The below is a full (unedited) transcript of a Youtube session / podcasting episode I recorded with Mike Ghaffary, partner at Canvas Ventures in Q1 2020. You can view the video/listen to the podcast on Youtube, Apple Podcast, Stitcheror wherever you get your podcasts.
Erasmus Elsner 0:07
What’s up everybody and welcome to another episode of Sand Hill Road, the show where I talk to successful startup founders and their investors about the companies that they built and invest in. And the goal, like always, is to give you a sense of what it’s like to be in their shoes to understand how their businesses tick, how they got to where they are today, and to learn from their many successes and mistakes. Today, I’m super excited to be joined by Mike Ghaffary, a general partner at Canvas ventures.
Mike Ghaffary 0:32
Being public is like being in the game right? The the shot clock is ticking, everything is happening. All eyes are on you
Erasmus Elsner 0:38
At Canvas Ventures, Mike is investing out of their second $300 million fund, focusing on leading the Series A and B investments across marketplaces and consumer software companies. So Mike is a really interesting and resourceful personality with a number of unique experiences as maker, founder and at-scale operator from launching the most expensive iPhone app ever, Barmax, which was a $1,000 bar examination preparation app to co-founding the podcasting app Stitcher, before podcasting was even a thing…
Mike Ghaffary 1:12
We were a little bit ahead of our time. And that shows you why timing is so much of a startup.
Erasmus Elsner 1:17
…to running Eat24 as their CEO, during the fiercest times of the delivery wars.
Mike Ghaffary 1:24
Eat24, when Yelp acquired it, 30% EBITDA margins had never raised a dime of venture capital, which is amazing. Can you imagine spitting out cash every year? That was great. The party was beautiful. That’s why Grubhub was such an attractive IPO to investors initially.
Erasmus Elsner 1:36
So in this session, we’ll talk to Mike about his journey as builder, operator, angel investor to becoming a VC at Canvas ventures. We’ll take a deep dive into the marketplace vertical,
Mike Ghaffary 1:45
Uber started saying, hey, we’ll give you a $20 coupon to try our service on demand side. But what would they give you as a driver on the supply side? We’ll give you a $500 credit. Yeah, that’s up to you like, okay, which side is more highly valued? Which side? Do you have to subsidize, get that on?
Erasmus Elsner 2:00
Let’s hear it from Mike himself. And let’s jump right in.
Welcome, everybody to another session of Sand Hill Road. And I’m super excited to be joined today today by my guest, Mike Ghaffary from Canvas Ventures. So before I want to dive into your background, as a maker, founder at scale operator, I want to take a step back and talk a little bit about your early days. And you have you have really a Swiss Army Knife of education. So you started out with a bachelor’s in computer sciences relatively quickly thereafter, you did the infamous JD-MBA combination at Harvard. Then after a one year stint at a late stage venture firm, Summit Partners, you decided to go on the founder journey. And you started one of my favorite podcasting apps, Stitcher, before podcasting was even a thing. So you built it really ahead of the market in many ways. Talk to us a little bit about this part of your of your journey.
Mike Ghaffary 3:14
Yeah, and it’s worth calling out that part of the reason I went to business school really young, kind of right after undergrad was I had actually started working for an enterprise software company when I was 17 years old. I’m from Cupertino, and it’s kind of in the water there. The Cupertino was on the map a little bit because of apple. But the iPhone was still 20 years away from being created. Cupertino wasn’t quite as famous as it’s now become still still some apple orchards left around still kind of quiet. I started working in software when I was 17 years old. And then did my first startup in college. Actually, I had a small college startup that I’m too embarrassed to usually talk about in some of my LinkedIn. But actually we had some big customers, eBay, PayPal, Symantec, but stitcher was my first real venture backed actual startup to your point. After all, the schooling was done all my kind of part time during school jobs and internships, other places. It was a pretty incredible journey. Like you said, I started at summit partners. And I had always had this itch to start a company again and actually want to start a company in Business School. Now there’s all these amazing companies coming out of Harvard Business School and Stanford and many other schools obviously, but at that time, they’re actually very few I think, you got to realize I started grad school in 2002 instead of.com boom, you know, everyone was talking about dot bust whole websites dedicated there’s like the FSU see something company that Phil Kaplan had created a website just to show everybody going under that was kind of the mentality. So I think I was only one of two or three people, including Jeremy Stoppelman, who then founded Yelp in my business school section who had any interest in moving back like we were coming from Silicon Valley mode engineers and wanted to go back there were like three of us. Now, I think. It’s like half the sections out of 90 people want to go back but at that time, very, very few. So I’ve had that sort of edge for a while. But while I was at summit, I kind of realized that Hey, you know what if I want to be a great investor, I think you really need actually more great operating experience. So I’m going to take the plunge once again. And my friend, Noah shannock. I’d worked with him at BCG. He was on the early founding team at StubHub, you know, not a co founder, but one of the very first employees, and he had a bunch of different ideas. I was advising him through a few of them. And he told me about the Stitcher idea. And we talked, I said, Wow, that’s the one you got to do. Like on demand podcast, this is going to be huge. The iPhone hadn’t even come out yet. This was just on iPods. And then the iPhone hit. Right when we you know, soon after launching, we thought this is perfect. This is amazing. This is a game changer. I will say to your to your earlier question. We were a little bit ahead of our time. And that shows you why timing is so much of a startup while stitcher was, I think an incredible idea is still an incredible product because of market timing, it was admittedly not a huge economic outcome, because you got to catch these things, right. And sometimes if you’re too early part of it is like network connectivity was still a little slow back then iPhone penetration wasn’t what it is now iPhone and Android penetration, you know, the content providers, we got them all on board, but they were kind of slow. And just this behavior of podcasting was still a little bit earlier.
