Evaluating Xometry's Marketplace Opportunity
Evaluating Xometry's Marketplace Opportunity
With 10 factors from Bill Gurley
Xometry is a custom manufacturing marketplace. Custom manufacturing, as the name implies, deals with buyer-bespoke products, which generally carry a great deal of price and lead time uncertainty. It’s not a standard SKU.
The traditional procurement process for such parts is costly, time-consuming, and somewhat constrained by geography. Buyers have to request a quote from various suppliers, and these quotes can differ significantly with no clear reason for the difference. From my brief stint in a factory, I know the process can often take days or weeks to reach a resolution.
This manual outreach process also limits the number of quotes a company can request. In effect, the market lacks a real price discovery mechanism, leading to widespread inefficiency. It’s one shop’s guess versus another shop’s guess, and any number of factors can influence those estimates. Information is scarce.
Xometry’s aim is to centralize price discovery and bring the procurement process online. It has built a marketplace menu with transparent pricing and lead times for a range of manufacturing processes and finishes. Importantly, it does not produce these products itself; as a marketplace does, it simply connects buyer to supplier and sets the terms for transaction.
The heart of the marketplace is unique data from millions of prior transactions. This data feeds an AI model that continuously learns from new transaction data (volume, process, material, location, etc.) to provide an instant price and lead time for any product (within the constraint of supported processes). Buyers can simply upload a CAD file and receive an instant quote.
The efficiency this enables should not be understated. SpaceX, Tesla, NASA, BMW, Amazon, and many of the largest buyers in the world use Xometry for one reason — it’s a vast improvement to the manual alternative.
This fact alone does not mean Xometry is a good investment. We have to examine factors unique to the company and industry more broadly to better understand the long-term opportunity.
For a useful framework, we turn to the king of marketplaces, Bill Gurley. More than a decade ago (in the article “All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces”), he outlined ten factors worth analyzing about any marketplace opportunity.
In this article, I’ll step through each one and analyze how it applies to Xometry. Spoiler: Xometry scores well.
1. New Experience vs. the Status Quo
Gurley writes, “Great marketplaces do not simply aggregate a market; they enhance it. They leverage the connective tissue to offer the consumer a user experience that simply was not possible before the arrival of this new intermediary.”
There is little doubt Xometry’s user experience is superior to manual quoting. Buyers instantly access a network of thousands of suppliers without having to reach out to individual suppliers and benefit from transparent pricing and lead times. It’s a novel experience.
Xometry’s instant quoting engine also meets buyers where they are. It integrates into CAD workspaces (Autodesk Fusion, SOLIDWORKS, and Onshape) and procurement systems (Coupa, SAP Ariba, and Microsoft Dynamics) to further streamline the workflow for engineers, designers, and purchasing managers.
Gurley references the “wow” factor as a key ingredient in marketplace success. Xometry’s “wow” factor is an ecommerce-like buying experience for bespoke manufactured products, with an ability to integrate directly into their preferred workspace. Such a capability has never existed before.
2. Economic Advantages vs. the Status Quo
Gurley writes, “If you can positively change the economics of an industry, you will find the participants on both sides rooting for your success. This gives you a huge head start when it comes to tipping the marketplace.”
It’s difficult to triangulate precise data on the economic opportunity Xometry enables, but it’s reasonable to assume the marketplace has a positive impact on both buyers and suppliers.
Buyers benefit from lower costs — both direct and opportunity costs of supplier negotiations — and a simplified workflow. Pricing is influenced by thousands of suppliers, which presumably drives lower prices and faster lead times. Buyers also do less work — simply uploading a CAD file answers the often-uncertain questions of, “how much does it cost?” and “when can I get it?”
Randy Altschuler uses “one throat to choke” as a euphemism for what Xometry offers buyers. What he means is that Xometry strives to be the one-stop-shop for a variety of manufacturing needs which would usually require buyers to deal with many disparate parties. Put simply, Xometry abstracts the complexity from custom parts procurement.
