Partner at Sova VC, a London-based venture capital firm building an international portfolio of high-potential early-stage companies.
For some observers, the niche B2B marketplace arena suffers from an image problem in that it isn’t seen as disruptive or constituting a large opportunity. I don’t agree.
Key contenders have already begun to emerge in different niches, like agriculture, cannabis tech, car wholesale and even the clinical trials market. I believe there is potential for more disruption, which is good news for investors.
During my 10 years in venture capitalism, I’ve been involved in investing in 15-plus marketplaces with either a B2B or B2C focus, including a number of successful exits. Now, within Sova VC, platform solutions are a key focus for us, and we are constantly monitoring this space. Based on our research, we can clearly see significant development and market potential, and during the early days of the fund, we started to build a B2B marketplaces portfolio.
Multiple sectors are now spawning B2B marketplaces providing investors with plenty of choice across opportunities consistent with their investment philosophy and, based on our experience, delivering attractive returns.
There are a few reasons why B2B marketplaces haven’t made the same progress as their B2C counterparts yet. To understand this, we need to look at the differences between the two types of marketplaces.
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In the beginning, B2C marketplaces were basic classified listings that helped consumers find services, often with some reviews. Examples include Craiglist and Yelp. The next stage in the evolution came with what Li Jin and Andrew Chen call the “unbundled Craigslist era,” where the marketplaces focused more on specific industries, and the platforms added features like filters, certifications and structured data to improve matching between buyers and sellers. Key examples include Airbnb, Tripadvisor and Angie’s List.
Then came the rise of “Uber for X,” where X stands for whatever service you want to buy. These on-demand marketplaces are software platforms with some value-add features and a strong focus on the customer experience. Uber, as one of the pioneers of ride-hailing, is an amazing example of that, but this model created many successful niche players, such as Handy and Instacart.
And finally, there are the managed marketplaces, which are platforms that are significantly involved in transactions and execution and guide consumers through the whole journey, creating an additional layer of trust. Great examples of those are Honor, Trusted and Wonderschool. This is where things get interesting, because managed marketplaces address a lot of the complexity that exists today in procurement.
In essence, B2B marketplaces start where the B2C marketplaces stand now. B2B marketplaces tend to be SaaS-enabled and provide wide infrastructure (from payments to logistics). By providing all the processes that both sides need in one place, they eliminate the chaotic paper, pen and phone approach that many businesses still rely on for their procurement.
And this is ultimately the key difference between B2C and B2B. A consumer might choose the cheapest product, or the more convenient service; it’s a pretty simple choice. But B2B procurement traditionally has longer sales cycles, there’s a negotiation over the terms and there are often multiple stakeholders involved in the buying decision, not just one consumer.
Traditional procurement is inefficient and time-consuming; it’s characterized by huge amounts of unnecessary effort. In other words, it’s begging to be disrupted.
Instead of a lengthy, drawn-out process of relationship building, a lot of talk and lunches before getting to the deal, it’s the other way around with B2B marketplaces: First, do the deal and then build the relationship. There’s no need for a chain of phone or Zoom calls that lasts for months. Just click the button, and the deal is done. There’s less communication and more business.
With B2B marketplaces, ?lients typically can save time, get better visibility on costs and manage things more efficiently. One of the best examples of such disruption would be in the logistics space. Some marketplaces also offer reverse auctions as well as supplier vetting, which is even better news for buyers.
The benefit for suppliers is simple: get more business and more geography.
B2B marketplaces can be a win-win for everyone, while the marketplaces themselves usually get a take rate (from what I’ve seen, anything from 2% to 30% or more, depending on the industry). Some will sell a subscription to their SaaS platforms and monetize on that, and it is now somewhat evolving to become more and more frequent, but the main model at least for now remains transaction-based. And unlike the B2C marketplace, the B2B space often has both higher retention and average order value.
The need for specific industry markets means we might not see household names in the B2B space, which may help to explain why they still fly under the radar for many investors. But taken as a whole, the global B2B e-commerce market was worth $12.2 trillion in 2019 — more than six times the size of its B2C equivalent.
From what I’ve seen, B2B marketplaces are already disrupting whole industries, especially where there are vertical markets with close to no IT infrastructure. For smart companies, marketplaces represent a new revenue stream that they weren’t aware of before. For investors, the marketplace space truly is a gem hiding in plain sight.
How a good B2B marketplace will operate depends on a range of factors. But there are a number of things to look out for to spot a really good opportunity:
o A marketplace in a commoditized and distributed market with close to no clear market leader.
o High average order value and frequency of transactions (if transactions are not so frequent, then a reasonably high take rate is a must).
o A high match rate (70% or more), as it supports proper market liquidity.
o When a market has complex workflows, SaaS enablement with “all in one window infrastructure,” as it eliminates procurement struggles.
B2B marketplaces have significant market and growth potential, which is good news for investors who can seize the day to support emerging trends and entrepreneurs who can benefit from transparent infrastructure developing in their markets.