Erasmus Elsner 6:10
So on a venture investment timescale, we were kind of early to market actually, remember, you talked about how you got distribution. You were focusing, I think, on news with Stitcher in the beginning.
Mike Ghaffary 6:21
Yeah, absolutely. So we thought, hey, news and talk radio, there’s plenty of music apps, you know, there was Pandora at the time, Spotify kind of launched a little bit later. And there are plenty of options for music. But to us news was this very valuable segment, if you think as an advertiser, like would you rather know that somebody listens to kind of The Wall Street Journal and NPR and certain formats, or that they, you know, enjoy listening to the Beatles on the radio, like knowing somebody’s news habits actually should be more valuable for monetization. And that was part of our thinking, as well as there’s a big gap in the market here. And we find it really interesting. And if you could, that was the name, stitch together somebody new segments to create the perfect kind of news half hour hour on their commute. And the daily American commute was just going up and up. And it continued, has continued to, we thought that could be a pretty compelling value proposition. And it was, so we’d stitch together like, you could get your NPR five minute kind of summary, then three or four minutes of The Wall Street Journal marketplace kind of podcast, then we started actually creating content partnerships and produce new audio content from blogs, I helped lead a partnership with TechCrunch, where we create a TechCrunch headline so you can listen to the TechCrunch headlines. I think that was TechCrunch, his first podcast ever. So we got a lot of these companies started VentureBeat and TechCrunch. And a bunch of others started on their very first podcast, we were early to market on all that. And it was pretty successful. We also kind of hoped that news was inherently viral, and people would like to share it. But I think it was still early for Twitter and other platforms. So the audio podcast news sharing didn’t quite take off the way it is taken off now.
Erasmus Elsner 7:51
I’m super excited about the podcasting space with Spotify doing the two large acquisitions with Gimlet and Anchor. Yeah, I think it’s a super interesting space at the moment, but I can totally see how you were early, you later became the CEO at Eat24. And I just learned that you were with Jeremy Stoppelman in the business section at Harvard, and this might have had something to do with it. Talk to us a little bit about how you got this position.
Mike Ghaffary 8:24
So that’s right. So Jeremy had actually tried to recruit me once earlier while we’re in business school actually ended up writing some of the early Yelp reviews on the site just when he was beta testing the product he left for the summer, and I was friends with him. So we hung out that summer in San Francisco summer before when you starting it, and then I went back to school. He didn’t come back for the second year and said, Hey, I’ll see how this Yelp thing goes. Apparently it went pretty well. Starting I think that first or second summer I did some early work for Yelp. I helped write write one of yelps first revenue contracts with an advertiser, I think it was a pay per call contract for a hair salon because I was doing this JD MBA and Jeremy’s like, you know, legal stuff, can you write a contract and I was like, I’m not a lawyer, by the way, but I can help you just save some legal bills and like put something together that you could, you know, run by maybe live. So I did some early work and helped out a little bit. But then Jeremy, I think around the time I was at summit partners early on, made me an offer the first time and tried to pull me and I foolishly thought, you know what? Yelp is too big. It’s 20 people. Now I want to go co found my own startup, it might have been smart to go to Yelp, although citra was an amazing experience. But luckily, I got a second bite of the apple. Jeremy recruited me for Yelp later after another startup trialpay that I spent some time with. And then I spent seven years total at Yelp. But after the first five years, there was this little company called Eat24. We first partnered with them when they were under 10 employees and under a million in gross transaction volume. And I’ll give you the background of the transaction platform that we launched for local marketplaces, startups, which I think is interesting, but that’s how we met them. And then they grew quite a bit. They grew to 150 employees and 150 million in gross transaction volume with Yelp being their number one source of new users. Having a unique distribution model for you 24, their big secret and differentiation was Yelp that helped catapult company to be a true competitor to grubhub and seamless. And the other big players in the industry. At the time after that acquisition, the founder said, Hey, Mike, we’re not corporate guys at all. They had never worked at a large tech company, you know, day in their lives. We’re really good friends. I’ve invested in their next startup now, actually. And they said, Hey, Mike, why don’t you run this thing? As a subsidiary of Yelp? We think that’s a good idea. And kind of Yelp board and management team agreed. So they said, Hey, why don’t you be CEO of this e 24. subsidiary, and then we grew quite a bit, I ran it for two years, we grew from 150 million in gross transaction, volume, annual run rate to 700 million in those two years and 150 employees to 500 employees. So it’s quite a journey, and a lot of lessons along the way.
Erasmus Elsner 10:45
Yeah. And that was really in the midst of what I call the delivery wars.
