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What are B2B marketplaces? Why did they fail before? What is different this time? What are their main features? In this piece we cover all this and why Concept is excited to be investing here.
Amazon CEO Andy Jassy, in his 2022 letter to shareholders, said that Amazon Business (their B2B marketplace offering) “drives roughly $35 billion in annualized gross sales” - outlining the scale and potential of the B2B opportunity - as well as its growth potential, given it only crossed $1bn in GMV as recently as 2016.
But despite the success stories, B2B Marketplaces are not for everyone - they’re a polarising business model for VCs mainly due to a lacking number of public comparables. Whilst some of the largest companies in the world operate some form of business-to-business marketplace model (Amazon, Shopify, Alibaba), standalone marketplace models are less frequently spotted in the wild.
In this piece I take a look at B2B Marketplaces, some exciting examples to keep an eye out for, as well as why we’re excited to be investing in this space at Concept Ventures.
Yes, they have. During the dot-com bubble of the 2000s, marketplaces saw a swathe of investor excitement as the prospect of digitising every industry was too appealing. From pet supplies (pets.com) to grocery shopping (Webvan), entrepreneurs were applying ‘the Internet’ to every existing industry they could touch. During this period, marketplaces began to emerge and attracted a lot of investor cash.
Unfortunately, the internet and its associated infrastructure were not quite as developed as they are today, with many of the building blocks required to facilitate transactions missing (online payments, logistics, invoicing, customer support and more). With as few as 22% of Americans having made a purchase online in 2000, digitisation of B2B workflows was, perhaps obviously in hindsight, a step too far… and Pets.com can attest to this:
“In 2000….there were no plug-and-play solutions for eCommerce/warehouse management and customer service that could scale . . . we had to employ 40+ engineers. Cloud computing did not exist, which means that we had to have a server farm and several IT people to ensure that the site did not go down. There were less than 250 Million worldwide Internet consumers in 2000- now there are 5 Billion.”
- Julie Wainwright, Former CEO of Pets.com
20 years on, and this picture looks very different. The degree to which the Internet has touched various sectors and verticals is much deeper than at the turn of the century, and COVID-19 only exacerbated this further.
Despite decades of tooling, and trillions of dollars in consumer spend, close to 80% of transactions are still taking place offline - this ratio is even more overweight in favour of offline in B2B.
Putting aside COVID and other macro circumstances, much of the infrastructure required to build and launch businesses is now available to nearly anyone. Webflow/Bubble, AWS/GCP, Stripe and other tools have significantly lowered the barriers to starting a business, and that’s not to mention the capabilities generative AI bring.
The final tailwind I’ll mention is the median age of the global workforce. Today it stands at roughly ~39 years old, meaning it is almost certain any given worker was exposed to the internet whilst growing up. As older business owners, managers and employees retire, more digitally native ownership and workforces are built every day.
In short, they’re digital or online platform businesses facilitating the discovery, and subsequent buying and selling, of a product or service between two businesses (not consumer marketplaces such as Airbnb, Instacart or Depop which are selling from a business or consumer to an end consumer).
These marketplaces come in many shapes and sizes, with transactions involving literally anything - from raw materials to finished goods, software to hardware, or people to consulting services.
Across their lifecycles, marketplaces make money in a variety of ways, usually through monetising the core transaction (take or rake), but sometimes through ancillary offerings such as financing payment terms, charging for verticalised SaaS or even paywalls/paid access to the platform (Sameer from Breadcrumb VC has a great breakdown on marketplace monetisation).
There are no definitive ‘playbooks’ for these businesses yet, but generally, the later-stage examples target building robust, diversified revenue streams, to overcome the lack of predictable revenue you get from volume-based businesses.
Whereas traditional online retailers will have some logistical overheads and/or physical inventory, marketplaces take advantage of not having to hold or touch inventory, instead helping connect buyers and sellers (often facilitating the tracking and operations).
They are often verticalised (focusing on a specific industry or sub-category) and enable buyers to discover and transact with suppliers across the globe. The core benefit is facilitating new transactions through the discovery of new buyers/sellers, which unlocks liquidity that wouldn’t have existed otherwise.
