Navigating marketplace growth: Lateral attacks and the power of the niche - Mira Mihaylova (Piton Capital)

Please note: The transcript is automated, meaning that there will be mistakes.

Mira Mihaylova: Completely driven by investors' behavior, founders obsessing too much over fast growth at the expense of burn runway. So scaling economics that are unproven, that can also be very, very, tricky. So forcing, you know, the scaling of a proposition that hasn't reached PMF, obviously dangerous. Forcing it to go faster is like applying excess fertilizer to a plant. It may work in the short term, but probably messes up the economics, and and the ecosystem in the long run.

Welcome to TwoSided, the marketplace podcast brought to you by Sharetribe.

Sjoerd Handgraaf: Hello, and welcome. I am Stuart, CMO with Sharetribe, and I am your host. Welcome to episode number four of season three of two sided, in which we continue talking to marketplace investors. In this episode, I'm talking to Mira Mikhaylova from Piton Capital. I was really happy to get this interview because I've known about Piton for a while.

Although, as you'll hear in the interview, I have always mispronounced the name, but they don't often do podcasts or a lot of publicity in general. Even their website is really basic. It's literally one page with link to the Wikipedia entry for network effects, a link to their Crunchbase profile to track their investments, and a link to a contact form. So merry no frills and just focused on investing, which is sort of confirmed from my conversation with Mira. What I really liked about this conversation is that she's making many points throughout the conversation, but she's pulling in all the time examples from their portfolio to illustrate some of the points.

That made it for me really a lot more understandable. I hope you'll appreciate that as well. Some of the things we'll talk about, something that was new to me, I hadn't heard phrased like that, is what they call frontal versus lateral attack strategy. Meta highlights the challenges of launching a marketplace that directly competes with an established player, which they call a frontal attack, and instead advises founders to focus on a smaller adjacent market first to gain traction and then gradually expand into the larger market, which they call a lateral attack. I thought it was very interesting concept.

I hadn't heard it about it in that way, but it makes a lot of sense to me. And then very much related to this, how important it is to start in the small market. Mina explains how focusing on a niche can lead to faster product market fit and eventually still to scalability. And then related to that, why actually liquidity is the core of any marketplace. I think we've heard this before, but Mira makes an excellent point of stressing the importance of building liquidity before worrying about things like advanced tech or scaling.

And then finally, also, in this conversation, there's no way around it. We have to discuss the role of AI in disrupting marketplaces. So we talk about how AI can optimize marketplace operations and help founders stay ahead of competition. Please enjoy this episode. I guarantee you will have, again, a slightly deeper understanding of what makes marketplace succeed, which, of course, is the goal of this podcast.

Enjoy. Here is my conversation with Mira Mihailova from Python Capital. Hi, Mira. Welcome to the podcast.

Mira Mihaylova: Hi. Thanks for having me. Really excited to be here.

Sjoerd Handgraaf: Thanks for taking the time. I know it's a bit early on your side, earlier than on my side anyway. Looking forward to talking about all things marketplaces. But before we go into that and everything that Python does around that, can you tell us a little bit about yourself? What did you do before you became a marketplace focused investor?

Mira Mihaylova: Sure. So I graduated mathematics in The UK, started my career in fixed income futures and options, at Merrill Lynch Bank of America. So some of the boring stuff, I'm afraid. We all we all have mistakes, I guess. And after four and a half years of that, I wanted to exit to a tech role, but wasn't sure what exactly, is a good fit.

So I did an MBA, for two years, and and during these two years, I experimented a lot. So I did internships at PayPal, which is big tech, Huddl, a US scale up, so more of a kind of the startup side, in an operational role, Bucks and Tilt, which are fintechs, also startups, and I also started my my own peer to peer circular fashion marketplace, that failed Alright. Unfortunately. Oh, cool. Yeah.

And and towards the end of the MBA, I, found, Piton as an option on our job board. So, I ended up there in the end.

Sjoerd Handgraaf: Ah, wow. Ah, wow. I didn't oh, I had missed that because I, of course, I did a bit of research about you, but I missed the fact that you actually did a a circular fashion marketplace. Oh, that is really interesting. Ah, I'm gonna definitely call that back later in the interview.