Mike Ghaffary 10:48
Oh, food delivery wars. We said, Look, there were the search engine wars in the late 90s. And I don’t know if there’s been that intense of a competition around consumer internet since then, maybe there’s the ride sharing wars, but that’s more of a duopoly in the United States, this multi party kind of competition that only heated up food delivery wars, was something that was very top of mind, we talked about, and I told everyone, and I think it’s starting to happen that the tails of these food delivery wars would be written for years to come to motivate employees actually to show up to work and be excited to work in that level of intense competition, because it’s actually a lot of fun and becomes business history.
Erasmus Elsner 11:25
I mean, I remember that in 2017. In the summer, I remember the news headline when it was sold to Grubhub, I thought about Yelp being the perfect distribution, unique distribution mechanism for this, but it was a fierce market where companies like Doordash, Postmates were burning cash in the billions.
Mike Ghaffary 11:42
The whole backstory of like how we thought about that in 2010, and I think probably got signed in 2011. One of the very first partnerships I ended up doing 200 partnerships was with Yelp and a bunch of, you know, M&A acquisition transactions, one of the very first partnerships I got signed was actually a grubhub. partnership that 10 years ago, but it never launched. And the reason that version of the partnership never launched was we thought the partnership had grubhub, integrating into our app the way Eat24 delivery comm and many others did later. And that’s what we thought we had signed. But then grubhub said, Hey, actually, we want you to have the whole transaction happen in the grubhub app. And we were like, wait, wait a minute, though, it’s a lot easier if the person’s already got their Yelp credential saved, they don’t have to reenter everything, go to a new app, conversion rate will be higher. And we kind of were at an impasse, and it just sat on the shelves never getting implemented this partnership. So I joke that we had to go build a whole transaction platform partnership, get multiple partners on do an acquisition, spend like five years building this whole thing up. Finally, for them grub hubs comm say, Okay, we’ll do that partnership, where you can actually just do the transaction to do food delivery right there in the Yelp app, which grubhub then did so along with the Eat24 acquisition was a you know, part of the give there was like, we will do this and let you acquire it. And we made a big return on it, which was great as well, because we do think it makes sense to be consolidated. But we do want that distribution, the Yelp app, and what those transactions and Yelp does make revenue on every single food transaction, the same like we did when we own the company, you know, and then grubhub kind of gets their share to that became an interesting platform for us, you know, a mindset we always had at Yelp that we shared with Apple, Steve Jobs, and Jeremy had actually spent some time together. I don’t know if you remember when Steve Jobs used to talk about, hey, when you look at the iPhone, people aren’t going and like when they need to search a restaurant going to a browser anymore, they’re using the Yelp app. So Steve was a big fan of Yelp. One of the things for both companies is really focusing on the user first. And if you focus on the user experience as a consumer internet product, and especially for me like doing BD partnerships, and M&A and integrations if instead of just thinking selfishly like, Hey, this is what works for us, or then you know, you got to look at your own company’s self interest, obviously. But if you also look at like, what’s best for the user, what’s best for the consumer, and then try to fit everything else. From there, everything follows quite nicely. And that’s how we kind of did our Yelp Apple partnership. That’s how we did the Yelp Eat24 acquisition. And that was the thinking behind the, you know, let the food delivery transaction even after we sell to grub up be integrated in the Yelp app, which I think users really like, super interesting.
Erasmus Elsner 14:28
Yeah, I didn’t realize that. So let’s transition a little bit into your life as a early stage venture capitalist. And the way that you transitioned was basically by already being an angel investor during your time at Eat24. And you made some angel investments in companies such as Strava, Optimizely, Superhuman, Atrium, Pocket and my favorite Phil’s coffee. So some of these rounds must have been really competitive. How did you build these relationships and get on the cap table of some of these angel investments?
Mike Ghaffary 15:04
That’s a great question. Because at the time, there’s probably 10 times the number of people angel investing, as there were when I started doing it back then, you know, there were some back then. But it’s really exploded now. And I think the question for a lot of people is, how do I break in? How do I get these great companies. And I was very fortunate that the first you know, 10 or so all, you know, had a very high hit rate in terms of working out to be pretty successful companies. And so getting those networks of great people is a big part of it, a way to bootstrap it, because I was also you know, didn’t have a ton of extra cash. When I first started doing it, a lot of people think you have to be kind of independently wealthy or something. And I wasn’t I had a lot of graduate student debt from those, you know, four years at an East Coast school can get very, very expensive. I think it was hundreds of 1000s of dollars, like a home mortgage level of grad student debt. After having zero debt from undergrad being so proud, I got a scholarship and undergrad, I piled it all on in grad school just because I had no choice.
Erasmus Elsner 15:53
Let me jump right in there. I heard you paid it off with the most expensive ever iPhone launched Barmax.