Generally, you will want to see some or all of the following characteristics when exploring a marketplace (and be sure to check the NFX Marketplace Scorecard):
When this is all pulled together, the end product/platform will often exhibit the following features:
A wide or comprehensive range of products and services: B2B marketplaces offer a wide range of products and services if broad, but if they’re heavily verticalised e.g. Medical Supplies, then they should comprehensively cover the category.
Convenient and efficient experience: B2B marketplaces should make it easy for businesses to find the products and services they need, compare prices, and place orders (compared with an arduous, manual and opaque experience otherwise).
Secure and reliable transactions: B2B marketplaces should use secure payment methods and should offer a variety of shipping options to ensure that businesses can make safe and reliable purchases.
Strong customer support: B2B marketplaces should be offering strong customer support to help customers with any questions or problems. This should be a big step up from experiences with legacy, offline counterparts.
Data-driven insights: B2B marketplaces can often provide businesses with data, market insights and trends that help customers make better decisions about their buying and selling activities.
Simple, right? ;)
Although there are a few emerging upstart examples, and some significant large-scale B2B marketplaces, the model doesn’t yet have a ‘nailed’ playbook in the same way SaaS does, for example.
I outline some of the common criticisms below, but they are generally down to two main categories of reason; trust and control.
Push Backs on Marketplace models:
High fees: B2B marketplaces often charge fees to both buyers and sellers. These fees can be a significant cost for some businesses and enforce bad behaviour like disintermediation (going around the marketplace) to avoid fees.
Lack of control: When selling on a B2B marketplace, businesses give up some control over their products and pricing. This can be a problem for companies that want to maintain high quality and customer service.
Competition: B2B marketplaces can be very competitive. This can make it difficult for the supply side to stand out and attract buyers.
Liability: who takes blame/responsibility when things go wrong? Similar to lacking control, who is culpable for defective, delayed or missing products?
Network effects: It can be argued that B2B marketplaces don’t display true network effects (in that every additional participant adds value to the network).
Who’s turning the theory into reality? It’s early days for B2B marketplaces, especially in Europe, but as per Point Nine’s market map, the continent is beginning to heat up. Much like the notion of ‘founder-market-fit’ if you’re to look at the countries that each marketplace is founded in, you might find a strong industry-marketplace-fit.
When looking beyond Europe to the US, where some of these models are further ahead, there are some good examples of maturing B2B Marketplaces here including ACV Auctions (NASDAQ: ACVA), Faire, Reibus and others. As James Currier recently said in an interview on the Everything Marketplace community, ‘Harvard Business School only did their first B2B Marketplace case study two years ago’.
Here at Concept, we’re proudly investing in B2B Marketplaces. Some of our announced portfolio companies include Ground Truth Intelligence, Clara, and Auctree, with more to come shortly - watch this space ;)
Whilst the connection and discoverability of buyers & sellers are core to the marketplace offering, we’re strong believers in founders focusing on additional problems software can solve for participants on either side of the transaction.
We’ve outlined the advantages and potential drawbacks of B2B businesses, but we feel it’s hard not to feel excited about this category. With a glut of AI-focused companies being founded and targeting ‘sexier’ markets and use cases, the multi-trillion-dollar business across the globe remains under-loved by entrepreneurs today.
We are strong believers in founder-market-fit and teams who possess unfair advantages when founding their businesses. With this in mind, we expect many marketplaces to emerge from geographies with rich industrial ties e.g. Netherlands with Logistics/Shipping, Germany with Automotive & Industry.
And we’re not the only European funds enticed by this business model, funds such as Index Ventures, Point Nine and GV, MarketOne, Piton, DFF and Speedinvest are all active here also.
COVID was the catalytic moment for digitisation across multiple industries - the point in time in which managers, workers, buyers and suppliers realised their jobs could be partly (or wholly) undertaken online boasting clear operational and economic gain, and this is just the beginning. With the proliferation of AI, we imagine this transformation will be accelerated as software and automation become easier and easier to build.
If you’re building a B2B marketplace in Europe, please get in touch with Oliver via LinkedIn or Email.
