Many entrepreneurs have some understanding of liquidity. Others, not so much. Everyone in finance understands liquid. But nearly nobody off the street does. Some people can give you a very superficial definition they heard in an accounting class in college, but for the most part, the population as a whole doesn’t fully grasp the concept of liquidity and its implications.
The most common way that most entrepreneurs become familiar with the concept is when discussing a “liquidity event.” Basically, this is fancy talk for “a chance to sell.” But this article isn’t really about the liquidity of your shares in a company; it’s about the liquidity of everything else that wasn’t before.
From Investopedia: “Liquidity is the degree to which an asset or security can be bought or sold in the market without affecting the asset's price.” This is a high-level summary definition that encapsulates many implicit factors without explicitly enumerating them. Liquidity is significantly affected by the depth of the market in which the asset (or service, as we’ll discuss shortly) is bought or sold, as well as the friction incurred to bring that asset to market. Something is liquid if there are a lot of people buying and selling the same or similar things AND if it’s not prohibitively difficult to buy it or to put it up for sale. Conversely, something is illiquid if there are NOT a lot of buyers and sellers transacting in the market for that given thing OR if it is a big chore to actually try to buy or sell it.
Liquidity is easy to understand in the context of financial markets, because they are the most liquid in the world. Public stocks are very liquid assets. For the most part, a given stock can be bought or sold literally in a millisecond, on a standardized exchange, with no deviation from the last traded price. The market is deep and there is really no friction to transacting, once you’ve opened an e*trade account with a talking baby spokesperson. However, some stocks are less liquid. Smaller companies often have significantly fewer market participants trading their stock and as a result, the market is not as deep and the likelihood that a given trade will NOT affect price is much lower. Buyers and sellers often have to pay “the spread” between the price at which buyers are willing to buy and the price at which sellers are offering to sell. On penny stocks and other obscure instruments, this spread can be $0.20 on a $0.10 stock, or up to 200% of the price itself!
For easy examples, let’s look at APPL and MAXD. AAPL, shockingly, is Apple. MAXD is a small tech company in California called Max Sound Corp. On July 17, 2013, AAPL traded over 7M shares and closed basically flat at $430.31/share. $430.31/share multiplied by 7.11M shares traded shows us that the dollar volume of Apple stock that changed hands is over $3B. And this was a light trading day for Apple; the stock’s average daily volume is over 11M shares/day. This means that in a single day, people bought $3B worth of Apple stock and sold $3B worth of Apple stock and it basically had no impact on price. Now, by contrast, let’s look at MAXD. On the same day, MAXD traded 131,090 shares and closed down 8% at $0.21/share. Multiplying the number of shares traded (131,090) and the price ($0.21) shows us that the dollar volume of MAXD stock for July 17, 2013 was about $27,500. This is equivalent to 64 shares of Apple. We can clearly see how Apple is much more liquid than MAXD. $1M worth of Apple stock can easily be sold into the market on a given day without any impact on price, but trying to sell $1M worth of MAXD stock in a day (or even in a month!) would effectively wipe out all the buyers and send the stock to $0. Apple is far more liquid.
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Ok, now that we understand basic liquidity, we can discuss the drastic shifts in liquidity of traditionally illiquid assets that new technologies and new platforms are enabling.
We previously used the stock market to illustrate liquidity, but the stock market is only one of hundreds of markets. We also have labor markets, consumer markets, real estate markets, a market for education…you name it. Pretty much everything has a market.
However, some markets are more liquid than others. The capital markets are the most liquid in the world, but think about the stock market in relation to the real estate market. How much easier is it to buy a stock than a house? Much.
The big sea change happening right now is that a couple of previously illiquid markets are become exponentially more liquid through technology platforms. Specifically, the markets for:
· Labor
· Space (not necessarily real estate)
· Personal assets
Let’s explore the newly liquid labor market first. Everybody knows the old way to hire/get hired: post a job/submit a resume --> interview --> hire --> on-board. This can take a loooong time and there is a ton of friction in the market. A job seeker can’t see all available jobs and a company can’t see all potential applicants. There is a ton of information asymmetry and it takes time and effort to match the right worker (supply) with the proper position (demand). But the labor market is shifting dramatically, enabled by new platform-based liquidity. The new liquidity can be summarized in 1 word: TaskRabbit. Using TaskRabbit, labor can be matched with demand in a matter of hours or even minutes. Both sides of the market are deep, so there is pretty good pricing transparency (it is unlikely that a Task Rabbit will be able to get away with charging a significant premium over other, similar Rabbits AND it’s similarly unlikely that someone will get a Task Rabbit to do a job for way cheaper than other people are offering to pay). Many market participants + transparent pricing = liquid market. Through TaskRabbit and all its competitors and similar companies, supply of labor that used to take days, weeks, or sometimes even months to place can now be matched with demand more quickly and more efficiently than ever before. To add another, even more granular example, see Amazon Turk. Labor can be bought sometimes in increments of seconds with no individual contracts or laborious on-boarding processes. Liquid.
The next newly liquid market: space. Filling/finding an extra bedroom used to be a matter of asking around to your friends on facebook or rolling the dice on craigslist. Or just letting it sit dormant. Again, this process was inefficient, manual, and generally illiquid. Supply and demand for space were not easily matched. Extrapolate the friction to commercial real estate or, really, just work spaces and the same dynamics were at work. But what TaskRabbit does for labor, Airbnb did for lodging space, and co-working and LiquidSpace (hmmm……I wonder how they got that name?) and its ilk did for commercial space. They created a platform that allowed the market to mature, greatly reduced the friction in matching the supply and demand, removed a huge amount of information symmetry, and that made the space asset infinitely more liquid. Finding or letting a place to crash (for sleep OR for work) is now easier than ever because of the new liquidity introduced by these platforms.
And now the last, but certainly not least newly liquid market: stuff. By now I think we all understand the frictions and information asymmetries that make markets illiquid. Few participants, lack of information and pricing transparency, etc. Everyone sees how these forces make your stuff feel illiquid, right? So I’ll just skip the explanation and list some of the solutions and progress in the space. eBay has been around as a big marketplace to buy/sell stuff for a while, but only for buy/sell transactions. There is a supply/demand for ownership of items, but there is also an emerging supply/demand for USE of items, not just ownership. As illustrated by the rental platforms enumerated above (Airbnb, LiquidSpace), there is an established and growing supply and demand for use of assets, rather than assets themselves. This makes an asset itself even more liquid and with increasingly liquid markets for increasingly liquid assets, the sky is the limit. Spare to Share is leading the way in the liquid-ification of personal assets the way that Getaround or RelayRides or Lyft have done for transportation. Share, rent, or sell your assets via the online platform that tells people who has what, where it is, its availability, etc. It’s no longer patchy guesswork to see what items someone might have available to them and this newfound information reduces the friction in P2P transaction in stuff and significantly and makes the market waaaay more liquid.
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So now that we know we can view everything more modularly, more on-demand, and more liquid, how will our behavior as laborers/employers, landlords/residents, and consumers change?
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Gint Rudis is an entrepreneur and co-founder of Chicago-based Spare to Sharewww.sparetoshare.com a collaborative consumption platform that provides for sharing, renting, and selling of items and other goods with closed, known networks. Prior to entrepreneuring, Gint worked in finance and management consulting. Gint holds a BS in engineering from Vanderbilt University and regularly regrets having graduated in 4 years.
