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Ameet Shah, partner at Golden Ventures, on the economics of vertical SaaS marketplaces

Conor Gleeson
None

Background

Ameet Shah is a partner at Golden Ventures. We spoke with Ameet because Golden Ventures invests at the intersection of two increasingly important trends: 1) embedded finance and marketplaces building "X Capital" products using their datasets, and 2) fintech scaling vertical SaaS (as with companies like Faire building CRM, chat, etc.)

Questions

  1. Can you talk a bit about your broader investment thesis around B2B marketplaces?
  2. Can you give us a taxonomy of B2B marketplaces? How do you see the broader space in terms of categories?
  3. In addition to marketplaces, you invest in companies like Swyft, which gives marketplaces access to logistics and fulfillment services on demand via APIs. How do you think about investing in the picks and shovels of the space?
  4. Switching gears to B2B wholesalers, Faire has expanded its products significantly in the CRM: chat, accounting, invoices, automatic payments to handle other needs of the retailers on the platform. If disrupting point of sale systems is the end game, why would marketplaces like Faire have more center of gravity in the retailers’ workflow than the existing POS system -- Square, Shopify, etc.?
  5. Are there ever areas where you think a company just shouldn't expand? Is there any risk to going into a market that doesn't serve the center square?
  6. When you're looking at these businesses from a financial perspective, how heavily do you weigh ancillary adjacent businesses outside of the core business?
  7. To what extent do you think B2B marketplaces can evolve into these end-to-end platforms? What do you think is the proper sequencing of product evolutions to get there?
  8. Some suppliers and makers we've spoken with said they still prefer using Amazon over Faire, because, one, Amazon fulfillment is easier than Faire's dropshipping and, two, suppliers have customer details on Amazon whereas they lose customer details on Faire through wholesale. What paths do you see for B2B marketplaces to help their merchants build better end-customer relationships and provide better support on logistics and infrastructure?
  9. How important is the emergence of API-driven infrastructure for things like fulfillment via companies like Nautical and Swyft?
  10. Does it matter if suppliers are promiscuous between different wholesalers today?
  11. Etsy shut down its B2B wholesaling business in 2018. What challenges made it hard for Etsy to get into this business, and how might conditions have changed since then?
  12. How important are net 60 terms in terms of encouraging merchant participation? Are these kinds of terms now table stakes for wholesale marketplaces?
  13. Moving over to marketplaces, can you talk about how businesses build their inventory today, and how are B2B businesses able to expand their access to new SKUs?
  14. How do B2B marketplaces tend to monetize? What does the breakdown look like between, for example, interchange on payments, interest on lending, ads, data and volume-based discounts?
  15. How do you think about the difference between managed services and higher friction marketplaces like Convoy Trucking versus vertical-specific marketplaces for wholesale like Faire or Provi? Is one approach better than the other?
  16. Can you talk a bit about the unit economics of B2B marketplaces and how they differ from consumer marketplaces, specifically GMV, margins, frequency of use and LTV over CAC?
  17. How do you think about category expansion for B2B marketplaces? What factors do you think are essential in determining whether broad horizontal marketplaces like Faire win out versus highly specific focused verticals like Mable and B2B food and grocery?
  18. How do you think about geography's carrying capacity for B2B marketplaces? How many winners would you expect to see in one region, and how does one marketplace among many escape this commoditizing competitive dynamic?
  19. B2B marketplaces in contrast to consumer marketplaces tend towards being demand-constrained. How does that change the dynamics of building a B2B marketplace, and how entrepreneurs have to think about getting started?
  20. We touched on this a bit earlier, but how do you think about it when it makes sense for a B2B marketplace to get into embedded finance, e.g., leveraging their data to build Shopify Capital-like products for their merchants? What determines whether this is value-add to customers?
  21. What effect has COVID had on the procurement process, and how has that benefited B2B marketplaces or not? Are there certain types of marketplaces that are coming out of the pandemic better or stronger?

Interview

Can you talk a bit about your broader investment thesis around B2B marketplaces?

We've been investing in B2B marketplaces for quite some time. Before they became en vogue, we looked at this as this massive opportunity that's largely untouched. Since we’re seed investors, we’re looking for markets where significant dollars are flowing between businesses. These are often older, more established buying patterns where the innovation is launching the marketplace itself.

