In recent weeks on both sides of the Atlantic ‘gig economy’ companies have consolidated at an accelerating pace. IAC has led the wave, acquiring Angie’s List after two years of courtship for $500m, after buying a smaller UK business only a few weeks before.
But the trend is far more broad based. TaskRabbit, the spiritual home of millennial services, is exploring a sale. And in the UK, IAC has bought MyBuilder and Homeserve has grabbed a stake in Checkatrade.
More broadly, companies as diverse as AirBnB, Just Eat and even Uber have expanded through acquisitions. Just Eat in particular has bought 12 companies since 2011, expanding to other territories by acquisition rather than organically.
What is driving all this consolidation in the gig economy?
- The leading gig economy companies are “2 sided marketplaces” at heart, connecting disparate and fragmented sellers of services with equally fragmented buyers. There is a huge and compelling need for eBay style connection of each side, and eBay style validation through reviews, feedback, and price transparency.
- Two sided marketplaces get more valuable the bigger they get. The simple reason is that additional revenue quite literally ‘drops to the bottom line.” eBay learned this lesson early buying PayPal for an incredibly cheap $1.5B. The same logic applies when AirBnB buys Luxury Retreats for $200m or Just Eat buys Hungry House for a similar amount, more revenue with far less additional cost.
- Expanding two sided marketplaces into new geographies organically is a real challenge. It is very difficult to make money from a marketplace until it reaches a minimum size, and enough reviews and activity are required for consumers to trust any platform.
- Finally, at scale two sided marketplaces are valued as a multiple of EBITDA (earnings before interest tax and depreciation), a proxy for operating profit. Doing acquisitions becomes simple maths. Just by way of example: if a buyer pays $300m for a smaller marketplace business doing say $50m of revenue, the buyer may be able to show $40m or more in profit by absorbing that revenue while only adding $10m of costs. $40m of EBITDA is worth far more than $300m in today’s market; well executed these deals can be a near-certain way to add to the buyer’s own market value by buying ‘post acquisition profits’ fairly cheaply.
A good example is Angie’s List. IAC acquired the company for about 1.8x revenue and 18x 2017 EBITDA. Once costs are rationalised, we would guess the ‘post-acquisition’ multiple of EBITDA will come down dramatically. On its own the company had already doubled EBITDA from the same period last year, pointing to significant future growth from its 5.7m members.
For any buyer with a large enough marketplace themselves, adding more scale can be so much more profitable than building organically, we can easily see at least another $1-2B of gig economy deals before the year is out.
Being big is truly the most profitable way to serve the smallest customers.