Let's talk about Python first or Python? Is it Python?

Mira Mihaylova: Python. It's a climbing a rock climbing tool. I think it's, the thing that goes into the rock. Yeah.

Sjoerd Handgraaf: I saw that actually in, one of the founders' presentations that they are, like, a tool to a tool to help people reach heights. I I this is actually very good metaphor. Yeah. So, Peton, could you tell us a little bit about Piton and specifically, like, what would say if if these are founders looking for a partner, what sets Piton apart from other investors?

Mira Mihaylova: So if if it's a marketplace founder, I think it's a very easy sale. You know, we are a fund that focuses only on companies with strong network effects. That's our bread and butter. We've done that for more than sixteen years. And, actually, my colleagues, Andrew and Greg, have done it for, I don't know, twenty five plus probably.

We have a lot of pattern recognition around marketplaces, generally network effects businesses, which also includes social, user generated content, libraries, even data aggregation, businesses, some pure SaaS businesses, that Okay. Can become a, you know, an operating system for something. But the marketplaces have been the bread and butter for us, you know, probably 70% of the portfolio. Both b to b, b to c, peer to peer, doesn't matter, as long as they have strong network effects that fits.

Sjoerd Handgraaf: Got it. Got it. Yeah. Okay. That's actually takes a little bit of the wind out of my next question, which was going to be like, are there any specific industries?

But but apparently not. So you were more about the model than the the actual area or industry that you're in. So what stages do you invest in?

Mira Mihaylova: So we are agnostic on stage as well. We've done anything from pre seed to growth equity, but the sweet spot is late seed and series a. So this is usually when we can see a little bit of a proven product market fit, a proven GTM or go to market to an extent Mhmm. Already something working. So this this is, our preferred stage.

Yeah. But but we we can be quite flexible.

Sjoerd Handgraaf: Yeah. Because I think most of our audience is very early stage founders. Of course, I understand sweet spot is one, you know, once there's a little bit more, let's say, data to prove traction. But for the deals that are earlier, like, you know, how do you evaluate a good marketplace idea from your perspective? Or or if someone comes with very, very early stage, like, what what are you what do you look at?

Mira Mihaylova: Oh, it's quite a list. So starting from the idea itself, you know, marketplace idea can be for a new market, or it can be a lateral or frontal attack on an incumbent in an existing market. If it's a new market, we always try to understand the space first. So what are the characteristics of the underlying trades, degree of standardization, motivations of the participants, types of trade mechanism, what type of data strategic, then what what are the characteristics of the industry itself, degree of fragmentation, economics of the players Yeah. Value chain.

You know, what are the information and trust requirements also that's also quite important. Existing behaviors, workflows, practices. If we're talking about an attack on a existing established player, we evaluate the likelihood of of success because Mhmm. Network affects businesses or marketplaces. The beauty is that they are very defensible at scale, right?

Usually quite untouchable in fact. So we prefer lateral attacks, and I can dive into that deeper maybe later on or even now. So we you know, if if a company starts with a small adjacent market, where you don't look like a direct threat initially, you fly under the radar for a bit until you dominate that adjacency, then you launch an attack from that adjacency into the main market, and that's a lot easier than just going head to head with someone who is already at scale. So we try to evaluate whether that adjacent market is a good wedge into the main market because, frankly, sometimes it just isn't. And, yeah, as I said, frontal attacks are quite difficult.

We have Yeah. You know, considered them and we always look at them. But, you know, it it usually involves the company subsidizing at least one side for quite a while. Yeah. Exactly.

And Yeah. It it reflects on the unit economics. It's also quite a you know, it's a long term strategy to subsidize. It takes a takes a while. And here it's an interesting one.

In some cases subsidizing can be possible, so if you look at Uber with a somewhat homogeneous supply, in others that can be quite difficult even. So if you were talking about completeness on the supply side or selection, that is not gonna be easy.

Sjoerd Handgraaf: So you mean that if the supply is homogeneous, then then subsidizing is easier because the like, because the unit economics are more predictable or something or, like, you you know roughly what it costs?

Mira Mihaylova: I think it's it's easier to to make your demand side happy, with a lot less pain

Sjoerd Handgraaf: Got it.