Mike Ghaffary 15:58
Right, that did help pay it off. Because I wasn’t ever a lawyer, except a summer internship at a law firm. So I’m glad I was able to make an app. And that did pay for law school, which was nice. But that was afterwards angel investing. The way I bootstrap my way into the first two was actually advice. And I found if you have a skill as an operator, I was started building a reputation having a unique skill for these BD partnerships. So I talked to the Strava founders, and I said, Hey, I really love your product. The other thing I’d recommend to people is if you really love a product, whether it’s consumer or enterprise SAS product, try to reach out to the founder and talk to him. If you have some expertise, be great at your day job. And when you’re great at your day job, and then you talk to a founder and share your love for their product, they might be interested in how your domain expertise could help them in their company. And that’s what happened with Strava. First and the founder of Strava. We hit it off right away. He tried to hire me said hey, can you just come over and do business volume here? I said no, look, I’m not available. But I could advise I love what you guys are doing. And I’m using the Strava product every day to this day, I’m using it almost every day to track you know, runs and bike rides and all this stuff. It’s a great product. So so we became friends that way. And that led to like, hey, we’ll give you an option grant, you can buy some shares, I’m an equity holder and I got to Angel invest in the company. Similar thing with Optimizely advise them on BD and Corp dev that led to me being able to get some investment in equity ownership there. And then you know, I was able to when y’all went public, sell some shares a little bit, diversify my holdings a little bit and start investing more. And that’s how and I think once you build some momentum have invested in a few companies now you can kind of broaden it. And that led to some others. The other thing is if you put out content, like what you’re doing now, so superhuman, I’ve written a book on productivity with my friend, Charles Hudson, because I’m really into inbox zero and productivity. And I was giving lots of talks on it. So Rahul, the founder of superhuman sought me out, he ended up going to a dinner I was attending, and he said, hey, I’ve read your stuff. And I think you’d be the perfect investor. And he This is his very first round, it’s kind of first money in. So that’s great when people are coming to you. So I think don’t sit around and wait for people to come to you go reach out to the companies and founders and products and care about but also put content out there and in the world, build your reputation. And you might find people coming to you as well
Erasmus Elsner 17:54
I love that. And so then in 2017, you joined Social Capital. And I remember these days in 2017, how Chamath Palihapitiya had this great vision of you know, building this API for founders. Yeah, capital-as-a-service and the SPACs, the IPO 2.0. And I was super thrilled about all of this. And then I remember in 2018, I was at the Jason Calacanis Launch Scale conference. And there he gave this infamous talk about flying too close to the sun. And he was really open and honest.
Chamath Palihapitiya 18:25
And then you get to this point where you felt like, hmm, I’m not happy anymore. And why am I trying to impress these other people? Why? Because everybody wants to feel validated. And in the absence of being able to validate oneself from within, you will seek others to validate you. And what’s dangerous about the world that we live in, which is entrepreneurship and technology is that it is so in the bullseye of everybody else now. Everybody wants to be in it around it, on top of it under it associated with it, funding it, being a part of it employed by it, employing I mean, all of it is true. And so it’s a very intoxicating, shiny object that people want to have around them. These governments these pension funds, these family offices, these very famous important people have all this money, they’re like, jump off, come here, blah, blah, blah, and you start to fall for it. And I fell for it. Now, what is social capital? The partnerships been dropped? I it will be what it always has been, you know, I think like, Look, when I read articles, and you see all the negative press, and it was so weird, because I’m about to publish our annual investor letter and I’ll just preview it to you for a second. Our returns are bananas. Okay. I’ve made more in the last eight years compared to the s&p than Buffett did in the first eight years of Berkshire
Erasmus Elsner 19:47
Talk to us a little bit about your experience joining Social Capital which went through a lot of changes and your first investment they’re leading the Series A in in Hubhouse, as well as the Series A and CloudKitchen.
Mike Ghaffary 20:00
Social Capital was an amazing place. You know, Tomas actually just put out the annual letter the returns and, and his vision. Chamath really, you know, he is a visionary. And he kind of can see around corners and sees a lot. And so I had a great time there. He describes in these letters, I think the nature of a change from being a more kind of traditional venture firm having that arm to taking on a new structure. So it did make sense. You know, for a lot of us there, we started thinking about like, hey, if we’re really committed to doing better in the more traditional way, we might do that. But it was an amazing time while I was there, the cloud kitchens, when the first investment you talked about that I kind of sponsored and led the diligence, I met the founder of that company, while it was still at 24. Obviously, he was talking to the various food delivery startups saying, hey, I’ve got this vision for this thing. I don’t know if he had the name yet. And I said, Hey, this sounds perfect, right? You can reduce delivery times, batch orders, reduce cost, put technology in the kitchens, allow more concepts like it just check, check, check, check all the boxes of the problems and the challenges I had as a food delivery operator in my marketplace. Because I was dependent on sometimes fickle Restaurant Supply, in terms of their quality, their ability to use technology, their delivery, reliability, and their ability to batch and consolidate orders from one place because they were all over town. And he was he said he could solve all these things. And the model sounded great. But I didn’t know you know, it’s another thing. One thing, not the idea. It’s nothing to have the capital, but the idea together, put the team together, execute. So I told him if you can do all that, that’d be great. And then he did it while I was at social capital. He also knew Tomas really well, the founder, Diego, the rest is history. And now I think the company’s worth $5 billion dollars at the last fundraise and all that hubhaus also another amazing company founded by shooting merchant now, you know, well over 10 million top line helping match people with houses and roommates, you know, you’ve got the average American getting married like 10 years later than they did a generation or two ago, and we don’t have society constructed for what people do during that time. Where do you live? Do you just live alone in a studio apartment? It can be kind of depressing thing, frankly. So I you know, I tell people how the house is not only a solution for housing, it’s also a solution for like loneliness, right? You have all these people are disconnected and all this stuff about social media, and Are we too disconnected offline and only connected online, it’s nice to have almost a family feel of five to 10 roommates will live together in a house. And we’ve got all this housing stock that was built when people were building bigger and bigger houses and some of that now people are open to having more consolidated space living kind of closer to urban environments, or nearby suburb hub house is doing really well for that. So I got to do some invasive investments, as well as see and work on interesting things like capitals of service, and a lot of the new you know, the fact that other areas were trying like being around all that and the colleagues I met and you know, the alumni were all kind of friends to keep in touch. So a lot of fun that came from that. But I was really excited when I had the chance to now join the Canvas Ventures team there.
