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Jeremy Gottschalk

How Much Do You Really Know About Marketplace Risk?

Special Guest

Jeremy Gottschalk

Founder of Marketplace Risk

Episode 2

May 6, 2019

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How Much Do You Really Know About Marketplace Risk?

Not having a risk program is...risky. This is true even if your marketplace is in the early stages of growth. Most startup founders are not risk experts and tend to avoid putting a program in place due to lack of knowledge or of funds.

The results could be costly.

In this episode of Platform Players, Jeremy Gottschalk talks about why he built the Marketplace Risk and gives marketplace leaders some key pointers about building a solid risk program.


Announcer: You’re listening to Platform Players – a new podcast for the marketplace revolution.

How much do you really know about marketplace risk?

It’s time to educate yourself. Learn about the top challenges marketplaces face, as legal expert Jeremy Gottschalk, gives you the 411 about mitigating risk.

Ladies and gentlemen, this is your Platform Player Flashback.

Narrator: It had been an eventful day at The Marketplace Risk Road Show and Jeremy Gottschalk was trying to wind down. It was a futile attempt.

He was too hyped up from these meetup events held around the country leading up to the Marketplace Risk Management Conference.

When he started this passion project, he knew that he could use his legal expertise to help marketplaces navigate the unchartered waters of risk – but he wasn’t prepared for how little some founders and investors understood about the risks and exposure that come with connecting two strangers via the internet.

The gruesome possibilities swirled in his head like a Stephen King novel:

What if a sharing economy driver got in an accident? What if a dog walker lost a dog? What if an errand runner assaulted someone?

He poured himself another scotch.

Even if the incidents were far less serious, at the very least, a perfectly good marketplace could be shut down, leaving many people out of a job and investors with nothing in return.

The phone interrupted his soliloquy.


“Jeremy, I need your help.”

It was the event host from today’s city.

“We have a portfolio company within our accelerator and I think they’re being sued. They’re not really sure what to do and to be honest, neither am I.”

“Have them give me a call and send me the documentation.”

Well, there went Jeremy’s evening. Not only was the company being sued, class action lawsuit over alleged improper worker classification. The response was due Thursday and it was a Tuesday night…and a lot of the documentation was missing.

“Hi, it’s Jeremy with Marketplace Risk. You need to send me your terms of use and any agreements you have with your customers on both the supply and demand side. I need to dig into the relationship here.”

“We don’t have terms of use. We have a contractor agreement with our providers.”

“Send me what you have.”

The next email confirmed Jeremy’s fear.

“This is it?”

To his horror, the founders had violated every risk management tenet for a marketplace business…and he could have helped them prevent this lawsuit completely. This would have been easy!

On the other side of the phone, the founder sounded as though the wind had been punched out of him. “We know now that we need to focus on risk. We just didn’t know about it before this. There aren’t any resources here in the Midwest.”

And, at that very moment, Jeremy knew it was time to double down on his passion project and transform the Marketplace Risk Management Conference into an entire platform that marketplaces could leverage from coast to coast.

Announcer: FLASH FORWARD: The Marketplace Risk Management Conference is now held in San Francisco every year and attended by some of the biggest names in the platform economy. In fact, what started as a small working group of six people has grown to 600 attendees! Jeremy and his team have also expanded their learnings to platform leaders countrywide by hosting Marketplace Risk Road Shows twice a year in twelve to fifteen major cities.

Let’s get down to the NITTY GRITTY.

Here’s your host, Kurt Bilafer.

Kurt: With great power comes great responsibility – whether you’re Spiderman or the founder of a marketplace. It is imperative for Platform Players to focus on risk management from day one, but unfortunately, many founders don’t even know where to begin. Luckily for us, we have Jeremy Gottschalk here with us today, who is going to give it to us straight.

Jeremy, thank you so much for joining us on Platform Players.

Jeremy: Thanks for having me. I'm excited to be here.