Mira Mihaylova: If you need absolute completeness. So if you think of maybe restaurant reservations where you need location, availability for a particular time and day, and size of the table, cuisine, ratings, this is a very complex and and for you to make the demand happy, you need to have all the restaurants on board. So that's gonna cost you an arm and a leg to subsidize. With Uber, you can subsidize a bunch of, you know, drivers initially to make your small demand happy. You don't need absolute, you know, completeness to basically have a product.

Sjoerd Handgraaf: Yeah. So it's about the ratio sort of needed, like, between supply and demand. Okay. Understood.

Mira Mihaylova: Okay. Absolutely everything or can I Yeah? Can I basically have a small subset and and still have a product market fit?

Sjoerd Handgraaf: Understood. Understood. So frontal attacks, very difficult. You said you you you as a company or as as a fund more enthusiastic about lateral attacks. Do you have any any success stories from that strategy from the portfolio?

Do could you could you give an example, like or that is maybe not yet fully beaten, but is making good headway in into a market? Yeah. Would it be possible?

Mira Mihaylova: Yeah. Absolutely. So we we have several. For example, Vesper in the portfolio is a data business. They aggregate data on dairy products, something that's not very transparent.

There are no price indices out there. So they're doing exactly that, taking data from different the different participants, forming the pricing indices, and it's a data product. They actually have now launched a marketplace now that they have all the the different participants, interacting with the data product. So this was a wedge that didn't look like a marketplace and didn't start as a market place, but, it went into the to to the main market, which is the trading. Okay.

We have also Gringo in, fintech. It started as a app for anything to do with your car, so consumer app.

Sjoerd Handgraaf: Okay.

Mira Mihaylova: You can pay your vehicle tax. You can pay for your fines. You can check the points on your, driving license and so on. Yeah. Now that they have, a lot of engagement in users in usage from from their users, They're spinning a marketplace into insurance, financing, b two p buying of cars.

So, bigger players, and anyone who needs a lot of cars, they can source them through the the Gringo network.

Sjoerd Handgraaf: Nice. Okay. Yeah. And where is Gringo? What's the market?

Like, where are they,

Mira Mihaylova: on is Brazil.

Sjoerd Handgraaf: Brazil. Okay.

Mira Mihaylova: Actually, one one thing I didn't mention about Teton, we are European. We have two offices in Europe, Amsterdam and London, but we do anything under the sun. So as far as, Brazil, Colombia, Egypt Yeah. Pakistan, you name it.

Sjoerd Handgraaf: That's terrific because that is I guess, also my own sort of view of marketplace, of course, like, for creating content for Sharetrep or learning more about marketplaces, I still have a pretty, I realized, like, Euro US centric view, but okay. Gringo, I'm definitely gonna look that up. It looks super interesting. So was this marketplace play like on the table when you joined the round or right when you when you invested in Gringo? Or was this

Mira Mihaylova: It was

Sjoerd Handgraaf: Something like that.

Mira Mihaylova: An idea I would say. So the the the founders already had that idea but it was last priority. They had a lot of other things that they they wanted to build. Of course. We've never influenced the them actually you know we we obviously keep talking about defensibility modes and

Sjoerd Handgraaf: Network effects.

Mira Mihaylova: Network effects. But if the founders wanna build the marketplace, absolutely. If they don't, that's also fine. We've had a company in the portfolio called, Booksy, actually we still have it sorry, and they they started as pure SaaS and the marketplace was not even on the table, back then. Yeah.

To your question.

Sjoerd Handgraaf: Booksy, right?

Mira Mihaylova: Booksy. Exactly. It's a beauty marketplace.

Sjoerd Handgraaf: Interesting player, yeah.

Mira Mihaylova: Yeah, Yeah. But pure pure SaaS when we invested, and, they wanted to be a pure SaaS at that time.

Sjoerd Handgraaf: Yeah. Because that was, that's for, for beauty. Right? They're originally from Poland, I believe. Yes.

And was it so that they did the, like, what we've called in the podcast, this sort of, like, stay for the tool, come for the network type of approach. Right? Like, they had this this booking software for beauty centers, I believe, or beauticians, etcetera, and then eventually turn into marketplace. Yeah. That is a that is a lovely story for people listening.

