Markets have existed for as long as humans have engaged in trade. Online marketplaces are the latest iteration of the town square, where sellers and buyers connect to exchange products or services. Platform providers do not assume ownership of the transacted products; instead, they act as impartial intermediaries, facilitating interactions between two parties.

Such two-sided marketplaces can make appealing investments as they have natural network effects and can generate healthy profit margins, according to Michiel Thiessen from EQT’s private equity team, who advises Idealista, a Spanish real estate marketplace that EQT acquired in 2020 before selling a majority stake four years later.

“Online marketplaces often benefit from a flywheel effect,” says Thiessen. “The buyer will naturally hover to the platform with the most supply, given the desire for a one-stop shop or full inventory. The presence of buyers will attract sellers as it creates sales leads. This flywheel effect, combined with the asset-light nature of online marketplaces, typically leads to attractive margin profiles.”

The marketplace model

Online marketplaces fall into three main categories: Business to Consumer (B2C), Business to Business (B2B) and Consumer to Consumer (C2C). As the Covid-19 pandemic accelerated the shift away from traditional brick-and-mortar retailers, companies were forced to rethink how they approach commerce on the web, prioritizing models that offer lower risk and higher flexibility. The marketplace model hits both these criteria, streamlining the shopping experience by offering a wide variety of products in one place. The platform handles the technical infrastructure and logistics, leaving vendors free to focus on what they do best: selling their goods or services.

Amazon is a prime example. When launched in 1995 it only sold books directly, yet by 2017 more than half of the units sold on Amazon worldwide were from third-parties. In 2024, Amazon Marketplace sellers listed over 600 million products, according to AMZScout, an e-commerce tool.

Amazon offers both its own products and affiliated brands, while also providing a platform for thousands of buyers and sellers to connect through the site, creating a so-called hybrid marketplace. Following a similar strategy, Walmart has grown to become the second-largest online marketplace in the U.S., according to data from ECDB.

Pure marketplaces, on the other hand, solely connect platform sellers to consumers. Lithuania’s first startup unicorn, Vinted, an EQT portfolio company since 2021, is a leading example. A peer-to-peer platform that facilitates the buying and selling of second-hand clothing items, the platform connects sellers, who want to declutter their wardrobes and bring in some extra cash, with buyers seeking sustainable and affordable fashion finds. After years of losses, Vinted posted a €17.8m net profit in 2023 before more than quadrupling that tally in 2024, achieving a €76.7m profit.

Marketplaces as businesses

As Vinted’s success shows, marketplaces can make compelling businesses. The marketplace model offers several key advantages over traditional retail, which can require significant investment in product design, inventory management and merchandising. Marketplaces eliminate these steps as third-party sellers manage their own inventories, reducing the overhead for platform operators. Since marketplaces don’t own the products they sell, they have the potential to scale more easily without worrying about warehousing or stock issues. Marketplaces are also rich in data, offering businesses the opportunity to analyze consumer behavior, optimize their offerings and improve their marketing strategies.

For sellers, marketplaces offer access to large, engaged audiences without the need for costly investments in marketing or infrastructure. For a small business, launching on a platform like Amazon or Etsy is less risky than building a standalone e-commerce site from scratch. Sellers don’t have to worry about staffing, time-zone constraints or complex shipping arrangements. The platform handles the majority of these logistics, allowing sellers to focus on growing their brand and satisfying their customers.

For consumers, the appeal of online marketplaces lies in the variety, convenience and ease of use. People like to have options, and marketplaces make it easy to compare and find the exact product they want. Whether you’re looking for last season’s must-have item or comparing prices for your next rental property, the ability to access a range of products in a single space is a massive draw.

As EQT’s Thiessen explains, fulfilling that essential role at the heart of an online transaction creates its own demands. “Building and maintaining a trusted brand as the key source of traffic for buyers and sellers is a challenge,” he says. “While marketing can help build this, it is typically the natural incumbent who has the ‘leg up’ and hence why we mostly prefer to invest in market leaders.”

Marketplace models have grown to dominate online commerce over the past decade. As the internet adjusts to the shock of AI chatbots upending how consumers source information, with OpenAI recently unveiling instant checkout tools for ChatGPT, it will be fascinating to see whether incumbents like Amazon and Temu can dominate the coming decade.