Three-sided digital platforms are a relatively new phenomenon that seek to eliminate the hassle in a transaction by owning fulfilment and delivery of the product or service. Redbubble is a three-sided marketplace connecting individual artists, fulfilment partners, and customers. The process is simple: artists upload unique designs and Redbubble partners with fulfillers to produce 'print-on-demand' (POD) products and ship to consumers.

Most marketplaces ‘take’ a rate from the supply side: Etsy ‘takes’ a rate from craftspeople, Uber from drivers, and Amazon from sellers. Redbubble, on the other hand, has a ‘reverse take rate’: the artist takes a rate from Redbubble. The artist uploads and configures digital designs to Redbubble’s product suite for free and then waits for the dollars to roll in. Redbubble deals with the rest: lead generation, manufacturing, and fulfilment. This fundamentally changes the relationship with suppliers relative to other three-sided platforms like food delivery networks or Amazon.

The connection that Redbubble fosters between individual artists and consumers and the relatively attractive unit economics piqued our interest in the company. Unlike most other three-sided marketplaces, Redbubble has scaled to over AU$500m in GMV with healthy gross margins and positive cumulative FCF. We interviewed the CEO of Redbubble to understand what makes the business unique and the opportunities to scale the marketplace.

Redbubble reminds us of Etsy in late 2016. Etsy was built by a craftsperson for craftspeople. The founder spent the first 10 years focusing on serving handmade artists like himself and built a sticky and differentiated supply side for the company. In 2016, Josh Silverman became CEO and reframed the way Etsy would serve craftspeople to explicitly focus on helping them sell more products. Redbubble is going through a very similar transition: a founder-led business with a new CEO reframing the focus to drive sales for artists. Mike, the new CEO of Redbubble, explains:

"The heart of Redbubble, particularly among a lot of the staff, is with the artists. As I said, that’s why we exist; we exist to serve artists and help them sell products. It’s not about shifting the focus but it’s about adding the focus and recognizing the core job artists want out of the platform is to sell their products. Therefore, our job is to bring the consumers to the site, enable them to have a great experience on the site, find the products, find the designs they can buy from the artists and then transact in a really good way. It’s actually about focusing on the core thing that the artists want from the platform, which is to sell products featuring their designs."

This is an important reframing as the artist ultimately cares about sales. In the early days of a marketplace, focusing on building proprietary supply is crucial to kickstarting the flywheel. However, in the long run, owning proprietary demand builds long-term value in the company.

The nature of Redbubble’s flywheel is also very different to a business like SEEK, the Redbubble CEO's former company. Mike’s comment highlights just how powerful the pure online classifieds business really is:

"What you would see with SEEK is that there are different balancing mechanisms. The goal was, if you had the most job ads, you would get the most job seekers and, if you have the most seekers, you would get the most job ads and it just naturally reinforces itself so beautifully. It’s like all those classifieds sites; it’s not just winner takes most; it is the winner gets better and accelerates away."

For a classifieds platform, advertisers pay to create content that drives organic traffic of which there is no cost for customers to consume. As long as SEEK wasn’t pricing out advertisers, the business reinforced itself. Redbubble’s flywheel takes more time and effort to get spinning; there is no cost for artists to add design content but it’s a transactional marketplace in which the demand side pays. Transactional marketplaces are ‘pure’ in that they will only succeed if the two sides transact to exchange value. This requires a frictionless user journey and high brand recall to generate repeat transactions; both challenges are crucial for Etsy and Redbubble to create long term value.

One way to look at Redbubble is as an artist platform layered on a third-party fulfilment network. The company offers consumers over 60m designs to print onto 100 products through 40 outsourced fulfilment partners. Over the last 5 years, Redbubble’s gross margin has grown from 33% to over 40% as the company leverages scale with fulfilment partners. Mike explains why scale is so important:

"I think those flywheel dynamics are definitely there. As I’ve said, we get better with scale. As you get higher scale, you can have a better fulfillment network that puts manufacturing closer to the consumer, which reduces shipping costs, which reduces shipping time which, we know, helps conversion. The more conversion you add, the more economics it brings, which brings more artists and so on."

