Status-quo and why B2B marketplaces are needed more than ever

To cater to the needs of all the different personas of my connections i.e. if you are an entrepreneur building a B2B marketplace or an investor looking to evaluate an investment opportunity, I have tried to capture how you should think about it and the to-dos, for convenience, I have divided the article into 3 parts -

• 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?

So, let’s start with the first piece of the long (very long) article and deep-dive into the B2B marketplace landscape!

Today, as consumers, we can order almost anything online in a few clicks: cars, cabs, massage, haircut, you name it and you have it. Businesses, on the other hand, are still stuck in the dark ages, often relying on the phone, excel-sheets and directories for their day-to-day operations, be it vendor discovery, evaluation and onboarding, payment and transaction administration, or after-sales convenience. Whilst consumer-facing marketplaces have become an essential part of our daily lives, business-to-business marketplaces are only just beginning to emerge. Think of the time, when you used to use Orkut or yahoo, that’s pretty much where we stand with B2B marketplaces. Without a doubt, Indiamart — a listing platform, Alibaba a horizontal B2B marketplaces etc have been in the ecosystem for decades now, but the vertical sector-specific solutions are only just beginning to take off.

Why is this happening now?

Digital procurement is not a new idea. There have been multiple e-procurement listing websites even in the pre-2010 era, but still, the majority of B2B spend remained offline, majorly because of the following reasons -

• They were horizontal listing platforms — Indiamart, Justdial were horizontal listing platforms that were built to handle indirect spending for the enterprise procurement department. These solutions were not built to cater to the customized requirements or also to connect the buyers with the best in class and most suitable seller.
• They were expensive and hard-to-use — Most of these platforms had a SaaS/subscription-based model, limited use cases and long onboarding processes. As a result, they were hardly ever able to become the go-to place for any SMBs or enterprises.
• They lack full-stack solutions — The platforms acted as a directory, rather than a full-stack solution that could make life simpler for both the parties by enabling — communication, payments with the desired cycle, logistics etc.
• They did little to facilitate trust — Many e-procurement platforms made minimal efforts to update the listings regularly, ensuring the quality of suppliers onboarded etc.

Now, as the very well known saying goes, need is the mother of all the innovations — The growth of the B2B marketplace in India, could be traced back to 3 events — 1) Implementation of GST, 2) Demonetization and 3) Disruption of supply chains across the world due to COVID — even though all these 3 events had a severe negative impact on the economy, but were crucial in driving the adoption of B2B marketplaces. For example — the introduction of GST made it convenient to transport goods between states, demonetization compelled businesses to experiment with digital payments, and COVID, when it was disrupting the chain of middle-men, contractors and distributors, every business was in the search of finding an alternative to ensure smooth execution and continuation of the value chain.

As per Redseer research, the eB2B market size in India was $1.7B in 2019, constituting 0.2% of the total retail market, and was forecasted to become a $60B market by 2025. I’m sure that the disruption caused by COVID, must have supplemented the forecast growth, and now the potential for 2025 would be in the range of $75–100B.

Now, given we understand the need and the history of B2B marketplaces, the next important question to answer is what kind of markets are suitable to get disrupted through the marketplace model, according to me, two market structures are more relevant than others for such an offering -

In these cases, both the supply and demand sides are highly fragmented and are connected through a channel of middlemen e.g. export houses, traders and agencies. These middlemen strengthen their relationships with both parties by providing additional services such as logistics, insurance or credit.

According to me, this is the most appropriate market structure for a marketplace model — here, you have the opportunity to charge a transaction fee by offering all the services that the middlemen were offering. Additionally, the supply and demand sides in these markets are very unorganized, hence, there is a potential to offer additional VAS as well, such as inventory management, order management etc.

This is again a market structure that offers an opportunity for disruption — given, all the buyers have relationships with multiple suppliers, the marketplace model could help in the discovery and evaluation of better suppliers, offering services/products at a cheaper price but of equivalent/better quality. Given there were no middlemen involved in the whole process, the monetization could become a challenge, hence there is a higher risk of disintermediation. To account for this, if the offering is -

i) Commoditised — The marketplace should follow a managed marketplace model, to ensure no communication between the buyers and sellers.

ii) Customized — The marketplace needs to offer something in addition to the discovery, to ensure stickiness — this could be a SaaS offering for the supplier for their inventory management, credit for the buyer etc. These value-added services have a much better monetization opportunity.