Kurt: Awesome. So, we're going to spend a little bit of time talking about your latest venture which is Marketplace Risk. What's interesting is, marketplaces are a relatively new phenomenon depending on when you want to say the first marketplace started. Obviously, you can go way back to Constantinople, and there were marketplaces there. But the reality is, these online marketplaces. I think it evolved, and their requirements evolved, especially as you start adding monetary incentives enabling currency and transactions to happen. How do you think these marketplaces think about risk? Do you think it's front and center when they're developing the marketplace, or is it more of an afterthought?

Jeremy: Yeah. Part of my goal is to bring that to the forefront of VCs, founders, and executives. If you look at the profile of a traditional startup, they are experts in some area whether it be technology or some product, and they tend to skew younger. So, there's often either limited business experience, and this isn't always the case, but most of them have not been CEOs or run a PNL before. Their experience is limited to their area of expertise and may be a little bit broader.

As a result, risk management and legal strategy isn't part of their experience certainly if they haven't run an organization before, been responsible for a product line or department. Oftentimes, the risk management hasn't even been part of their plan certainly as they're starting up.

The other thing is when people do think about risk management, a lot of times they think of it as a luxury of big enterprises. So, no doubt, Walmart, Amazon, IBM, they think through risk management, but a startup even if they're thinking about it, you think about the cost associated with it and what you get out of it.

Largely, if you think about risk management, you're proving negatives. When bad things don't happen that's good, but try and prove to somebody that because something bad didn't happen, you did a good job.

Then I would say the third piece of this is founders are motivated by what investors are looking for. Founders want to secure funding so they can grow. That's how you really feed the machine. Investors and VCs particularly are not focused on risk management and legal strategy.

I've consulted on dozens of investments for our VCs or other VCs from coast to coast. They all really leverage similar or in some cases the same due diligence process and documentation. Nowhere does it ask about risk management. So, it doesn't put that in the mind of the founders or the founding team.

As a result, if the investors aren't focused on it, then why in the world would the startup founders or the founding team be focused on it? The net of all this is risk management is one of those things that is just not part of the conversation for most startups.

Kurt: It is interesting that at the beginning of the process, there is no risk. At the end of the process, we're about to go public. I'd better CYA. What do you think those metrics are that are risk-related?

Jeremy: To get to that point, all of the disclosures about risk in an S-1 are generated by a law firm. Nowhere do they really come from the startup. Those are to protect for lawsuits from investors. It would be great if all of that content originated from the organization that's going public, but it simply doesn't.

But, of course, the metrics that define the growth, those are for better or worse, those come from the startup. From when I talk to startups and particularly marketplaces, that's really where my focus is and where some people would kind of dub me an "expert," I would say in quotes, lowercase e.

It's very easy in the U.S. particularly to protect a company from risk. I would look at it in two different ways. Number one is legal liability. There is a federal law, and every state has laws that would effectively prevent a platform from being successfully sued for what goes on among the users of that platform.

A metric is not being successfully sued, and there's almost no other industry that could leverage that metric or could point to that. Then the other thing is, how are you focusing on protecting your users. Again, marketplaces have two sides: supply and demand. Are you focusing on protecting both sides of your marketplace by leveraging technology to prevent incidents from happening, fraud, etc.?

I would say, obviously, metric would be you want low numbers. You want to make sure that whether it's chargebacks, whether it's fraud, whether it's number of customer incidents, it's going to be different for the platform, but that reflects your effort to create a good experience and protect your customers.

Kurt: Usually, the thing is, particularly when you start enabling payments in a platform, fraud risk needs to move more from a mitigation to a prevention. Sometimes, that means inserting friction. One of the questions I have is what are some of the typical questions that you get from early-stage marketplaces, startups, or Series A, or even further along? What are the problems that they're looking to address?