Suppliers benefit from greater opportunity, capacity utilization, and workflow support tools. Traditionally, machine shops have been somewhat constrained by geography. Altschuler references the small machine shop in Detroit which is bound to automotive cycles. With Xometry, that shop is no longer limited to local opportunities. It can reach buyers anywhere in the country (or world, for that matter) and spend less time quoting and more time manufacturing products.
Xometry also offers Workcenter, a manufacturing execution system, for shops to manage end-to-end requirements for both Xometry and non-Xometry jobs. The Thomas acquisition brings advertising services on the largest manufacturing sourcing site in the U.S. And the company offers financial services such as Advance Card and FastPay, which offer suppliers faster receipt of funds than the usual net-30 or net-60 terms, improving cash flow dynamics.
3. Opportunity for Technology to Add Value
Technology is the heart of Xometry’s marketplace. Without unique technology, the business would not exist. More data propels the marketplace forward, driving better pricing and lead times and improved opportunities for suppliers.
While Xometry is not a regular in conversations around AI beneficiaries, it most certainly is one. AI is the fundamental enabler of the marketplace, and without it, no value would be created.
4. High Fragmentation
Without fragmentation on the supply and demand side of a marketplace, it’s difficult to scale. Suppliers would obstruct the intermediary, and buyers would leverage their power to “obliterate” (Gurley’s words) its relevance. Fortunately, supply and demand for custom manufacturing is highly fragmented.
Xometry estimates there are over 200,000 machine shops in the U.S. alone; these shops have <20 employees on average. The company also recently expanded into Europe and Asia, growing the global supply pool. (The Tridi acquisition, for one, opened up a network of vetted suppliers in Europe.) Ultimately, there’s no telling how many small machine shops there are in the world — all of them have access to the internet and shipping capabilities.
Likewise on the demand side, the number of buyers is incalculable; anyone involved in the production of anything needs custom parts. Xometry is working to develop enterprise solutions to drive engagement among the largest buyers, but a very long tail of buyers remains outside of the network today. No individual entity has significant bargaining power.
5. Friction of Supplier Sign-Up
Gurley writes, “In some markets signing up suppliers is relative [sic] easy. In others, it can be a painfully slow process that requires lots of touch and local presence.” Xometry’s sign-up process is the latter: a high-touch, high-friction process which “increases the costs associated with supplier aggregation.”
Manufacturing is not like driving. Logically, suppliers shouldn’t be able to simply sign up as they would in the Uber app and get underway. Different shops have different machines and capabilities, and Xometry needs to know the specifics of each supplier to ensure the proper functioning of its marketplace, not to mention ensure quality.
The supplier qualification process includes all the items you would expect and a few more. Xometry requires the partner to manufacture test products to assess quality and at times performs factory checks and other forms of quality control.
This slow and steady approach delays the network’s expansion and carries higher costs, but it’s essential, especially in manufacturing. Without quality, Xometry would not be winning more business. A strict vetting process is the first step to ensuring quality, and quality drives buyer retention, which is critical for the demand equation, the “more critical” aspect of a marketplace per Gurley.
Besides, this methodical approach is not strictly a negative — it’s a barrier to entry. A competitor would need years to build a vetted network of thousands of suppliers globally, not to mention accumulate the necessary transaction data, as Xometry has done.
Overall, the pace of new supplier additions is respectable: last year, the company added 900 suppliers (+36% YoY) to reach 3,429. That’s a rate of roughly 17 suppliers added per week — not too shabby considering the work required.
6. Size of the Market Opportunity
At the time of IPO, Xometry estimated its addressable market to be $260 billion based on the six manufacturing processes available on the marketplace. As the company extends support for new capabilities (accelerated by the Thomas acquisition and the partnership with Google Vertex AI), its addressable market should approach the total $800+ billion global custom manufacturing market.
The size of the opportunity is no doubt attractive. But the more important questions surround specific industry dynamics. Will market participants really use and benefit from what a marketplace brings to the table?
I would say the evidence overwhelmingly points to yes. We’ve spoken about how Xometry resolves the challenge of managing a costly, labor-intensive buying process. Custom parts procurement is a vital but non-core ingredient in output, yet it’s a frequent bottleneck. There’s a reason sophisticated buyers (SpaceX, Tesla, Amazon, etc.) turn to Xometry (and steadily grow marketplace spend); the menu solves a problem.