Erasmus Elsner 22:41
You are investing out of the second fund the $300 million fund focusing on leading the series A and Series B in marketplaces and consumer companies. But also doing I think you mentioned it somewhere else like 30% is B2B Enterprise. Talk to us a bit about what you’re doing and what Canvas Ventures is all about.
Mike Ghaffary 23:00
Yeah, and as a firm, it’s probably even it’s more than that enterprise Saas and B2B definitely more than half. And right now, frankly, like I my deal flow, what I’ve been looking at by my last investment at Canvas, I’m really excited about was consumer facing. But right now I’ve been seeing just a lot more activity on B2B and enterprise a, some founders have predicted that a recession might be coming. And now that looks a little more likely, you’ll often see during these cycles, a shift towards a little more B2B. The other factor that’s been, you know, well discussed is the platform shift has happened there was kind of like the PC revolution and a bunch of software for that, then they all became an internet connected and there’s much software for that, then there was the mobile revolution and a bunch of software for that. There’s not a new platform that really has ubiquity, you know, people were hoping or thinking maybe it’s VR AR voice. There’s been a bunch of candidates, ai people throughout there. But none of these have really taken off. Ai does have a lot of potential, but actually a lot of those seem to be B2B applications right now as opposed to consumer applications. So probably right now, it’s even more than 50% enterprise software and B2B I look at. But let’s talk about flying homes. First buy homes is really exciting company. So they’re helping reinvent the residential real estate transaction transaction that for many people is the largest transaction they’ll ever have in their lives, probably the single biggest and most expensive asset they own. It’s very stressful time they you know, buying and selling these things. And yet, even though it’s this largest transaction, very little has happened the past 10 years to make that transaction easier. So you have Redfin and Zillow where you can go shop around if you need to sell your home in a hurry. There’s open door and Zillow has gotten this business to that kind of ibuyers it’ll quickly take it off your hands and that’s one market especially in homogenous markets kind of like Arizona and so there’s a couple a couple things there but you know for you or me if you’re just saying like hey, I’m a first time homebuyer or I want to go upgrade kind of this trade upcoming I want to upgrade my house and and sell my other house comfortably. It’s such a stressful process. It’s been This transaction may be the most stressful financial transaction or one the most stressful things you do your whole life is buying and selling these phones and the founder just taught first principles. Why does it have to be this way? So one of the first products company offered is the all cash offer where they said in these very competitive markets, Seattle where they started San Francisco Bay Area now expanding to places like Boston, LA, DC, you can imagine really, all the top 10 metros for the US where there’s multiple bids happening, you know, for homes, especially in markets, but even in you know, in slower economic cycles and some of these tighter geographies and still can be very hard to find the right house. So they said will enable anyone to be an all cash offer, kind of level the playing field through smart underwriting technology similar to what like open door and some of these other companies have now for the first time we can build models, they can more accurately predict what a home is worth. And so using that they can also do kind of smarter underwriting and do things that traditional banks can’t do to say, Hey, we know you can afford this house will line up a mortgage for you, along with the $21 million Series B that we lead. And when I joined the board, we announced they announced $120 million debt line from Citibank. And the funny part is Citi can’t underwrite this through their mortgage group. But they can underwrite it working with a tech company like fly homes. So they enable anybody, you me or anyone who doesn’t have to have a rich uncle or be really wealthy themselves to put all cash, fast, close offers on homes, which really helps you when really appeals to the seller takes a lot of stress out of it might even get you a discount on the house. Because people might take certainty over a longer clothes that’s uncertain, then they’ll also help you trade up your home where you can go say, hey, I want to go buy a new home, give me a guaranteed price on my old home. So I know what I can afford and help bridge that period. So you don’t have to sell your old home first before buying the new home, which if you’ve ever tried to sell and buy a home and string those things together can be very stressful. They kind of help solve all that. So that’s a really exciting company that it’s grown quite a bit just since we invested.
Erasmus Elsner 26:53
That’s a super interesting segment real estate tech segment is one of the hardest. And we’ve seen a couple of models like you mentioned, the Opendoor fullstack model, then the Zillow data play, there are so many angles and inefficiency there.
