Unbundling billions in niches

Sneakers are my vice. We all have one or two “unhealthy” obsessions that, for one reason or another, strike a primordial chord in our souls, and empty our wallets.

Some spend thousands of dollars on the latest golf clubs. Others back up the boat for fancy fishing gear. And the majority of people with a sales quota are obsessed with watches.

In short, we all have a “thing” that we self-identify with to a level that wouldn’t really make sense to an “outsider".

Many of these “things” are sold through niche, verticalized marketplaces, which cater to the unique preferences of sneaker heads, gear heads, foodies, etc.

Speaking of marketplaces, you’ve probably seen this image floating around the depths of the internet. It’s a raw illustration of all the ways entrepreneurs have attempted to unbundle Craigslist into standalone, seemingly niche businesses. Many of these companies went on to collectively raise billions of dollars in capital, and generate hundreds of billions in sales.

Andrew Parker, a tech geek and investor from Spark Capital and Union Street Ventures, made the thought provoking image back in 2010. It appeared in a piece he wrote about the unbundling of Craigslist, featured on his even more thought provoking Tumblr “The Gong Show” (nice).

My first observation: These logos are old AF.

My second observation: Many of the logos on the list are durable, publicly traded businesses in 2023.

Some unbundling examples that jump off the page:

And then in 2012, David Haber of Spark took another stab at the chart, updating it for a shit ton more logos.

In the context of technology and marketplace businesses, unbundling refers to the process of breaking down a horizontal platform or service into smaller, specialized businesses.

According to A16Z, unbundling occurs:

A general online shoe store like Zappos can give you the basic facts about a pair of basketball shoes, but the website isn’t built to provide collector level information that sneaker junkies are asking for, nor carry the inventory to keep them engaged. They also won’t go the extra mile to invest in verification to keep fakes off the market, which is rewarded with a premium take rate.

Because Zappos appeals to the shoe generalist, who may also be simultaneously searching for work boots for someone else in the family, it can’t fulfill the specific desires of die-hard enthusiasts.

Unbundling works effectively for passionate groups of consumers, such as the car market or sneaker market, due to several reasons:

These three factors give way to a business with an increased value proposition and competitive differentiation. By tailoring products or services to specific preferences and needs, businesses can establish a stronger connection with their audience.

Now, even though we’ve been talking about unbundling the likes of Craigslist, ebay, and Zappos, they’re all still enormous.

And as a metrics wonk, I’d be remise to point out that many “niche” or unbundled businesses get caught in the proverbial LTV to CAC trap. What tends to happen is they serve a niche where either the frequency of purchase or the size of purchase is not high enough to offset customer acquisition cost, after you layer on customer churn.

How often do you buy a luxury watch? And will you remember where you bought it the next time you want to buy?

This happened to me when I tried to unbundle TripAdvisor and start a marketplace for last minute tours and activities… my notes from that experience below:

Lesson #7: As a marketplace, you can be either low frequency or low price, but you can't be both.

Our average purchase was $60 per ticket x 3 tickets, or $180. However, people go on vacation infrequently. And they'd have to remember us again each time. We were in the proverbial dead zone. We had what they call low Lifetime Value to Customer Acquisition Cost.

Dan Hockenmaier, the head of strategy and analytics at Faire and writer of Dan Hock's Essays, explains the benefits of breadth, and why horizontals marketplaces have better unit economics compared to niche, verticalized businesses:

Let’s unbundle (ok, last time, I’ll stop) that further:

So unbundling isn’t always a slam dunk.

Despite the reasons why unbundling may present unit economic challenges, I still think it’s possible to keep unbundling as long as you can validate there’s a passionate enough, and affluent enough, audience worth serving.

One prominent example where this ultra-unbundling is working Cars and Bids. The marketplace, started by YouTube star Doug Demuro, goes a step further than just used cars, honing in on a specific era of enthusiast automobiles known for their quirks and features (IYKYK).

Ten years ago, you’d be hard pressed to find a VC who would be willing to underwrite a business who’s bread and butter is slingin’ Dodge Dakotas from 1997 or Mercury Capri’s from 1977. But DeMuro recently revealed on a podcast that Cars and Bids did roughly $100M in sales last year.

The reason why horizontal businesses break and offer new opportunities is the same why already-verticalized businesses break and offer even further opportunities.

I believe that as marketplaces we originally deemed as “niche” zig to go broader, there’s a massive opportunity for others to zag and unbundle even further.

I think we are already seeing it with GOAT and StockX, which were originally strictly for shoe enthusiasts. They are now expanding their TAMs to sell clothing, baseball cards, and jewelry. Not only have they stopped going deeper (e.g., doubling down on Jordan Basketball shoes from the early 2000’s), but they are actually going in the other direction; they’re going horizontal.

The question is, and always has been, just how narrow can you go?

Like I said, I’m really into sneakers; more specifically I’m into cool running sneakers. You see, not all running shoes are created equal. You have your daily trainers, long run shoes, flats for speed sessions, trail kickers, and, most importantly, special race day kicks. And depending on the race you are running (5K, 10K, Marathon…) you have an even more specific subset within that.

Similar to how Zappos was unable to properly characterize or inventory Jordan basketball shoes, GOAT and StockX do a poor job of bringing these running shoe characteristics points to life within my buying experience.

I really think someone could create GOAT but specifically for running shoe enthusiast and collectors.

To take Cars and Bids a step further, could someone unbundle it into a marketplace for highly tuned pickup trucks?

There’s a larger-than-you-think group of people who are obsessed with tuning their flatbeds. And more specifically, within that contingency there’s a larger-than-you-think group of people who are obsessed with a single truck - the Chevy C10… whether that be candy painted, lifted, lowered, or slammed.

Don’t believe me? Here’s a video of the Texas C10 Nationals, an event where they fill the entire Texas Motor Speedway in Fort Worth Texas with enthusiasts.

That’s a pretty big stadium., and we’re talking about a single model of truck from 1960 - 1987.

A few other (crazy) ideas:

To be clear, I don’t necessarily think all of these business ideas would be venture backable. If you are curious what qualifies as venture backable, Lenny Rachitsky wrote an excellent piece on the topic (and explained why that’s OK if it is the case):

But I do think there are minimally hundreds of millions of dollars still locked up in fanbases, collectors, weekend warriors, and hobbyists that have yet to be served adequately.

Where there’s a passion, there’s an opportunity. And more specifically, wherever people self-identify, there’s an opportunity.

I believe the majority of unbundling comes from the work of enthusiasts who have a passion, create media around said passion, and then make the leap from content to commerce.

By the way, all of these are portfolio companies of The Chernin Group, started by media mogul Peter Churnin, with the mission to back creators who are building businesses for passionate audiences.

In short, you can spot opportunities for unbundling by identifying groups who link a good (Rolex Daytona) or experience (surfing) to part of their identity. And many times you can predict who will build that business by honing in on the person with the loudest voice.