Marketplace Revenue vs Gross Market Value
By Trevor Lew
Marketplace startups have grown in popularity over the years. One of the simplest examples of these companies is eBay. Other companies like Lyft and Uber are forms of marketplace companies too. They aggregate riders and drivers in a way that’s much easier and more efficient than if there wasn’t a connective platform. The Amazon Marketplace is an example of a hybrid model where part of the revenue stream is subscription-based (Amazon Prime) and part is on a percentage fee of value of the goods being sold. However, the primary way marketplace businesses extract value is by collecting a percentage fee on the transaction spend flowing through the marketplace.
The metrics for these businesses are very different than other popular types of startups like software-as-a-service or consumer products. It’s important for marketplace startups to know how they’re different than these other companies to avoid trying to pitch themselves to investors in a similar way. One of the biggest things we have been seeing are marketplace companies that are treating their Gross Market Value as actual revenue.
Gross Market Value (or Gross Bookings in some cases) is the total value of goods and services flowing through the marketplace. Most public companies further define this metric in their 10-Ks and 10-Qs. From an accounting perspective there are different ways to interpret the handling of Gross Market Value. Does the platform take custody of the full payments? Or is it simply facilitating the payment between a customer and another party. This post isn’t about what is GAAP on this matter, but more how potential investors are looking at this metric.
Gross Market Value is generally not considered revenue as the filings of all these marketplace companies show. Companies like Uber or eBay recognize transaction fees as revenues. Taking revenue and dividing it by the Gross Market Value will give you the Take Rate percentage which is its own metric that shows how much value is being extracted. Furthermore, using fees as revenue instead of the Gross Market Value will normalize gross margin. Most tech companies should not have low gross margins, and marketplace companies that position themselves as having such can be doing themselves a disservice.
Marketplace companies raising capital can make sure they avoid any potential misunderstandings with investors by using transaction fees as revenue and showing Gross Market Value separately. It’s important to know that most VC firms with revenue size requirements are going to use the fee revenue metric to standardize size versus other opportunities.
Hopefully this was a helpful tip to marketplace companies looking to raise!