In addition to the above, the additional criteria/structures that offer better marketplace opportunities are -

• 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, resulting in 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.
• Supplier-buyer relation — 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 — To scale a B2B Marketplace, requires a strong infusion of capital, and to be able to raise capital from venture capitalists, the market in which you are operating should be large enough to attract investors. The marketplaces generally trade at 4–8X of their GMV, the multiple is dependent on the growth rate, take-rate and the market potential, but for this example, assuming an average of 5X multiple on GMV, a take rate in the range of 10–20%, a further potential to grow 6–7X — to become a unicorn, the marketplace needs to do >$200M (INR 1500 crs) GMV now, and should have a future potential to do INR 9,000 Crs to INR 11,500 Crs. Like the SaaS animals chart by Christopher Janz, for the Indian marketplace to become a unicorn, it should follow one of the following models:

Having referred to a few articles, I think there is a misconception on what exactly the x and y-axis denotes. A few of the people consider -

• y-axis is the total number of SMEs in the ecosystem — whereas in practice it should be the number of SMEs that the platform would be able to onboard. Generally, for the best performing platforms, it would be in the range of 25–35%, else 10–15%.
• x-axis as the annual sales by SMEs — whereas in practice it is the wallet share that your platform can capture. Given, there would be multiple channels for the SMEs to sell their products — you, your competitors, offline channels etc, you would be able to get a share of the total wallet. In the best-case scenario, you can get up to 60–70% of the share, whereas for enterprise customers, it can go maximum up to 20–25%.

Considering the optimal case scenario, of 30% SMEs onboarding and 70% wallet share — the overall market should be at least INR ~48k Crs ($6–7B) in the GMV, for a marketplace to have the potential to become a unicorn.

One additional thing to note is, all the marketplaces have a constraint on one side, in the majority of the cases they are supply constraints. For example, let’s consider the case of Airbnb, they have constraints in terms of the number of properties there could be on the platform, similarly, for Uber, it is the constraint on the number of cabs that can be there on the platform etc. Hence, while looking at a marketplace model, it is important to identify which side is the constraint side, and then look for the TAM/SAM/SOM with that as the centre.

Market landscape and the various value propositions

Even after a lot of attempts, I was unable to find a market landscape or a way of segmentation that points out the nuances of the various offerings. Hence, gave a broader attempt based on my limited understanding, purely driven by the founder calls and secondary reading.

Not an exhaustive list, only for representational purposes

Given the complexities of the B2B transactions and the multitude of variations in the value chain of the industries, it is impossible to come up with a one-fit-for-all segmentation. The one presented above is a simplified version of how to think about the opportunities in the ecosystem. Other than the middlemen, you can broadly divide the market into 4 players -

• Raw material supplier — Term used to denote those that produce/build/develop the raw materials, or any commodity used by manufacturers for production or otherwise.
• Manufacturer — Term used to denote those that manufacture, provide finishing and packaging to the products.
• Exporter/Distributors — Term used to describe those who source final goods from manufacturers and sell to the retailers/brands/commerce platforms etc. Given, a lot of these marketplaces aim at eliminating distributors, this player is only relevant for cross-border transactions.
• Retailer/Brands/Builders/Commerce platforms etc. — Term used to denote those that are interacting directly with the consumers.

As evident from the image, there could be 4 different types of transactions — 1) between raw material supplier and manufacturer, 2) manufacturer and retailer, 3) between exporter and retailer and 4) directly between raw material supplier and retailer. In addition to this, there would be an underlying infrastructure that would enable these transactions, given the complexities associated with them.

There are various nuances attached to the interaction between the players and the value proposition offered by them -

Local vs Global — As much as the local supply chains were broken during COVID, there was a much larger impact of it in the cross-border transactions value chain. For example — Consider the exports of craft-based MSMEs, the value chain there used to be — MSMEs manufacturing the products — selling it to export houses / presenting in the trade shows and from there the retails/brands/commerce platforms used to purchase the products. Owing to COVID, given this value chain was broken — it created an opportunity to fill this whitespace. Over here also, there are a variety of models that came into play -

• Connecting MSMEs to retailers — Players like Lal10, Qalara, Bzaar etc. built a marketplace that provides support to MSMEs to sell their products directly to mom-and-pop stores, commerce platforms and brands. In addition to this, they also offer value-added services that were earlier offered by the middlemen such as credit, logistics etc.
• Connecting export houses to retailers — Players like Sourewiz, built a marketplace that provides support to export houses in selling the products to the retailers and the commerce platforms. To improve stickiness, they also offer VAS such as inventory management to the export houses.