Likewise, we’ve spoken about how Xometry allows suppliers to spend more time manufacturing and less time prospecting for sales. Why would a small machine shop owner with limited resources want to waste time responding to inquiries when they can accept jobs that already fit their capabilities with a single click? They want to make parts, not run a sales process.
Custom manufacturing seems like a natural marketplace opportunity. The lack of suitable technology and data constrained price transparency in the past. Xometry recognized this early and has crafted an effective solution. Now the process of scaling begins in earnest.
7. Expand the Market
Logically, if a company didn’t need custom parts in the past, are they really likely to buy one now, just because the process is easier? I would think not. So I tend to think of Xometry as a market penetration play over a market expansion play.
But who knows? Maybe Xometry does expand the market. Either way, the existing market is more than enough for Xometry to reach multiples of its size before making a real dent.
8. Frequency
Frequency begs two questions: how often do customers buy? And when they do buy, do they establish direct relationships rather than returning to the marketplace for repeat orders?
The evidence points to a consistent purchase cadence and a steady commitment to marketplace use: 96% of revenue comes from existing buyers. This data point satisfies both conditions — buyers order frequently, and they come back to the marketplace for their needs rather than going direct to the supplier.
Cohort analyses support this point. Every customer cohort has exhibited steadily growing spend over time. The slide below, to me, is the single most powerful point of evidence for Xometry’s continued success.
9. Payment Flow
Gurley writes, “…it is much easier to extract reasonable economics when you are in the flow of payment. The supplier not only looks to you as a provider of revenue, but they receive that revenue ‘net of the fee.’ Contrast this with a marketplace where you add value first, and then send a bill to the supplier at later date for services rendered. In this latter case the marketplace appears as an expense, and it’s easier for the supplier to view it is a ‘tax’ versus a distribution relationship. Cash is king, and if you bring the cash, you are king.”
Xometry is the principal in every transaction on its marketplace. Buyers pay Xometry, and Xometry pays the suppliers net of its cut. In this way, the company can be considered a “distribution relationship” rather than a “tax.”
Its business is spread-based; it assumes pricing risk and loses money on some transactions — particularly those that require newer finishes or techniques where it owns comparatively less data. But net-net, it targets a 30-35% take rate (gross margin) long-term.
I would hardly consider this excessive for an industry where quotes can easily differ 100% or more. For comparison, Uber’s gross margins were 33% in 2023 (note: this is not an apples-to-apples comparison, but an instructive point nonetheless).
10. Network Effects
Everything in marketplace land comes down to network effects. If the service improves with more users, it’s a self-reinforcing growth formula. And as I’ve said before, “Growth that doesn’t reinforce itself is inherently tenuous.”
Network effects appear to be in play, but it’s early innings. The story goes something along the lines of:
As Xometry expands its geographic presence and extends support for additional manufacturing processes, it should attract more buyers.
More buyers bring more opportunities for suppliers; more suppliers again improve the value proposition for buyers.
More transactions enhance the pricing model, moving the market rapidly towards efficiency and “perfect information.”
And the cycle repeats.
That sounds like a self-reinforcing growth formula. And there are early hints of network effects. Active buyers and suppliers have grown at record pace recently; as word spreads, we could see the pace of additions continue to accelerate.
But I try to avoid too bold or too specific predictions. We’ll have to wait and see.
Conclusion
Gurley, not one to miss a step, ends with an ode to the importance of execution. Plenty of marketplaces with high scores across these metrics have failed to build a durable business. Xometry’s success is far from guaranteed.
In 2023, Xometry did almost $500 million in revenue, less than ten years from its founding. Ten years from now, I expect the picture will look quite different. And at a sub-$1 billion valuation, even moderate success seems far from priced in.
The question is: can Xometry execute on the opportunity ahead?
I think so. The team is laser-focused on the long-term, has proven operational chops, and is led by two co-founders who retain significant ownership. But again, only time will tell. Marketplaces are a tough business.