Bets often have unintended consequences.

In the late 1990s, a Dutchman named Arjan Bakker came to Poland after losing a bet whose stake was a trip to the country. But he fell in love with Poland, decided to stay and started a business.

One day he came up with the idea to build a Polish version of eBay. The internet was still nascent but he thought that an auction site for people to buy and sell goods was something people wanted.

Legend has it that when he was looking for someone to help him build the platform, a hacker broke into his company's computers. After two months of searching, Bakker tracked down the hacker and offered him the job.

We don’t know if the story is true. It’s a bit too Aaron-Sorkin-ish for me. But what we do know that Allegro.pl launched just before Christmas 1999 from the basement of a computer warehouse in Poznań, Western Poland.

The initial version was a niche flea market for hobbyists, and the initial growth came from word of mouth. People were drawn to the fact that they could find everything for a low price: old coins, comics, perfumes, cosmetics, clothes, toys for children, even winter tires.

This initial traction – no more than a few thousand registered customers – was enough for the British group QXL Ricardo to acquire the service a few months after the launch.

Thus starts Allegro’s turbulent journey. Two more acquisitions – QXL sold to Naspers, and Naspers to a group of private equity firms –, new leadership and multiple crises that brought the company to its knees.

Now, Allegro is the most popular ecommerce platform in Poland with 21 million registered customers and nearly 194 million visits per month, which puts them in 10th place among the world's biggest retailers. It recently debuted in the Warsaw stock exchange with a €12 billion valuation – the biggest in Western Europe – and soared to almost $19 billion in the first week of trading.

Today we are going to cover how Allegro got started, and the lessons they had to learn throughout the way – the power of being a first mover, why branding matters and why fragmentation doesn’t.

How Allegro works

Allegro is a typical marketplace – it aggregates buyers and attracts sellers, taking a percentage out of the sellers earnings for every good sold.

Allegro has sellers of all types – Decathlon or Adidas, individual sellers, and even Allegro itself. Most of the transactions happen between seller and buyers – over 90 percent of products sold on Allegro. never go through one of its warehouses: they just move directly from seller to buyer.

But what started as a site for hobbyists quickly became an online monster, mostly thanks to piggybacking off another successful platform for the initial traction.

After the initial acquisition, QXL absorbed Allegro, and Arjan Bakker remained at the helm as the manager of QXL Poland. They had a brilliant idea: to partner with Onet.

Founded in 1996, Onet.pl is one of the largest Polish web portals and, according to Alexa in October 2017, it was the 45th most popular website worldwide and the 3rd most popular site in Poland.

In the early 2000s, just as Allegro was getting started, it signed a contract with Onet to distribute and report Allegro auctions and, as a result, within a year the marketplace grew from a couple thousands users to over 200,000.

This kicked-off a flywheel that, 20 years later, keeps spinning profitably: as more merchants join the platform, the breadth of the products offered increases and price competitiveness improves. This, in turn, leads to increases in the number of buyers browsing and purchasing goods on the marketplace.

The Allegro platform creates powerful network effects that benefit both buyers on the demand side as well as merchants on the supply side.

This proved to be crucial.

Fending off eBay

In a world where international marketplaces – eBay, Amazon – dominate, Allegro is a lesson on how being the first mover is an incredibly advantaged position, and how well-known, large and global brands can lose to local, strong competitors.

In 2005, eBay decided to enter the Polish market and compete with Allegro. Now, eBay is a profitable but forgotten brand who lives under Jeff Bezos’ shadow. But back then, eBay was as feared as Genghis Khan: they raided new territories with a strong army and huge war chest.

eBay is still active in Poland. But while Allegro has an 82% market share, eBay enjoys a paltry 1%.

How can a “small”, local fend off an Internet giant like eBay? Like MercadoLibre in Latin America, Allegro was the first mover and played a tremendous role in creating the market. That’s because local marketplaces are winner-takes-most dynamic. I wrote in The Undisputed Overlord of Classifieds:

Marketplaces to work and be defensible it needs two things:

Absolute Density. A classified business needs to have enough users that if you are buying, you find what you are looking for and if you are selling, you can actually sell your product. If there are no buyers or not a good enough selection, you are toast.

Relative Density. A classified business needs to have a better absolute density when compared to its competition in a given region.

This means that if you are first mover and achieve a good enough scale, you kind of win.

All things being equal, consumers will always gravitate to the marketplace with the best and broader offering. Because of "Success of the Successful" dynamics, if two marketplaces start with 51% and 49% market share each, the 51% won't get ahead linearly but exponentially. This means that it’s very hard to catch-up with a marketplace that’s ahead of you.

But Allegro isn’t winning just because of their advantageous strategic position. Allegro has a Brand, and, sorry to hammer on this, but a brand is a moat.

Branding and being the first choice

The same year that eBay entered Poland, Good Morning America ran a curious experiment: they purchased a diamond ring at Tiffany & Co. for $16,600 and one of similar size and cut at Costco – the wholesale retailer that sells hot dogs for $1 – for $6,600.