Redbubble’s fulfilment network is not exclusive and other POD companies often use the same fulfillers. Scaling the fulfilment network is important to reduce the last mile cost and improve the customer experience but it’s not the defining competitive advantage of the company: the long tail of content is.

Over 60m non-perishable designs are available on the platform; each design exists forever. For Etsy or Amazon, once a product is sold, that specific item cannot be sold again. Redbubble is still selling products with designs from over 10 years ago. It's very difficult for Etsy or Amazon Merch to replicate 15-years worth of unique designs. This long-tail of non-perishable digital content forms the basis of a moat for Redbubble. Mike highlights:

"One of the big strengths of Redbubble is the long tail of content and the advantages that has, both from a competitive moat perspective but also for what it plays into long tail SEO and SEM; it makes that a much more important part of the business...The positive part, for me, is that the content library is such a wonderful defensive element and a unique competitive advantage that you can’t just throw money at to replicate. That is the part of the business that I think is a really great base from which to build."

However, just owning the content is not enough.

Arguably, phase one of scaling a marketplace is building proprietary supply; phase two is building proprietary demand. As we discussed last week, Etsy has a similar challenge of improving brand recall and repeat buying. There are many opportunities for Redbubble to follow in Etsy’s footsteps and optimise the transaction funnel, user reactivation, and search functionality. There is also a large opportunity to reduce the shipping costs and experiment with free shipping like Etsy. Although Etsy has more products, the search and discovery user journey across millions of SKU’s is similar on both platforms. At Etsy’s 2017 investor day, Etsy CEO Josh Silverman made some interesting comments about the nature of repeat and habitual buyers that could have parallels with Redbubble:

"Our habitual buyers fall into 2 camps. Many of them are also single category, so they love us for home furnishings. I've met some habitual buyers who are all about vintage couture. And so when you ask where are they shopping, they're in couture shops. Most of our habitual shoppers are on our site every single month. And actually, a pretty high percentage of them are on the site every single week. And it turns out that for a fair number of Etsy shoppers, even though they might only buy once a year, they're actually on the site once a month. So our opportunity is there. We've just got to do a better job surfacing the right inventory to drive conversion. And some of the things we talked about around fulfillment, too. They're there but if they have the confidence it's going to arrive on time and that they feel good about the shipping price and those kinds of things are also important to kind of get them over the line." - Josh Silverman, Etsy 2017 Investor Day

If users only buy once or twice per year but are regularly visiting and searching on the app, it’s an execution problem. If they are not visiting, it’s a much bigger problem. Since 2017, Etsy has improved the average active buyer GMS but still only 50% are repeat buyers. This seems to be at the top of Mike’s priorities for Redbubble:

"I think (repeat buying) is the core problem to solve. Every aspect of that user journey needs to be targeted, improved and experimented and that will all add to repeat rate; there is no single thing. Additionally, over the top, investing in our brand. Our overall brand awareness is really important. All of those things will work together and repeat rates and loyalty is just something we are going to grind out, over the next few years."

In the absence of a Silicon Valley-type VC community, we believe there are many interesting technology mid-cap opportunities in Australia of which Redbubble and Adore Beauty are top of the list. If there are any others that you think are high quality then please reach out.  Redbubble is yet to release cohort data - is there any reason it can’t match Etsy’s cohort performance over time? Redbubble trades at 6.5x GP after marketing expenses (GPAM) and expects FY2022 marketplace revenue to be slightly ahead of 2021. Last quarter, Etsy grew non-mask GMS at a remarkable rate of over 30% and trades at closer to 30x GPAM. The scale and opportunity of the two companies are slightly different but the core problem looks similar: improve brand recall and drive repeat buying.