Mike Ghaffary 27:10
It is a huge market, if you think about just like where dollars go, we spend money as you know, as consumers as a housing. So it’s this huge chunk of GDP transportation was another really big chunk and Uber Lyft. They kind of went after that, but the housing ones still feel somewhat wide open. So in addition to marketplaces where I’ve spent a bunch of time across cloud kitchens have house e 24. You know, various other investments and real estate Tech has really emerged for me because those companies have house cloud kitchens actually all have a real estate angle, and now fly home. And then as a firm, like my partner, Paul, previously on the board of house invested in roof stock. So kind of as a partnership, we’ve now got, you know, five or more companies, where we’ve all done in this prop tech team. And so we become developed more and more expertise and tend to see most potential investments. They’re coming through our door. Now,
Erasmus Elsner 27:55
Let’s take a deep dive into the marketplace vertical. Now, you have this Medium post titled where I’m investing and 15 marketplace questions. I want to kick this off with the first question you ask there. Which side of the network values the transaction more to me, this seems a little bit like a new version of the classical chicken and egg problem marketplaces.
Mike Ghaffary 28:15
Yeah, cuz both as a prop are always going to be a problem. Right. But which one’s more acute? Both founding? And then at this time, if it’s shifted? Absolutely. And what do you think long run? It’s going to be what what do you think the constraint will be in the long run?
Erasmus Elsner 28:25
And I don’t know if you’ve seen this series of articles put out by Lenny Rachitsky. He was a product manager of growth at Airbnb. And he conducted a series of interviews with all these marketplace early employees and founders. One of his key takeaway was really that what really matters in the beginning is supply and he has this list where he says Airbnb, Open Table, Lyft, Caviar, Doordash, Etsy, they all focus on supply and only very few, such as Rover and TaskRabbit actually focused on demand.
Mike Ghaffary 29:06
I would say, it’s not always the case. I don’t know if it’s 50-50. In the recent wave of consumer apps, then yes, it’s been proprietary supply has been the secret that’s been it for Airbnb to get started. That’s been for like Uber Lyft. That was it for food delivery. And we could talk through those I agree with that point, to an extent in the answer has often been proprietary supply. But if you look at labor marketplaces, it might be different. Sometimes it might be actually where your demand constraints, sometimes like nurse marketplaces, there’s a shortage of nurses. And so proprietary supply, again, is the name of the game. But there’s other times where you have plentiful supply and actually getting the demand side locked up. That could be really interesting. You know, that might be part of how it plays out in some of these more like restaurants, and some of their hourly worker verticals. So it really depends on the on the circumstance. What I found is a couple years ago now more and more It’s changing. But a couple years ago, I’d be with the founder. And if I asked him this question before I kind of publish this article, they often hadn’t thought about it. They could like come up with an answer on the fly. And by the way, I didn’t invent this question. It can. I got it. During business school, I had a professor Tom Eisenman. And he didn’t even call these businesses, marketplaces, per se. He called them two sided networks. And he said, the first question, you asked me to side network, which side of the network values the other side of the network more, because that’s the side you should subsidize, there was an old adage at a nightclub, which side of the network values the other side more if you have like men and women going to a nightclub? And he said, Well, you see that there’s a lot of these ladies drink free nights and a lot of this effort to make sure that you have kind of a gender balance in the nightclub. If that’s the case, what that tells you is the male side of network is valuing the female side of the network and that example more, right? And so like, that’s kind of a silly example. Right? It might be dated. I’m sure there’s environments where that that can be different. But it’s interesting to ask, you know, if you look at an Uber case study, Uber started saying, hey, we’ll give you a $20 coupon to try our service on demand side. But what would they give you as a driver? on the supply side? We’ll give you a $500 credit. Yeah, that’s like, okay, which side is more highly valued? Which side? Do you have to subsidize, get that on? Ed Baker’s this guy who was the head of demand side growth in Uber, and we were talking about doing a Yelp Uber partnership, and we said, okay, how much will you pay us per user, if Yelp drives users Uber? And he’s like, well, we probably can’t pay much, if anything, and I said, why he’s like, we’ll pay you if you can get drivers, not consumers. He said, I said, Look, aren’t you in charge of getting consumed? He’s like, Yeah, I am. But I’m actually spending all my time trying to figure out how to get drivers because when I get drivers, consumers just come. It’s so constrained, we just need drivers.
Erasmus Elsner 31:39
You mentioned that somewhere else that you got, like 10 times the number of riders for every driver. And I think you refer to this in number three of your question list as the cross-sided network effects, right. And I think you gave us some really interesting examples there with a nightclubs and with theUber drivers. In the case of Airbnb, I think it’s super interesting to look at the pricing, having less of a take rate on the host supply side than on the traveler side.
Mike Ghaffary 32:06
Yeah, how you price is really interesting. And Airbnb, another interesting thing about their supplies, they’re one of the few companies like eBay had this going, but not Uber and Lyft, where they have national or even international demand for localized supply, they could go sign up supply in any market, and they can get this crowd like whole network effect across their entire database of supply. For Uber, you get supply in San Francisco of drivers. And that only applies to people who are physically internet enabled. Worse yet, they have to be in the like specific region, little part square block radio, when you can find a business that has national or international demand for the supply that actually gets really interesting as well.
Erasmus Elsner 32:46
I know from my own experience, running a niche home sharing marketplace for techies. Everybody said it’s a winner takes it all market. And I personally found that if I get to a certain level of marketplace liquidity in one area, be it Berlin, New York, this already was a lot of value for for the network.