Type of platforms — A lot of articles have talked about the various models, and have used different nomenclature for the similar offerings — so, once for all, to avoid any further confusion, I prefer to classify them in the following manner:

• Open marketplace / Listing platforms / Double commit marketplace — Players like Indiamart fall into this category, where both the parties viz-a-viz supplier and the buyer, need to commit before a transaction takes place. Given, substantial time and effort are required from both parties, this model has the lowest liquidity. Generally, this model fits best for very customized needs. Also, it is very important for the players operating with this model to have sufficient supply for each requirement.
• Buyer-pick model / Closed marketplace — Moglix, Udaan etc. fall into this category. As the name suggests, here, the buyer decides the supplier for the requirements. The liquidity for this model is higher than the double-commit marketplace.
• Managed marketplace / Marketplace picks model — Zetwerk, Fashinza, Lal10 etc. fall into this category. As the name suggests, once the buyer has given the requirements, the marketplace through its channel of suppliers ensures the delivery of the product/services. This model has the highest search to fill rate. The quality, consistency and customer experience is the king here, because the credibility associated with the delivery is that of the platform, and blame could not be placed on suppliers.

Service vs goods offering — Almost all the marketplaces that we have talked about till now offer products/goods to their buyer. Whereas, there are other kinds of marketplaces that offer services/enable services through their network. For example — blackbuck is a marketplace that enables businesses to discover, evaluate and onboard trucks for transportation of their dry products. Similarly, in the wet product space, there is Celcius, which allows businesses to discover, evaluate and onboard reefers and cold-storages for the products.

• This is a very interesting segment, as the need for these services is directly dependent on the sales of the products by the retailers/brands/commerce platforms. For example, consider the organization of seafood industry, or this infatuation of the grocery start-ups of going closure to the end-customer, given both of these are wet products, the second-order impact of the growth of these industries would be the growth of cold chain logistics i.e. increase in the number of reefers, cold storages, pack houses, ripening chambers etc — and as mentioned above, this will result in an increase in the demand of the marketplace that is organizing the industry.
• A stretch on service marketplaces would allow us to consider 4PLs also as the managed marketplaces. For example — consider Shyplite, they have all the transporters on their platform, the buyer (in this case the brand), provides them with their requirements, and then Shyplite takes care of identifying the best logistics partner, the last-mile delivery of the product and after-sales services. Hence, these models could also be evaluated similarly to the marketplace model.

Monetization models — I think this is the most difficult part for any B2B marketplace. In most of the cases, all the buyers had a fixed annual contract with their suppliers, and hence there were no major issues in their life until COVID struck. Hence, a lot of them have resistance to paying high take-rates to these marketplaces. The various pricing models used by marketplaces are -

• Commission on the transaction — Generally observed for wholesale marketplaces — In the cases, where the marketplaces are enabling a cheaper deal for the buyer with similar/better quality + offering customized requirements, they are able to charge healthy take-rates. For example — Lal10, Celcius etc. In the scenario — when the demand centres are concentrated from some enterprises or the supply is concentrated from some big suppliers, the take-rate generally gets compromised.
• Subscription fees — Generally observed for high-resistance marketplaces — The marketplaces that facilitate larger, less frequent transactions of non-standard goods, with long sales cycles, negotiation-based pricing, complicated payment terms and multi-party relationships, such as manufacturing — buyers have resistance to paying high take-rates. In such a scenario, marketplaces attempt to pivot into a SaaS enabled platform, offering workflow tools, inventory management etc. and try to monetize that offering.
• Lending to buyers and suppliers — In a lot of models, marketplaces do not monetize the transactions but offer credit facilities to the buyer for a period of 60–90 days or credit facilities to suppliers for procuring the raw materials, and then are able to charge interest on these lendings.

Customized vs commodity products — As I have talked about earlier also, marketplaces that offer commodity products face a strong threat of increasing competition, as it has lower entry barriers. This results in competitive pricing, compromised margins and hence, a difficult path to profitability. Whereas, players in customized segments such as Bizongo, are able to take advantage of high entry barriers and can charge healthy take-rates.

Focused Industry — I believe, the future of B2B marketplaces are verticalized offerings, that have the potential to become a SaaS-enabled marketplace in future to improve the stickiness with the product. The players could be segmented into various industries -

Not an exhaustive list, only for representational purposes

In the 3rd part of the article, I have talked in detail about how to evaluate the investment opportunities in this sector, but my personal favourite marketplaces are — verticalized SaaS-enabled managed marketplaces for customized goods. These marketplaces enjoy higher stickiness, owing to their SaaS offering, and have lower competition, because of high barriers to entry.

Please follow the following link to access part 2 of this article, where I have talked about what does it takes to build a B2B marketplace unicorn :D

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.