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Bill Gurley: How to Know If Your Internet Marketplace Idea Will Work

By Bill Gurley · Investing · 1 min read

Gurley says the first thing he looks at is whether customers show up on their own or if the company has to pay for them. Organic traffic versus bought traffic — that changes everything.

Key Points

Organic traffic is a completely different value proposition than bought traffic
Google, Skype, OpenTable, LinkedIn — none of them ran ads to get big
A marketplace with a high rake is like a casino — customers will eventually go where the rake is lower

Any company that's spending heavily on marketing to drive people in — that's just a far different value proposition than someone who has a product so good that everyone comes to it.

Organic vs. Bought

Gurley: When you're looking at these companies that are hard to value, what are you looking at? Growth is a big one. But one that I think people really should focus on, especially for internet businesses, is whether traffic is organic or bought.

Any company that's spending heavily on marketing to drive people in — that's just a far different value proposition than someone who has a product so good that everyone comes to it. Google never ran marketing ads to get big. Skype never ran ads. OpenTable never ran ads. LinkedIn doesn't run ads.

People that are having to spend heavily on marketing are basically renting or borrowing customers. I don't see any reason why a company that's heavy on marketing should get the same kind of multiple as someone with an organic customer base.

Google never ran ads. Skype never ran ads. OpenTable never ran ads. People spending heavily on marketing are basically renting customers.

The Casino Problem

Gurley: The thing that strikes me about the deal business is that the value to the customer is a direct function of the rake of the platform — the margin the platform takes. It's a bit like a casino.

If you had a casino on one side of the street that took a 50% rake and another one on the other that took a 10% rake, eventually all the customers are going to go where the rake is 10%. The offer as a product is a direct function of that rake.

So if we see a Facebook or a Google offering a much lower rake to participate, I think it's inevitable that they have better offers.

If you had a casino that took a 50% rake and another that took 10%, eventually all the customers go where the rake is 10%.