Mike Ghaffary 33:05
Well, it’s a good point, because you can tap into like all of Europe, right? And maybe the world versus if you’re trying to go head to head with Uber. It’s much harder, because yeah, you get some drivers, but convincing those you have such a small pool of consumers. And Uber can be hitting those consumers hard. You don’t have the whole world is your oyster to tap into on the demand side.
Erasmus Elsner 33:22
Yeah, for sure. So let me double click a little bit on unlocking supply in the beginning. And there was this great medium post by Sarah Tavel from Benchmark where she talked about delivery wars, something that you are intimately familiar with having been in those trenches of the delivery wars. And she mentioned how Grubhub basically, in the beginning, they were focusing on restaurants who had their own delivery fleet. And then when the next wave of privately funded Doordash, Postmates, and Uber Eats of this world came in, they were unlocking a new supply by looking at restaurants who didn’t have their own delivery fleet, and that this was really a source of growth for them. And that this is in many ways the Achilles heel of Grubhub, which was a public company already.
Mike Ghaffary 34:08
Eat24 had the same challenge. So getting back to your earlier question we didn’t kind of go into fully When did we make the decision that it was a good idea to consolidate and sell to grub hub do the strategic partnership we realized, you know, we have this tremendous growth 100 50 million to 700 million gmv. In two years, Eat24 was actually the largest food delivery provider on the West Coast. Seamless had a lock on New York. Grubhub had Chicago in some other parts of the country, and then Eat24 dominated the West Coast. We saw Postmates and Doordash coming up and Uber Eats was still experimenting, but we realized pretty quickly there Hey, wait a minute since proprietary supplies so important just getting these restaurants online when they had their own food delivery driver was a big coup. And by the way, Eat2424 when we acquired it 30% EBIT margins had never raised a dime of venture capital, which is amazing. Can you imagine they got to 150 million of gross transaction volume and they made roughly at the time but anywhere between 10 and 15% net revenue on the restaurant relationships all with no outside capital. I mean, it’s incredible 30% EBITDA margins, spitting out cash every year, that was great, the party was beautiful. That’s why Grubhub was such an attractive IPO to investors initially, but we could see that the party wasn’t gonna last forever classic kind of disruption coming in better proprietary supply, even though it was at much worse margin, this is coming in from Doordash. Because now they can able any restaurant to be on their platform, it doesn’t matter whether they have a delivery driver or not, the model is far less profitable. But as a young public company like grubhub, or Yelp, trying to compete if you you know, in trying to potentially take your profitability, to get into the segment is very difficult. Uber was very lucky, they weren’t a public company yet, when they went full steam into UberEats. They were willing to experiment, scale, build that business, get it kind of predictable enough so that when they went public, they said, yeah, we know we have this big money losing secondary line of business, but it’s growing really fast as part of what we do. And if you want to invest in our company, you just need to underwrite this too. And that worked as an existing public company, especially a young one who’s still kind of building out profitability that’s very, very challenging to do. So I would say it was kind of a bit of an Achilles heel. And that’s why some consolidation was inevitable. grubhub had an existential threat, the whole company was just about food delivery. So they kind of had to get into last mile, and they have gone into it. Now there’s a question of how successful that will be relative to the others, but they’ve had to do it and they’ve had some success. And definitely a lot of challenges to Yelp, for example, didn’t need to be doing actual last mile to hiring those drivers and stuff, we could just kind of stay out of it and partner right and do the sale to grub up. That was kind of our thinking. But it makes for an interesting landscape when you you know, that’s the interesting thing here is every time you think a marketplace is set and done your Airbnb examples, great. It’s like Airbnb, it’s locked up, no one will ever have another Vacation Rentals start up again, someone will someone will find new, unique proprietary supply a new angle, a different way of doing it, it’ll happen with we work around office space, or each one of these things gets invented and reinvented and kind of stripped away on the supply side, or it could be a distribution and demand side angle as well.
Erasmus Elsner 37:05
I think that the really interesting part about these delivery wars. You actually have this public company, GrubHub, which in theory should have had better access to capital. And then you had on the other hand, these Masa-public-offering (MPO) SoftBank-funded Doordash and Uber Eats, who really had this patient capital to put it all into into into CAC, and negative unit economics, selling dollars for a dime.
Mike Ghaffary 37:28
Yeah, if you’re gonna make big business model changes, the public capital markets actually are not a better well of capital. And so I’ve explained this to a few entrepreneurs, like if you have a big pivot shift, business line expansion, or an Achilles heel is something that you need to open up and do before going public to scale your business. Like, try to do that before you go public. Because if you wait until after your public, that’s gonna be really challenging. Now, companies come here, sometimes like 10 years into their life, of being public will then say, Hey, we’re gonna do a big new direction will change. And often what companies will do in that situation these days, because there’s so much private equity, they’ll go private. And it’s kind of like, going on the sidelines. You can imagine a sports team, they’ll call a timeout, right? This basketball team, they’ll go on the bench, they’ll huddle, regroup, redo strategy, figure things out before jumping back in the game. Being public is like being in the game, right? The the shot clock is ticking, everything’s happening, all eyes are on you. You can’t be redoing your strategy, redoing your plays and rethinking everything redoing the coaching during the heat of the game, you can only do it really on the sidelines in those private markets, where like you said patient capital will allow you more now, that patient capital was extra patient in the peak of the SoftBank era, in the SoftBank is a little bit feels on the retreat era, we’ll see if if that kind of patient capital in the private markets continues, or if it takes a break and surfaces later. So that’ll be interesting to watch.