Our thesis stems from the general concept of what a market inefficiency or failure is: an inefficient delivery of goods or services in a free market. This is most often represented by the supply side not delivering what the demand side desires. For example, there's this great Bezos quote, which I'll paraphrase. It's something like, “What I love about consumers is they’re divinely discontent; their expectations are never static – they go up.” He highlights the ever-changing needs and desires of the demand side. While he’s referring to consumers in B2C marketplaces, I think that translates over to B2B marketplaces as well. What is good today is not going to be good enough tomorrow. This is a complex value proposition, particularly for SMBs, to deliver on without technology.

We believe the future of B2B marketplaces starts with vertical SaaS solutions. These initially look like software-enabled workflows that streamline operational inefficiencies between supply and demand, making online transactions possible where previously they may not have been. We are looking for companies that commoditize the undifferentiated heavy lifting that supply and demand engage in to deliver their goods or services more efficiently. So what does that look like in practice? We have this loose framework, supported by a few tenets.

The first is this idea of being in the natural workflow of buyers and sellers. In B2B marketplaces, there's still a lot of human involvement to facilitate a transaction. This isn't just about matchmaking buyers and sellers. A whole workflow follows, including sourcing, procurement, logistics, fulfillment, contracts, payment, terms, etc. -- all these things still involve humans across multiple entities. So the software-enabled solution needs to support all or parts of this pre-existing workflow.

Secondly, we look for solutions that can be comprehensive for all transactions on the demand and/or supply side. In the absence of that, you have multi-tenanting across the legacy and new interfaces, creating headwinds for adoption. For example, many vertical SaaS solutions start with something that just aids the supply side in handling all their orders, regardless of whether that’s a lead from the marketplace or an existing customer. Being able to serve all customers creates alignment between the groups. We talk a lot about entrenchment: the idea that if one side of the marketplace is going to do this, they have to commit fully, which requires them to adjust their workflows, adapt their software and hire/staff to support the workflow. This is a non-trivial ask for SMBs and enterprises.

Finally, one of the most important parts is that you have to enable transactions. That's everything from KYC/AML, payments, credits, dispute resolution, etc. This locks the company into the workflow, ensures consistency and presumably creates value on all transactions. 

It’s important to note that an early-stage company rarely can accomplish all of the above, but we like to see that as part of the broader vision.

Can you give us a taxonomy of B2B marketplaces? How do you see the broader space in terms of categories?

We look at it in a couple of different ways. High-level, there are aggregators, managed marketplaces, channel marketplaces, vertical SaaS-enabled marketplaces, and then tech-enabled brokerages.

At the aggregator level, it’s just about curating supply and matching demand with that supply; Focusing on high-quality liquidity, creating efficiency in the market by bringing both sides together in one place, and then allowing for self-managed matchmaking. One example is Faire, where you're working with wholesalers and sometimes solopreneurs or brick-and-mortar stores that potentially leverage or buy into those services.

Then you've got managed marketplaces. Again, there's a big focus on curation. Not all players are fungible, so you have to have a vetted set of suppliers to deliver a specific set of services or products. These marketplaces are often supply-constrained, and there's more work done in brokering the transaction, whether it's a white-glove service or through some sort of SaaS tooling. Examples of this are Reibus, the steel marketplace, and Toptal.

A “channel marketplace” is a term we’ve coined describing the relationship between a master brand and the regional distributors or channel partners. The association is primarily around distribution. The brand control sits at corporate, but then you've got all these local distributors that handle everything from fulfillment, customer support, offering ancillary products that fit together. These marketplaces are designed to have no channel conflict, and you can preserve all your local relationships.

My personal favorite are these vertical SaaS marketplaces. They start as vertical SaaS software, then layer in a marketplace later on. Usually, it begins with a software solution that is focused on a highly technical business problem. For example, a software provider may give away or charge a very low fee for something that has high intrinsic value to a marketplace participant and has a low marginal cost to deploy. That’s a fancy way of saying: solve a huge pain point through software, give it away, and use that as a way to onboard the supply or demand side. Then, by aggregating both the supply and demand through this SaaS tooling, you're able to facilitate discovery on both sides.

An example is Notch, which works with food distributors and restaurants -- a highly fragmented market. The prices that restaurants make their decisions on are the prices they receive the previous week. Between the time they order and the time they receive the goods, the prices for the goods can change. Notch streamlines this process between buyers and sellers while also controlling payments between the parties.

Finally, there are tech-enabled brokers. Fundamentally, this is taking an existing agent, broker, distributor, or wholesaler and empowering them with technology. , and having them operate more efficiently than other players in their industry. This technology acts as a competitive advantage for that one broker.

