machinery, procurement, business directories, and more, digital marketplaces play the same, essential role in bringing together a fragmented set of buyers and/ or sellers. As a result, businesses in these categories also benefit from the attractive elements outlined above; they are fast growing, defensible and profitable.

Because businesses in these sectors tend to be smaller than those in the ‘proven’ categories, valuations of assets in these markets are generally more accessible to a mid-market investor. Beyond this, there are also more potential primary deals in the space as well as, in some instances, greater opportunity for value creation.

However, whilst there is strong support for the investment thesis, a combination of (i) challenges identifying the right specialisms, (ii) backing the right winners and (iii) the speed of the flywheel effect means that many investors end up being more reactive than proactive in their investment strategy, with exciting, relevant businesses often outgrowing a fund’s cheque size within a short window.

Get in touch and receive our report

As a result, we actively track key themes and specialist marketplaces that we believe investors should be watching and tracking today but are likely to be slightly longer-term investment opportunities in our Ones to Watch report.

We are pleased to announce that the latest edition of the report is now available. Please get in touch with one of the team to receive a copy of the report.