I was going to title this post Marketplace 2.0 (you know like software 2.0, enterprise 2.0) but I realized I dont want to create another empty bandwagon Anyways, last week, oDesk raised a good chunk of cash from an investor that knows more than anyone about building marketplace businesses - Benchmark. Which reminded me of one of the most important things I learned in the 2000 B2B craze.

As much as most people think that the value created by market places are from counter party discovery (aka search), capturing that value rest solely on providing transactional settlement services.

eBay.com is the exception rather than the rule. For consumer goods, the search cost of finding a business is high and the switching cost low. Thus EVERYTIME you want to buy a laptop, you will try to find someone to give you the lowest price. Thus eBay was able to build a gigantic business focusing solely on “discovery” as its main business. However, in the long run, when Google has taken over the world’s entire need for search, I would venture to guess that in 5 years, Paypal will generate over 2x the revenue of eBay’s Marketplace business. Note that Paypal is an example of a settlement service (financial one).

During the B2B days, eBay’s success on its business model let many to believe that if one created a marketplace and help business x find business y (or person x and person y) one can charge 10% for helping to broker that transaction. Oh boy, were we (I) wrong.

For most other businesses (non-consumer goods) counter party discovery is a commodity. It is also part of the transactional value chain that is hardest to capture. In most transactions, relationships matter much more (finding a plumber, contractor, house, supplier of PCB’s, or babysitter). The switching cost to of changing vendors/customer are very high. In that environment, once the introduction is made, the relationship between buyer/seller is taken “offline” - there is no longer a need for the marketplace going forward (for the completion of the initial transaction AS WELL AS the next transaction) . . . UNLESS you can add value through settlement services.

The marketplace (the discovery portion) is actually NOT the core competency of the marketplace business, it is just another way for the venture to hedge and reduce spending on Google. The marketplace acts as a FEEDER into the settlement services provided by the marketplace. As does Google. . .

Google has create the biggest “suckout” in the history of business by rendering metcalfe’s law irrelevant.

In such a world, oDesk has created the model for the next generation of online marketplace ventures. While others are still stuck in the 1.0 world competing with Google on search/discovery, oDesk has instead focused on how to lower friction and increase trust for the ENTIRE value chain. It has created a platform for relationship management that does not in anyway pigeon hole the value of the marketplace to fulfilling the initial need for finding a counter party. It has inserted itself between the buyer and seller permenantly. And that, is the brilliance of oDesk.