Jeremy: To answer your first question more generally, when I talk to people about risk, they say, "Who are you, again?" Being a lawyer has its trappings. Talking about risk management is a double whammy. So, when I talk to people, I try to work backward and illustrate situations that could be prevented whether it's an incidence between users, litigation, some sort of a media story, and there are so many good examples that what I say is I scare people first, and then I coddle them.

I tell them, "Here's what's going to happen if you don't pay attention. Then I say, but there's good news. You can prevent all of this from happening." Very quickly, the question is, what should we be focusing on? I typically look at the organization. I tell them first and foremost, "You need a backstop. You need to think about insurance."

Most people's experience with insurance is auto, renters, homeowners. It ends there. Those are commodity-type insurance. It's really pretty easy. You can get it online and no questions asked. When you get into insurance for marketplaces, oftentimes the quality of the broker dictates the quality of the program and frankly whether or not you're actually even insured for what you're doing.

By the way, you don't want to find out that you're not insured for the service that you're providing or the goods that you're selling when something goes wrong. So, the first question, I start at the top and say, "The C-suite needs to be thinking about insurance. You need to be protecting the company and of course, yourself with a well-structured insurance program.

Second thing, how can we protect our users? Because I think, generally speaking, something bad happens, and then someone ends up in front of me because whether it's a VC, their insurance company, a mentor, or a colleague, they go to them and say, "We had a horrible incident happen. We could have never seen this coming." And they'll get routed to me. As a result of that, they will try to prevent that thing from happening again. I try and walk them through a more comprehensive look at risk management to not only prevent that exact incident from happening, but similar incidents, other types of incidences, and of course avoiding insurance claims, avoiding litigation.

Kurt: Let's face it. The focus is like you said, there are these multi-sided marketplaces, and we either focus on the demand of the supply side. I'm building a company to satisfy for those requirements. Typically, more focused on growing that and proving that model than I am about inserting friction.

I think that's the first thing that I hear whenever it comes to trust and safety, risk and compliance, however you want to label it. When it comes to payments and marketplaces, there's a tremendous amount of regulation, and it's only increasing.

Jeremy: Part of the reason that Marketplace Risk started was just a simple lack of resources. To solve all of these problems can be very, very expensive. When I left my full-time GC role, I went on to consult, but I realized very quickly that in the consulting capacity you're asked to solve discrete problems.

So, you're not really able to give a comprehensive view on risk management, which is what all of these startups could use. So, I created just that, a boot camp that is a top-down approach. The idea is that from start to finish, we will have issues spotted just about every possible thing that could go wrong, but also, solutions.

An organization that exercises a little bit of forethought can do a lot to protecting both their marketplace, but also their company itself. It's broken down very simply into what I would call at an executive level, governance considerations, and then the business model and the product design where a lot of this lives. Then technology tools and resources.

Just getting this information to the startup. They've got to know what exists out there. Whether they could easily build it, or in many cases buy it, and what people are leveraging to prevent certain types of risks from coming to pass. Then the fourth is a customer service incident response, claims handling, and litigation management section that really digs into how you really should be talking to your customers when things go wrong.

If you hit scale, things are going to go wrong. Statistically, they have to. That's, frankly, a measure of success. I hate to say that, but if nothing goes wrong, it's probably because you haven't really hit scale. When you do, and things go wrong, how you respond either creates more risk, more exposure, or presents your organization. Frankly, that could be even a better light than it was before.

That whole boot camp takes at least a half day; generally speaking, it's a whole day. The idea is to give a crash course on risk management specifically for this business model. These startups are really doing some interesting, innovative work, but there are some huge risks that come with connecting people together who don't know one another. It creates an opportunity for bad actors to leverage these platforms in a way that suits their needs and not necessarily the intended use of the platform.

