Software businesses are judged on recurring revenue, expansion and margins. Marketplaces are judged on whether buyers and sellers reliably find each other, and how much of each transaction the platform keeps.
12 min read · Level 4
The first question in sector investing is often simply which numbers a sector's companies choose to highlight, and why. Marketplaces lead with GMV and software companies with ARR because those are their largest honest figures. I think translating each into revenue and retention before comparing anything prevents most sector-driven misjudgements.
SaaS (software as a service). Customers pay recurring subscriptions. The central measures:
Measure What it shows ARR size of recurring revenue Net revenue retention revenue kept and expanded from existing customers Gross margin cost to deliver the software, often high Rule of 40 growth rate plus profit margin
Net revenue retention (NRR) compares revenue from a group of customers now with a year earlier. If customers who paid 1,000,000 last year now pay 1,150,000 after upgrades minus cancellations, NRR is 115%. Above 100% means existing customers grow even without new sales.
The rule of 40 adds revenue growth and profit margin. A company growing 30% with a 10% margin scores 40; one growing 60% while losing 30% scores 30.
Marketplaces. A platform connects buyers and sellers and takes a cut. The central measures:
Gross merchandise value (GMV) total value of transactions Take rate share of GMV the platform keeps Revenue GMV x take rate
A marketplace with 50,000,000 of GMV and a 12% take rate has 6,000,000 of revenue. Headline GMV can look large while revenue is small.
Marketplace-specific risks: liquidity (do buyers reliably find sellers?), the chicken-and-egg problem of attracting both sides, and disintermediation, where buyers and sellers meet once and then transact outside the platform.
Because the two models are often confused and compared on the wrong figures. A marketplace reporting GMV next to a SaaS company reporting ARR looks many times larger, when their revenues may be similar.
The risks also differ. SaaS risk concentrates in churn and competition; marketplace risk concentrates in liquidity and whether the platform can keep transactions on it.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Two companies each describing themselves as having 50,000,000 of volume.
Company Model Reported Revenue Gross margin Key risk A SaaS ARR 50,000,000 50,000,000 78% NRR falling to 95% B Marketplace GMV 50,000,000 6,000,000 65% buyers moving off-platform
Company A has more than eight times the revenue of Company B (50,000,000 / 6,000,000 is about 8.3). Treating both as 50,000,000 businesses would badly overvalue B.
Comparing a marketplace's GMV with a software company's revenue, or ignoring net revenue retention when evaluating SaaS growth.
For marketplaces, multiply GMV by take rate before comparing with other companies.
For SaaS, request NRR by customer cohort and look for levels near or above 100%.
Add growth and margin to gauge the balance between expansion and efficiency.
Ask what share of buyers transact repeatedly on the platform and how the company prevents off-platform deals.
When evaluating software or marketplace companies.
Do not apply the rule of 40 to very early companies, where growth and margins are too volatile for the benchmark to mean much.
Operators and investors in service marketplaces - such as those for home services, freelancers and tutoring - commonly describe customers and providers taking repeat business off-platform after an initial match, reducing take rates and making growth in GMV harder to convert into revenue.
For service marketplaces, ask what keeps repeat transactions on the platform.
Create a free account to read the rest and apply it to your own investing.