How Magma Thinks About Marketplaces in Latin America

Magma loves marketplace startups. Over the last decade, we’ve reviewed hundreds of different marketplaces and invested in 15+.

Successful marketplaces have transformed industries across Latin America, driving efficiency and innovation in e-commerce, logistics, real estate, fintech, healthcare, and travel among many other sectors. Although the first digital marketplaces emerged more than 20 years ago, new marketplaces can still create huge value for both consumers and businesses alike.

We’re really bullish that founders will build new, big, transformative marketplaces to solve Latin America’s biggest problems, following in the footsteps of marketplaces like Mercado Libre, iFood, Rappi, QuintoAndar and more. 

In this article we’ll cover how we think about marketplaces and what we look for when investing, along with a brief history of why marketplaces are important. But to really understand how we think today, it’s important to understand how we got here.

Three eras of marketplaces: From Offline to Online, Mobile, and what might come next

Marketplaces have been around forever. From ancient trade markets, to modern flea markets in a nearby neighborhood, marketplaces answer a simple question: Why go to multiple suppliers if you can find them all in one place?

We are defining a marketplace as “any platform that connects buyers and sellers of goods or services with each other and provides infrastructure (such as reviews, payments, or messaging) to facilitate a transaction” ⁽¹⁾.

Marketplaces make much more efficient markets. Buyers can compare prices and quality across suppliers to make better, more informed decisions. Suppliers in turn get exposure to a broader audience and more opportunities to sell. The competition for demand ultimately pushes suppliers to offer better products at lower prices – everybody wins.

But marketplaces didn’t change much until the early 1990s, when the internet started to allow buyers and sellers from all over the world to get together, virtually, in online marketplaces. Craigslist, eBay, Alibaba, Mercado Libre, Booking.com and hundreds of other online marketplaces emerged in the 1990s. Marketplaces were now global, online, and open 24/7.

The next big shift for marketplaces was mobile in the late 2000s and early 2010s, creating companies like Uber, Airbnb, Didi and Doordash. The rise of powerful smartphones now equipped with GPS and cameras enabled new business models that weren’t technically possible before. People could call an Uber directly to their location and drivers could find their passengers all from their phones. Mobile-first experiences made it easy for sellers to snap a photo and list items instantly, while buyers could now browse 24/7 from their couch. 

Three Eras of Marketplace Startups: Offline, Online and Mobile

As for what’s next, we think AI has the potential to be the next big platform shift for marketplaces, and we’re actively looking at the new kinds of experiences and use cases it unlocks.

Covid-ZIRP (Zero Interest Rate Policy) Era: The Rise and Fall of Marketplaces

The next big shift after mobile came with Covid. 2020 and 2021 were turbulent years for startups, but especially so for online marketplaces. The two main driving factors were:

1. Zero interest rates made capital cheap and VC dollars abundant, particularly in Latin America, where VC investment grew ~4x from 2020 to 2021.
2. Online marketplaces saw demand skyrocket as e-commerce penetration had 10 years’ worth of growth in 10 weeks as people needed to buy online during Covid.

Almost everyone viewed these shifts as the new normal, with no reset in sight. Huge growth rates paired with zero interest rates motivated investors to pour billions into online marketplaces at sky-high valuations. The sudden surge in available capital made founders and investors less disciplined, driving a push for growth at all costs and turning many marketplaces into large money pits.

As interest rates started to rise again in late 2022 and the world went back to normal post Covid, many marketplace companies were caught off guard. Growth-at-all-costs strategies led to bloated structures and poor unit economics. Funding dried up, and both public and private marketplace companies struggled. Battery Ventures’ Marketplace Index, which tracks top publicly traded marketplace companies, shows the rapid rise and fall of marketplace businesses in 2020-2022.

Battery Ventures’ Marketplace Index vs Nasdaq Composite Index (2012 – 2023)

The market bottomed out near October 2022, and while the Nasdaq made a full recovery by the end of 2023, the Marketplace Index remained ~50% below its 2021 highs, hovering at 2018 levels, according to Battery Ventures’ latest index report. 

Marketplace fundamentals haven’t changed, and we still like them

The 2022-2024 period has been painful for most marketplaces, but we still believe entrepreneurs will solve some of Latin America’s biggest problems with a new generation of marketplaces that unlock economic good and efficiency for Latin Americans.