That is a cool story to check out because that was a quite a growth spurt. Because I think I learned about them first time at the marketplace conference, like, maybe 2019, I would say, maybe or '18, like, long time ago. I think now they're topping US app charts and whatnot. So, yeah, that's a great that is a great story. So now we talked a little bit about sort of our green lights like when you evaluate pitches is there some sort of common red flag that is a blind spot for people that sets you off on a marketplace, early stage mistakes that you see made or essential problems in the business idea that you often see?

Mira Mihaylova: I touched on the small adjacency. I think

Sjoerd Handgraaf: Yeah.

Mira Mihaylova: Starting in the big market and trying to start in the big market from day one Okay. Is a is a mistake usually. It just it will take you forever to build real liquidity and in a marketplace context, liquidity is your product. So so you will not reach product market fit for for a very long time. So that that can be a problem.

I don't think it's the, founder's mistake or or, you know, red flag. A lot of this is driven by investors behavior. A lot of investors wanna see, you know, can this be a multi billion exit or or whatever. And I think it's actually the investors to blame, if I'm honest. Completely driven by investors' behavior, founders obsessing too much over fast growth at the expense of burn runway.

So scaling economics that are unproven, that can also be very, very, tricky. So forcing, you know, the scaling of a proposition that hasn't reached PMF, obviously dangerous. And Yeah. If you think of the marketplace, some of the best examples out there, they have a natural growth rate to them that balances between supply and demand. And you have this Yeah.

Kind of flywheel. Forcing it to go faster is like applying excess fertilizer to a plant. It may work in the short term, but probably messes up the economics, and and the ecosystem in the long run. I would say a third one here, having a eye take rate that is too high and encourages leakage or or just messes up with the the behavior of your participants. That's also one that, we see quite often.

Sjoerd Handgraaf: Yeah. Yeah. In your in your first point, you bring out something maybe in the important to address that there are many good marketplace ideas that can be a great business, just not a venture scale outcome business. So indeed, like, the fact that you that that's maybe indeed because, of course, like, many of the founders that are listening to this podcast might have ideas that are just perfectly fine, maybe even national marketplaces or particular needs that is just not not not venture sized.

Mira Mihaylova: I think it's it's very important for these founders out there, there will be funds that will absolutely love you and we are one. We don't worry about you know is it a multi billion, is it a billion plus. A small well defined niche will always have a way to expand into something, might not be evident. It can also be quite beautiful on its own. We've seen companies that once they become dominant in a small market, small niche, they can extract amazing economics.

They can start upselling. Don't worry too much. And, you know, if the the big funds out there don't, love you for some reason, we're here.

Sjoerd Handgraaf: Yeah. Okay. Oh, that's good. That's good. Yeah.

Yeah. So it's a little bit like this, I think some some other investors call this sort of like this Tom obsession. Right? Like, if you cannot prove your market at the very first slide, then they're not interested. No.

Yeah. And then some something else you mentioned actually about the this is maybe more of a, like, a, let's say, investor focused question. But, you mentioned about the the, you know, growth at all cost things. Do you see that changing now, you know, like, this post zero interest rate that that there was a lot of, like, many years ago or many years ago, couple of years ago, it was really, like, growth at all cost and amazing evaluations and a lot of money poured in. Like, have you seen that focus shifting?

I don't know if it almost maybe never part of that, but have you see the changing behavior in the way that pitches are presented or other investors joining rounds?

Mira Mihaylova: A little bit. Definitely. Because the the money is not there anymore this in the same way it was. But Yeah. I think there's always some founders that are amazing at fundraising, and they will be able to fundraise, and they will be tempted to try.

And I'm not saying that this is a bad strategy per se. It's been done many times in the past, but one always has it has to be careful. Does the upfront investment justify the end reward here? Because in in many cases in the past, it didn't.

Sjoerd Handgraaf: No. No. Yeah. There is there is a multitude of examples. Yeah.

You also mentioned something else in your previous answer about a well defined niche market you said is always able to extract more money from the market. Maybe that's a good segue to a next question. Like, have you you know, like, if you look at the history of marketplaces in terms of, like, monetization, it used to be, like, classified only, then a little bit of the transaction. Have you seen in in in recent investment in people any interesting, monetization models or anything happening in in the in monetization or in adding value layers or or anything that sort of struck your eyes? Like, oh, this is an interesting way of monetization that other marketplace founders should maybe think about.

