Last year, my firm launched an ambitious index for tracking the stocks of global consumer-marketplace companies—enterprises that connect buyers and sellers online. We looked forward to the growth of our Battery Marketplace Index after the public share debuts of iconic companies like ride-sharing services Uber and Lyft and office-space giant WeWork.

Things didn’t go exactly as we’d expected. While shares of some of the companies in the index went up late last year, shares of Uber and Lyft slumped; Uber’s stock has rebounded somewhat but is still down 19%* from its IPO in May. Lyft’s shares have slipped 35%. WeWork didn’t make it to the public markets at all after institutional investors read the company’s stock prospectus and grew uncomfortable with its mounting losses and lack of a path to profitability. Overall, according to our research, marketplace companies lost a shocking $120 billion in market value from March through mid-November 2019.

So, what happened? And where do we go from here?

In a presentation in November at the Marketplace Conference in Berlin, I offered some thoughts about three specific lessons learned from all this by marketplace companies and investors.

First, rapid growth with ballooning losses is no longer a viable strategy.  Your business model and the underlying unit economics will take center stage going forward. Second, heterogeneous, or differentiated, supply bases drive advantages for marketplaces (I’ll explain that more in a minute). Finally, I think companies need to be more mindful of regulatory risk in the sector given some of the actions taken by governments this year. Forward-thinking marketplace companies that take these lessons to heart can, I think, thrive and prosper—and might grow large enough to eventually be included in our marketplace index.

Here are some more-detailed thoughts about each of those three lessons and what companies can do, specifically, to heed them.

Your business model matters—e.g., you can’t keep losing money forever. This seems obvious, but it’s not a lesson that was acknowledged in 2019 by companies like Uber, Lyft and WeWork. Instead, these companies pursued a grow-at-all-costs strategy that simply wound up being out of sync with changing investor sentiment across the public and private markets in 2019.  Investors wanted more efficient growth, a clearer path to profitability and better unit economics—but some of the large marketplace companies that faltered in the public markets couldn’t demonstrate this.

Uber spent extravagantly on customer acquisition and retention, as well as on moving into new cities and countries. Lyft did the same and piled on marketing expenses as it engaged in a fierce price war with Uber. The cash burn of both companies was huge: In the first three quarters of 2019, Uber lost $7.3 billion, even more than the $1.7 billion it lost in the comparable period in 2018. Lyft lost $2.2 billion in the same period in 2019, compared with $702 million in the first three quarters of the previous year, according to CapIQ.

Other marketplace companies also stumbled here. GrubHub saw its stock price drop by over 60% from late 2018 through 2019 as it rolled out its own network of drivers to deliver food from restaurants to consumers. This was a capital-intensive move that torpedoed profitability and placed the company in the increasingly commoditized and low-margin, food-delivery business with many, similar services (e.g., Uber Eats, DoorDash, Postmates, etc.).

Source: Jeffries Equity Research – October 2019 – 2019F and 2020F EBITDA Margins

My advice to marketplace companies, considering all this, is to pay attention to unit economics—not just growth. Growth without attractive unit economics is just not sustainable; it’s like gorging on empty calories. So, what exactly are attractive unit economics in this sector? I see three key metrics to track. First, have a plan to break even on paid acquisition within 12 months. Second, maintain an “LTV to CAC” ratio, which means lifetime customer value compared to customer-acquisition costs, of 3X or more within 2-3 years of customer acquisition. Finally, you should also strive to comply with the so-called “Rule of 40”—the idea that a company’s growth rate plus EBITDA margin should equal or exceed 40%. Younger companies can hit this benchmark by growing very rapidly (e.g., 100% annual growth with -60% EBITDA margins). But as they mature and growth slows, they need to focus on efficiency (and eventually profitability) to keep up (e.g., 40% revenue growth with 0% EBITDA margins, 20% growth with 20% EBITDA margins, etc.)

How diverse is your supply base? A related issue here is how homogeneous or heterogeneous the supply side of your marketplace is, and how that affects your spending. If your supply is not very diverse or differentiated—think Uber and Lyft, whose drivers all basically get customers from point A to point B in the same way—you will have to compete for customers in large part based on the price of your service, which often leads to higher marketing costs and margin compression. The hot food-delivery sector (as referenced above) faces the same dynamics: I can probably get my restaurant meal delivered to me in the same manner from a variety of providers, from Grubhub to Uber Eats to Doordash. The offerings are just not differentiated, so these companies spend a lot to get my business, delaying their ability to make a profit. Grubhub’s EBITDA margins have compressed significantly since 2014, as more competitors have surfaced in the market.

I’m more encouraged by the prospects of marketplace companies like Airbnb because they have highly differentiated, or heterogeneous, supplies of products and services. Airbnb’s site houses a huge variety of rentals in different formats (single rooms vs. houses and apartments), geographies and price points. A search on the site is fairly complicated and driven by multiple factors: Do I need beds for two people or six? Do I want an ocean view or not? Should I stay downtown or in the suburbs? Pay $150 a night or thousands of dollars to stay in the Scottish castle? This heterogeneous supply is simply harder, by definition, to commoditize, since it’s so hard to replicate–and it helps create a competitive “moat” around the business and the potential to boost profit margins. Etsy, a marketplace featuring unique handmade and vintage items, is another good example of heterogeneous supply: It is virtually impossible to find Ety’s products anywhere else online. The result? Etsy’s shares are currently trading at a far higher multiple relative to next-12 months’ revenue than either Uber’s or Lyft’s, according to CapIQ. Etsy’s next-12 months’ multiple is just over 6X, compared to 3.3X for Uber and 2.7X for Lyft.

Regulators are not to be ignored. Tech giants like Google and Facebook have figured this out already. But smaller marketplace companies should heed this warning as well. Last year saw a continuing rise in regulatory concern over marketplaces, ranging from cities like Chicago and Philadelphia seeking to limit the number of ride-hailing cars on the road to the California state legislature passing a law called AB-5 that would compel many companies to classify “gig economy” workers as full-time employees, rather than contractors. The California law, which went into effect Jan. 1 but is facing multiple legal challenges, could dramatically increase costs for companies like Uber and Lyft, which would have to comply with minimum-wage laws and offer workers benefits like sick leave, unemployment and workers’ compensation for its drivers. Today’s marketplace companies need to be prepared to work with, not against, local and state governments to mitigate the impact of these types of regulations.

Last year was a challenging year for marketplace companies. But I continue to be bullish on this sector over the long term because marketplace companies have so embedded themselves into the fabric of our daily lives. Uber’s stock may be down, but the company is still worth more than $63 billion—significantly more than General Motors—and has fundamentally changed the transportation industry, with many people now forgoing buying their own cars and eschewing traditional taxis. Food-delivery services like Grubhub (market cap: $5.2 billion) have upended the restaurant industry, changing how and where people eat; similarly, travel companies like Airbnb have transformed the $7.6 billion global travel and tourism industry.

Simply put, online marketplaces aren’t going away. Many are going through some growing pains, but by focusing on a path to profitability, differentiated offerings and more regulator-friendly business models, they should be able to build successful public-market profiles as well.

*Stock-price figures as of 1/27/20.