Erasmus Elsner 38:54
Yeah, it will be super interesting to watch. So the last point I want to focus on is the take rate, the take rate is always a big topic in marketplaces. And it can range from the lower end from 5%, where it’s more like a credit card processing fee to 25% on the high end where it is starting to feel really like a greedy rate already. And there are a lot of different models on how to price it. And I’m particularly fascinated by the Airbnb pricing when I was acquiring supply for my marketplace. All the hosts told me “Well, the take rate is just 3% at Airbnb”, because that’s basically the story that Airbnb was telling the hosts. On the other hand, you have the 12 to 15% guests rate. Jean Tirole, the Nobel Prize winning economist has a paper on pricing marketplaces. Talk to us a little bit about what you recommend the typical pay grade is in between 10 and 20%. What do you recommend founders?
Mike Ghaffary 39:48
Yeah, so there’s a lot there. First of all, I think you pretty accurately summed it up, although you put 25% in the high end of the range, I’ve seen 50 and 65%. I think those are not sustainable. So I’ll say that now but 25 and 30% can be sustainable depending on the value you provide. So doordash, for example, they’re providing the last mile delivery, they’re really replacing the need to go hire a food delivery person, you know. And overall, when you take all their fees into consideration take adding up to something like 25 to 30 is not crazy, I don’t think. Now, if you’re just matching, and you don’t have hard costs like that, and so you don’t need to charge that high of a take rate, then you could see it should be maybe more in the 15 to 20%, you 24. Like I said, they were going between 10 and 15% grub hub, back when you’re in the Eat24 days, I haven’t checked it recently, they were at 16%. But trying to creep up towards 20. I think those are all fair. So I think you hit the range, well, like 10 to 25, you could be a little higher, if you’re out of bounds, here’s how I would think about it. Sometimes founders will brag, we have 50%, take rate, it’s amazing. And I don’t think it’s anything to brag about. Because now your revenue model is hooked on, you’re like, Hey, we can afford to hire this many employees based on that 50% rate eventually is gonna have to come down, people usually are going to find out, they’re not going to be excited about paying that kind of a rate, they’re gonna try and disintermediate you leave yourself exposed to another marketplace coming out, you know, if another marketplace comes out and undercuts you by one or 2%, that’s not going to matter as much, right, it’s gonna be more about who has the bigger network. But if you’re charging 50%, you’re just leaving this huge opening. So So there is this upper limit, but the lower limit, you made the reference credit card fees, and that’s why I will see a lot of marketplaces charging 1,2, 3, or 5% is a common one, or like seven. And I say, look, the credit card companies are charging three just to swipe the card 3%. Just so you built a website, you hired engineers, you have an ops team, a support team trust and safety, maybe you’re matching people together, you you’re doing all this work that everyone else gets paid 15-20% for when you’re saying your value, you’re providing the total you can collect, you really think it’s only 5%, it tells me one of two things, either you’re massively under charging, and that’s how you’re getting people on and they might complain later when you raise it, or you’re not actually providing that much value. And either way with my investor hat on when you go talk to investors, they’re not going to be thrilled about that. So that’s this hack a lot of marketplaces do, or they’ll do 0% to get started. That’s the other thing I caution founders is they’ll say, Oh, I didn’t know take rate just to bootstrap the two sides. That’s fine. Maybe at your pre seed and your seed stage when you really are bootstrapping experiencing, okay, maybe do that. But if you want to actually experiment to see you have a real marketplace on your hands, one of the hallmarks of that is you got to start charging the take rate from very early on, there were times where at Eat24 charge five to 7% to some early people to get them on board, but they quickly kind of started working on like, move them up, move them up and saying we’re gonna kick you off the network. If you don’t, by the way, it’s way easier to just start people at the higher level coming in the door that has to drag them up, you create, it’s almost organizational debt that will drag you down later. I think it’s really important to be thoughtful and to charge high enough from the get go, while not being overly greedy and leaving in exposing yourself to competition.
Erasmus Elsner 42:49
Yeah, it makes a lot of sense. So Mike, thank you so much for being with us here. So thank you.
Mike Ghaffary 42:54
Thanks for having me. It was a pleasure. Great. You’re so experienced in marketplaces.
Erasmus Elsner 43:00
Maybe a last thing, where can people find out more about you? And what you’re up to?
Mike Ghaffary 43:04
Yeah, absolutely. So on the Canvas website, if you go to canvas.vc, we have a team page, there’s links to a bunch of my stuff there. And then, I also write on Forbes, and then on Medium too, so I think both on the Canvas website, it links to my Forbes and Medium articles. And you can finally follow me on twitter at New Mike. I publish all my stuff there. So just at New Mike.
Erasmus Elsner 43:28
Perfect. Thank you so much for taking the time on Thank you. Appreciate it. Thank you.