Marketplaces like Mercado Libre have become a source of income for millions of small and medium-sized businesses across 18 countries in Latin America, while allowing tens of millions of consumers to buy online, with world-class service.

iFood connects over 60 million customers with more than 350k restaurant partners across Brazil, processing over 100 million orders monthly. The platform enables local businesses to expand their reach and provides flexible income opportunities for more than 300,000 delivery drivers.

QuintoAndar allows more than 175k tenants in Brazil to rent a property without the need for security deposits, guaranteeing landlords timely payments, and reducing paperwork.

Besides transforming their own industries, like e-commerce, food delivery and real estate, great marketplaces also push for innovation in adjacent industries. Entrepreneurs are building entire companies around payments, financial services, software and logistics to enable Latin America’s great marketplaces – and this infrastructure itself enables new and more ambitious companies to be built.

Marketplaces can be successful in different forms and across industries. The fundamentals of the business model haven’t changed, which makes them interesting companies for us to invest in:

• Strong network effects: For each new user on the platform, the platform becomes more valuable to everyone else, attracting even more users. Marketplaces can be hard to get off the ground initially, but once they are moving, network effects can provide a strong tailwind and defensibility. 
• Asset light & scalable: Marketplaces typically don’t own inventory. They act as digital middlemen between buyers and sellers, making them efficient and highly scalable with low capital needs.
• Can have multiple revenue streams: As marketplaces scale, they can layer in additional revenue streams like embedded lending, insurance or premium features, which allows them to capture more value per user and improve unit economics.

What We Look for in Marketplace Startups

We believe you can build great marketplace businesses on both ends of the TAM spectrum in Latin America: 

• Niche overlooked markets: We love marketplaces that might seem to have small TAMs, but can expand their markets as they grow and add features. Companies like Mend, which is creating a marketplace for surgical procedures in Latin America, or Soutag, which is creating a marketplace to connect gas stations with gig economy drivers are some examples of this thesis.
• Huge capturable markets: We also like to look for opportunities at the other end of the spectrum, where TAM is really large, and there are larger, more “obvious” opportunities. Markets like Brazil’s $42B trucking industry, which Frete is addressing, or Mexico’s $102B real estate rental market, where Houm is building, are usually very competitive but also filled with opportunities. In these cases, we usually look for founders with strong founder-market fit and a very clear “why now”.

B2B Vertical marketplaces are still a big opportunity: In Latin America, B2C marketplaces got a head start and we think the next big wave is B2B. We wrote about the rise of B2B marketplaces in 2021, but businesses still purchase a majority of their goods through non-digital channels, and struggle with offline transactions, fraud, lack of online reputations and transparency. We’re actively looking to back the next great Latin American B2B marketplace.

We’re happy to meet founders building any kind of marketplace, whether it's vertical or horizontal, B2C or B2B or any other kind. Successful marketplaces can have many different characteristics, but we usually look for:

• Real network effects: Network effects make marketplaces incredibly valuable as they scale, and provide a strong competitive moat vs new entrants. At scale, network effects can bring lower CAC and better retention rates, customer lifetime value and unit economics.
• Strong unit economics: “Nail it before you scale it”. We look for startups with good unit economics, or at least a very clear path towards them. Reversing the order and scaling before having a clear path to good economics is a great recipe for large scale trouble.
• Sustainable growth: We love seeing companies with a good share of organic user growth. Companies that rely solely on paid acquisition often struggle as customer acquisition costs rise with scale. We like seeing creative approaches to acquisition, like companies exploring product-led growth or viral growth loops among others.
• Good take rates: Take rates always have to be earned, not given. We like seeing marketplaces that add enough value to be able to charge a significant take rate on transactions. But beware of overdoing it, and going a rake too far.

Marketplaces will continue to thrive in Latin America

We’d love to meet founders trying to solve Latin America’s deeply rooted problems like access to housing, healthcare, financial inclusion, and broken logistics and supply chains with marketplaces. We believe the next generation of marketplace startups will continue to reshape the landscape by returning to fundamentals: solving real problems and focusing on strong unit economics and sustainable growth. The opportunities are everywhere, and we’re always on the lookout for the next great one. If you think that might be you, feel free to reach out!