B2B Marketplace evaluation hacks — which investment can give me 100X returns?

This is the third part of the 3 piece article on the state of the B2B marketplace in India, the other parts could be accessed at the following links -

• Status-quo and why B2B marketplaces are needed more than ever
• What does it take to build a B2B marketplace unicorn?
• B2B Marketplace evaluation hacks — which investment can give me 100X returns?

Finally, you are at the last part of the article. Thanks a lot for bearing with me until now. I think this section is the hardest part of the article, only for the reason that how much variety is there in terms of monetization model of various B2B marketplaces — for example,

• there are a few marketplaces that monetize through lending the credit to the suppliers, you might want to evaluate them as a FinTech start-up,
• there are a few SaaS-enabled marketplaces, that monetize only the SaaS component of it, so you might want to evaluate them as a SaaS platform
• there are a few marketplaces that monetize through advertisements, there you might want to evaluate them similar to any other content platforms
• And then there are pure-play marketplaces, luckily, you can evaluate them much similar to any other marketplaces

I think there are people much better than me who have talked in detail about how to evaluate a lending FinTech start-up, a SaaS platform or a content platform. For the purpose of this article, let’s deep-dive into the fourth proposition, and slightly touch upon the SaaS component part of it.

Again, the evaluation could be broken down into qualitative and quantitative aspects of the market, founder and business proposition.

Market — I think I have already talked about this in detail in the first part of the article, but summarising the same here for the continuity -

• A highly fragmented demand and supply-side — There are two market structures that are more relevant for a marketplace model than the other structures. The first structure allows the marketplace to replace the middlemen, offer similar services and charge a lower commission than them to improve stickiness, whereas in the second structure marketplace could help with better discovery and providing convenience.

• An intransparent market — In addition to the structures mentioned above, in the scenario, where there are a lot of infrequent buyers, and very limited but large suppliers — generally buyers get tricked by the suppliers because of the lack of market and pricing understanding. The case-in-point for this is the chemical industry. This structure also opens up a strong potential for a marketplace model to provide discovery, convenience and trust to the buyers.
• Monogamous vs Promiscuous market — Given, a lot of these supplier-buyer relationships have been built over decades, an attempt to disrupt it at the onset is a recipe for disaster. In such a structure, the platform could only act as an enabler for those relationships, by optimising the workflow and providing support for allied activities. Disrupting a promiscuous market is easier than a monogamous market.
• Size of the market opportunities — As is the case for any startup, VCs optimise for investing in markets where there is a huge potential upside. For marketplaces, with respect to the Indian context, the GMV potential for the market should be at least $6–7B if the take rate is in the range of 10–20% to make it an attractive proposition for VCs.
• Constraint factor — All the marketplaces are constraint from one side, in most of the cases it is the supply which is a constraint, for example — the constraint for Urban Company would be to onboard more service providers, similarly for Ola it would be to be able to onboard more cab drivers etc. Hence, it is also worthwhile to understand the constraint side, and then calculate the prospective market size.
• Commodity vs customized goods — Commodity products are standardized, hence, getting to a sufficient supply scale tends to be easier resulting in a lower barrier to entry, hence more competition. In such a case, pricing becomes competitive, margins get compromised, hence having a difficult path to profitability. Whereas for customized goods, given there are significant barriers to entry, you have the opportunity to charge a healthy 10–20% take-rate.

Founder — I believe that the founder-market fit is of utmost relevancy in this market in comparison to any other market. Generally, founders with a strong background in the industry have an upper hand in getting the early successes. The key traits to evaluate the founders are — subject matter expertise, operational know-how, deep understanding of the user journey of the buyer and the seller, leadership capabilities and the ability to network with businesses.

Go-to-market strategy and buyer-seller engagement — I have covered a lot about it in the second part of the article, summarizing the key points here for continuity -

• GTM — A VC’s dream would be to see that both the parties i.e. the buyer and the supplier are facilitating/referring their counterpart to get onboarded onto the platform to ease their transactions, this would result in a strong virality, and the network effect would enable to scale much faster than any of the other players in the ecosystem. Otherwise, a direct sales approach with a good payback period is also a good value proposition. To understand whether the payback period is decent or not, I like to follow either of the following strategies — either PB should be < 12 months or contribution margin made over 18 months > CAC.
• Buyer-seller relationship — Again, a >100% net-revenue retention rate would be VC’s dream. It would imply that all your beneficiaries are becoming dependent on the platform for their daily workflow, and once they interact with the platform, they continue to interact with it on a regular basis. This is easier to achieve for high-frequency type marketplaces and for certain categories. Additionally, a clear cut increase in the wallet share of buyers or share of earnings on the supplier side is a true testament to the fact that the platform is becoming a universe for both the parties and hence is becoming irreplaceable. For the best marketplaces — the wallet share could go as high as ~70% for SMBs and ~25% for enterprises.
• Growth rate — This would be fairly similar to a SaaS platform, i.e. until you reach an annual revenue run-rate of $10M, the expectation would be to continue to have 2–3X annual revenue or GMV growth. In case the company has chosen to delay the monetization in favour of GMV growth, then the benchmark should be at least a 3–5X annual GMV growth. Also, for businesses with lower take rates, that is generally the case with markets with high average order value or lower commoditised product offering, the expectations around GMV will typically be much higher than for businesses with higher take rates and vice versa.

Summarizing the key points -

I think that’s it for now folks! I hope that this post will be useful for entrepreneurs building B2B marketplaces and VCs interested in this space. I would love to hear any comments and feedback on the above. And, if you’re building a B2B marketplace at the seed+ stage, or are a VC actively following this space, please don’t hesitate to get in touch. My email is abhisheksingh@riverwalkholdings.com. I would love to connect with you to brainstorm and identify the overlaps.