Kurt: What's interesting is I think the reality is these fintech-enabled marketplaces are relatively new, like certainly within the last ten years. So, you've been in the middle of it and watching it evolve, and obviously, it will continue to evolve. The one thing that I see that's happening now is obviously consumer expectations are evolving as well. Often, they're outstripping the pace with what the marketplace actually does. When I say consumer, I mean both on the demand side and the supply side, particularly depending on the marketplace.

I think there's a lack of education and understanding of how difficult it is to get on the demand side of these things. There are these consumer expectations which is everything is going to be fast, cheap, and guaranteed, this highest level of service. When there isn't, I'm going to speak out.

I think brand reputation risk is one of the first things that people think about, but the reality is these things can have a spiral effect or a significant impact on the ability to grow these economies to scale. But there certainly could be a very interesting ROI model because I'm sure if people have a risk management plan in place, it does impact their insurance premiums and a whole host of other things.

Jeremy: On that point, what you would normally see with startups, they're generally rated with premiums that you almost can't believe. So, you're a startup. It's a couple of founders, and they are working out of a co-working space, or maybe they are working out of their home.

They go to get CGL, Commercial General Liability insurance, they might pay five grand, maybe eight grand. As they grow, very oftentimes there's not an audit of how big the company is, how they've evolved, what services they're providing, what's actually transacting on the marketplace?

Something goes wrong. They go to their insurance company. One of two things happen. The insurance company says, "Sorry. This wasn't covered." Or they say, "Great. It's covered. We are going to non-renew you, and if you want to go to the markets for insurance, it's probably going to be, again depending on the value of the claim. Yeah, it could be $500,000 or a million dollars."

I've seen it over and over and over again. Literally, a premium that goes from $5,000 or $10,000 to a million dollars. It would put them out of business. You wonder why nobody was thinking about this before, but if you don't have experience with this and you haven't seen that happen, you're not thinking of it.

What I tell people, and again, I don't have data to back this up. I certainly have a lot of anecdotes and a lot of experience, but I tell these startups, "If you go through this boot camp, I'll save you probably a million dollars, and I'll save you a legal hire at least a year out.

Announcement: Platform Playersis brought to you by Yapstone, the premier payments provider for the platform economy, and this is Tic Toc where Kurt gets up close and personal with our player, but he only has 90 seconds. Gentlemen, your time starts now. Tic Toc.

Kurt: My first question is, what's your favorite book?

Jeremy: Oh, my gosh. Can I swear on this? I don't know.

Kurt: Yeah. Of course, you can.

Jeremy: Right now, it's Unf*ck Yourself, what I'm currently reading right now. It's a great book.

Kurt: What's the best piece of advice you've ever gotten?

Jeremy: Oh, my gosh. Listen more than you speak. Truly listening to people and hearing what they have to say I think has probably taken me further than anything.

Kurt: What's your favorite smell or sound?

Jeremy: This is kind of gross, but my dogs. They smell like dogs. Thank God for my dog walker. She washes them every week, but they're always running around and panting, and they're crazy. I hate the sound of their bark, but they're very happy dogs, so it kind of goes together I would say.

Kurt: Okay. What would you be doing if you weren't doing this?

Jeremy: Professionally, you know what, I've always for—now I'm about to age-out, but I've always thought about being a cop, always. It turns out that the Chicago Police Department won't take you after 40, and my 40th is July 4th. So, I think my window is closing, but it's been something that literally, not a week of my life has gone by where I thought, "That would be a really cool job."

Kurt: What do you still enjoy doing the old fashion way?

Jeremy: I handwrite everything.


Kurt: Listen, Jeremy. I really appreciate you coming on Platform Players and talking about Marketplace Risk. I think as you see all of these marketplaces appearing and growing, one of the biggest things they're not thinking about is what's the downside risk and how do I mitigate it until it's too late, which obviously, you confirmed you're seeing the same thing. I do think it's great that you started a platform to help educate people both in person and online as to what they can do to start mitigating these different situations before they arise. So, thank you again for spending time with us today.

Jeremy: Absolutely. Thank you for having me.

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