Mira Mihaylova: We are very agnostic here, and we have a range in the portfolio, transactional, SaaS, hybrids, that there's as you said, there's some, new layers now on top of the existing, revenue models. It really depends on the context, I would say, and and the underlying market. It really depends on how the economic incentives, stack up and and and how they drive behavior. So I would say we're seeing a lot of b to b marketplaces that are now shifting away from the high transactional take for that reason. So in some instances, these transactional fees, created psychological barrier to using the platform for all transactions, so you end up with leakage, low, wallet share, and that's a problem in b two b.

And and not just b two b, I mean if you take again Booksy, this is a good example of a pivot not a pivot, but a a new revenue model. The old version, the pure marketplace was charging a transactional fee, and that that resulted in a really suboptimal product because, beauty salons were trying to avoid the platform as much as they can. They were canceling appointments, resulted in double bookings. So, also, the consumers were unhappy. There was a lot of support calls.

So really not a good outcome. And, if you take Booksy, they're doing SaaS, just pure subscription. And now they're adding, payments, as a as an extra layer. So they're augmenting the trans the subscription fees with, with, fintech. And, this is one area which we see, a lot of innovation, marketplaces that embed fintech in what they do, in which looks very promising.

In terms of what mhmm. I think, freemium is not a new thing, but it's quite interesting. It it's probably the most disruptive and and most difficult one. We've seen cases where it works and cases where it doesn't.

Sjoerd Handgraaf: Could you give an example where it works?

Mira Mihaylova: Classifieds, it's an old example, but, you know, AutoTrader and Carguru. I think Carguru started as, freemium, free for the Yeah. The car dealers. Yeah. And that managed to build, real market share over time.

And it it's still doing fine. Then if you think of some equivalents to Booksy out there, I think that started with freemium, I think there the the issue was supply quality because freemium unfortunately sometimes will attract the type of suppliers that you don't want. It's the suppliers that are absolutely desperate for work and for customers, and these are usually the suppliers that will not make your customers happy. And the other problem is also just psychological. Suppliers think that, because it's free, I mean, there's no value in your product.

Sjoerd Handgraaf: Yeah. That's the day. Yeah. That's the risk of freemium in general, I'd like to say. I'm stealing this quote, but it's about the freemium is basically like acquisition model and not a revenue model.

So that yeah. That makes total sense. Yeah. Thanks. So have you seen anything regarding, like, new value added services that marketplaces are adding?

Mira Mihaylova: Yes. So a lot of the the b to b marketplaces that I mentioned, this is something that they're doing a lot, whether that's quality check, verifications, logistics, fintech, you know, financing, very big topic for B 2 b. Even in B 2 C, so if you look at a a portfolio company of ours like Ferryhopper, which is a Skyscanner for ferry tickets. And they're selling now insurance, trip protection, meals, car rentals, plenty of upsell that you can do. We, I would say, no, not value added services, but there's a kind of a new layer of monetization.

Marketplaces that already have good usage, can look into data sales, especially in the kind of AI world. But this doesn't always scale well. I wouldn't use data sales as the kind of sole revenue model.

Sjoerd Handgraaf: No. That makes sense. Thanks, Mira. One last question or actually I have two more questions, but, one question is founders are always struggling with, acquiring one side. You know, there's always one side constraint.

Do you have any interesting tactics that you've seen in your portfolio of companies using to acquire either supplier demand that is a little bit unusual or or extremely successful?

Mira Mihaylova: Yes. I think creating value for one side, or one segment without the marketplace liquidity, will be a a great example, and it's a very common one. And here again, we mentioned that for a marketplace, liquidity is the product. Yeah. Yeah.

You need to build something that is already usable, before you even have the other side. Again, take Booksy with the scheduling or booking software, which salons can use without, having, any demand side on the platform, because they onboard their own customers. So that's easy. It can also be, as I mentioned, a segment. You know, there's a company called SuperDoc, which is a marketplace for patients to find, discover, and book doctors.

They initially went after the GPs. And this is an interesting one because GPs, they have way too many patients. Yeah. In fact, they don't need any more patients. Right?