They then asked a reputable gemologist and appraiser to assess the rings' values. He assessed the Costco ring at $8,000, more than $2,000 above the selling price, and the Tiffany ring at $10,500, $6,000 less than the retail price.

Why can Tiffany get away with armed robbery? In the 7 Powers, Hamilton Helmer writes that “Tiffany's power lies in Branding.” Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.

Allegro has been leveraging its brand for two decades to become the first (and sometimes only) choice for 12.3 million active buyers and 117,000 merchants: according to the “Ecommerce in Poland” report, the awareness of the Allegro brand is as much as 98% percent in Poland, and for 81 percent of Internet users, Allegro is the first choice for online shopping."With almost two decades of existence, the Allegro platform has evolved to become the most trusted Polish online marketplace.

Ignoring Fragmentation

These two dynamics – a first mover advantage and a trustworthy brand – gives Allegro the possibility to ignore European tech’s biggest mandates: you need to expand internationally to go big.

The European Union is composed of 27 member states, 24 official languages, and 4,233,255 km2. This means our "market" is fragmented across culture, regulation, payment methods, buying habits and more.

European entrepreneurs see Europe's highly fragmented nature as one of the largest barriers to scaling a technology company. Heck, there are playbooks for it.

The curious thing is that Allegro has built a €19 billion business just in Poland and has done it outside major tech circles and without raising a single euros in venture capital.

For God’s sake, they are based in Poznań, Western Poland.

They can achieve that with:

  1. deep penetration – Allegro has significant market share in electronics (62%), home and garden (74%) and fashion (46%)
  2. expanding to other sectors – they operate a price comparison site Ceneo.pl (21 million MAUs), ticket retailer eBilet (2.3 million tickets sold in 2019 )and payment processor PayU.
  3. Catering to large Polish diasporas in countries such as the United Kingdom.

Interesting lesson for interesting times.

Another acquisition and doubling-down

In 2008, QXL Ricardo was acquired by Naspers in 2008 for €1 billion, and with that, they took on the Allegro operations. But that’s not the one that matters. That one simply sets the tone for the key acquisition: in 2016, Napsters sold Allegro to an alliance of private equity firms – Cinven, Permira and Mid Europa Partners – for $3.5 billion.

With the change, a new CEO was brought in – François Nuyts. But why is a Frenchman from Bordeaux, obsessed with food and kitesurfing, leading a Polish company ranked in the top 10 e-commerce sites in the world?

Nuyts joins after 13 years at Amazon, where he was responsible for establishing Amazon in Italy and Spain, as Vice President & Managing Director of Amazon Spain and Italy.

I guess that the Amazon experience comes with a few tricks because under his direction, Allegro has grown tremendously: in the past 2 years, GMV grew by 99%, net revenue by 102% and adjusted EBITDA by 113% on a last-twelve month (LTM) basis.

Nuyts pushed for investing in the experience and convenience of Allegro’s services to both supply and demand: they developed a great mobile app, improved logistics, and set up new pricing tools.

But the biggest trick of them all is launching Allegro SMART!, an Amazon Prime-style subscription-based loyalty program with 2.1 million subscribers.

On top of that, Nuyts doubled down on the strategic decision of not doing warehouses - connecting more than 100,000 sellers – many of them mom and pop stores – with 12 million active buyers without even touching the product.

The future of Polish ecommerce

Allegro owns online retail in Poland. This means that investing in Allegro is like indexing the Polish ecommerce growth. And from the numbers, it looks like it’s not a bad idea.

Poland has a population of 38 million, or 9% of the European union, but the e-commerce market is worth just €9.9 billion, representing a modest 1.9% of the overall EU market.

That’s a lot of room to grow.

Revenue in the ecommerce market is expected to show an annual growth rate (CAGR 2020-2024) of 9.4%, resulting in a projected market volume of $17 billion by 2024, with an ARPU of $607.

And two things are pushing it forward – credit cards and COVID.

Right now, bank transfers are Poland’s most-used payment method, taking a 50% share of all ecommerce transactions and €5 billion in yearly sales.

But cards are forecasted to grow at a compound annual growth rate of 25% up until 2021 and will take almost 30% of the payment market. That, couple with the fact that Firms such as PayU now offer the ability to defer ecommerce payments up to 30 days after purchase, will push the market forward.

On top of that, we have COVID. The ecommerce boom triggered by the pandemic worked pretty well for Allegro – net profit jumped to €64.2 million in the first half of the year from €41.7 in the same period in 2019.

Allegro is a solid company, but the IPO sucked. Yes, it was the biggest one in Western Europe. Yes, it almost doubled in a week. But if we are thinking about the Polish tech ecosystem, the IPO might as well never happened.

First, it looks like most of the money raised on the IPO will be used to reduce debt leverage and not to invest in innovation. But what’s worse is that it’s not clear that this IPO is recycling talent or capital in any way whatsoever.

The reason to love IPOs is that it mints new millionaires and capital cascades down to the ecosystem in the form of new companies and angel investments. But if all employee stock options are for executives, you’ll just make the rich richer. And trust me, I don’t have a problem with money. I like money. I’m OK with Bezsos having more money than God. But I also like to see people rewarded for their efforts, so they can turn around and help more people start more companies.