But they they would love to have something that helps them schedule, fix their calendar, and so on. So the GPs could find immediate value while the specialists couldn't because for specialists, finding new patients was the number one driver. But if you start with the GPs, they bring all the patients because they onboard them. And then once you have all the patients, you go into the specialists. So this is starting with a particular segment where you might find an an easier, faster product market fit.

I think AI is an interesting one here because AI could unlock a lot of these product wedges. There's a a company in The US called RealPage. Now they're in the news for being in trouble with price fixing, but let's let's take that aside. It's a company that, offers landlords software that helps the landlord price the property. They reached a really impressive supply coverage by doing that.

And obviously, if you have all the landlords on your platform, you could potentially spin a marketplace from from that. So it's a very interesting kind of way of fixing the chicken and egg problem. There's ways to you can fake it, and I I think, plenty of examples from your previous episodes where you don't have the supply, but you obviously say that you do, and then you manually go out and source it. Very common one.

Sjoerd Handgraaf: Yeah. Thanks. Yeah. I really like what you said. I think you mentioned earlier in this podcast that, like, liquidity is the product of your marketplace.

Right? Like, I I think that says maybe a really good reminder because, of course, like at Shareatribe, we sell a marketplace tech or marketplace tool, like a marketplace building tool that people sometimes get really obsessed about the tech, not realizing that actually let's first you know, you could you could have liquidity running with the most basic of services or, like, the most basic of technical platforms. Like, so so that's what you should focus on early stage rather than getting too much ahead of yourself in terms of, like, what are the tech requirements. As an ender, could you share any advice with early stage marketplace founders, whether of, like, something to do or something not to do specifically that you have seen?

Mira Mihaylova: A very general one. One of my colleagues has a a great line, that your investors are the only participants in your business that you cannot fire or it's very hard to. In any startup, it's important to pick the right investors, But in marketplaces, because they're a very difficult beast to build, and they are very particular Yeah. I think important to pick, an investor that understands the marketplace model and has pattern recognition, knows the different strategies and challenges. Don't be afraid to to focus on a small niche as I already mentioned.

I think it's the right strategy plus it can still be a very nice business and a very, you know, sexy one. Maybe we're on the the kind of the AI, topic a little bit. AI will probably disrupt and help marketplaces in many ways. I think it pays to be paranoid and always on top of this, just to make sure you're not the ones being disrupted. Whether that's AI being a new wedge into something, just an AI tool that can lead into a marketplace, whether it's, you know, AI is becoming the new channel.

So if people interact with agents, how does an agent find you? Do you wanna build something with SEO dependency or or Google dependency? And, yeah, there's a lot of questions there, I think, that founders should be asking themselves.

Sjoerd Handgraaf: No. That's fantastic advice, especially the niche. Like, honestly, I talk quite frequently with marketplace founders, and and it's almost, I don't know, I would say one in in every two conversation I have the feeling that, you know, you could make the market smaller. Like, you could focus more. You could drop a category or you could drop a location and have a you know, go really to this white hot center or whatever is the metaphor people like to use.

Yeah. No. I I think that's a great one to reiterate. Well, Diane, I wanna thank you for your time and for for sharing, all your knowledge and experience. If people want to get in touch with you, where do they go?

Where should they send their pitch? How should they get in touch?

Mira Mihaylova: My LinkedIn will be the best channel. I I

Sjoerd Handgraaf: And, of course, people can read more about Piton Capital at pitoncapital.com?

Mira Mihaylova: The best source will be the the portfolio page on Crunchbase so they can get a sense for the companies we've backed over the years. The best source will be speaking to myself or one of my colleagues. Got it.

Sjoerd Handgraaf: Alright, Mira. Thanks a lot for your time, and, thanks again for coming on the podcast.

Mira Mihaylova: Oh, thank you so much for having me.

Sjoerd Handgraaf: Thank you for listening to Two Sided, the marketplace podcast. If you enjoyed this episode, don't forget to subscribe. And if you really liked it, please give us a rating or a review on Spotify, Apple Podcasts, or wherever fine podcasts are downloaded. If you got inspired to build your own marketplace, go visit www.sharetribe.com. It's the fastest way to build a successful online marketplace business.