In addition to marketplaces, you invest in companies like Swyft, which gives marketplaces access to logistics and fulfillment services on demand via APIs. How do you think about investing in the picks and shovels of the space?

One of the CEOs we work with, Ryan Lee from Nautical Commerce, has this line that I love and quote all the time: the magic of marketplaces is that they productize the invisible. Amazon has trained us to order and expect something within a couple of hours and up to two days later. There are a lot of things that go on behind the scenes to make that happen -- decisions that were made before we even decided that you or I were going to make that purchase. Delivering a similar experience on the B2B side requires a lot of heavy lifting to make that happen.

When considering building a marketplace, there are many decisions you have to make upfront, particularly whether they want to own the infrastructure or partner with the best-in-class partner or provider. For example, if you were starting a marketplace four or five years ago, you probably were building a lot of this stuff yourself. But suppose I’m building something brand new today. In that case, this infrastructure is now available through companies like Nautical Commerce. This helps operators get from zero to one and beyond and keeps them focused on the core business.

This goes back to the earlier concept of commoditizing the undifferentiated heavy lifting. We think these things are core pieces, essential to an actual transaction. I believe we're in the unbundling of monolithic marketplaces phase. Challengers are rebuilding the offering through best-in-class services and products. In doing so, they are leveraging innovative business models to offer unique access to supply that was previously impossible. The customers are not necessarily the wiser but benefit from this along the way.

The other thing that we’re seeing is that there are so many agents and aggregators up and down the stack in many industries. These represent opportunities for integrated software solutions to streamline the process. We think about how these low-value brokers and inefficient workflows can be replaced by machine-to-machine transactions. The value accrues at the end of the spectrums, the actual producers and consumers.

Digitizing these workflows and connecting disparate data sources gives rise to additional opportunities. For example, with access to end-to-end data, software providers can provide better underwriting models, leverage AI/ML, and third parties to enrich data sources. This just wasn't possible without automation.

In B2B marketplaces, you're selling a good or service, and you're taking a cut on that transaction. Most of the value of that transaction goes to the service provider or producer. So anything you can do to automate along the way allows you to capture additional value on top of the transaction price. You can't just keep throwing bodies at this type of stuff. You have to automate a way to scale.

Switching gears to B2B wholesalers, Faire has expanded its products significantly in the CRM: chat, accounting, invoices, automatic payments to handle other needs of the retailers on the platform. If disrupting point of sale systems is the end game, why would marketplaces like Faire have more center of gravity in the retailers’ workflow than the existing POS system -- Square, Shopify, etc.?

When I was at Zynga, we had this strategy to protect the core franchises by offering complimentary games in the same category. I'll use Words With Friends as an example, a classic word game that was one of the biggest titles at the company. We thought of Words With Friends as a fortress and strategically built products that acted as adjacent squares or moats. Launching a series of other word games -- likely fast follows of different products -- gave us the advantage of feeding the core product. I think this analogy is similar for product expansion -- it’s really about protecting the fortress. It allows you to avoid being outflanked by a competitor in another area. By offering this new product offering, you force other groups to be 10x better than not just your core solution but all of the solutions that are out there.

There are pros and cons to that approach. It gives companies the flexibility to capture and/or protect the market share through these adjacent products. This means, for example, I could treat one of these products as a loss leader and give it away for free, and the fact that that product is connected with some of my other products allows for seamless data to flow between the two. As we know, aggregating all the data into one solution creates additional value and product expansion opportunities on its own.

The other strategy is to enable a developer ecosystem and let other companies fill the holes and offer best-in-class solutions on your platform. Shopify has done an incredible job of that through its developer ecosystem and enabled merchants. I give them a ton of credit – they’ve always maintained the position of not trying to compete with the developer ecosystem. I think they’ve done a fantastic job on that front. 

Perhaps this is a non-obvious point, but expanding your product offering is making your product more self-serve -- which is another way of saying, “We're outsourcing some of the work that's required to the customer.” As a result, the operational burden no longer falls on your team and falls to the marketplace operator and provides the control they want.

Are there ever areas where you think a company just shouldn't expand? Is there any risk to going into a market that doesn't serve the center square?

I think of it more as, “are you under-optimizing for the opportunity?”. You don't want to spread yourself too thin, so you have to allocate resources judiciously to deliver a sufficiently robust version of that product that’s markedly better than the alternatives. You have to be very deliberate in your thinking around that. For example, you wouldn’t go into the lending business if you didn't think you could offer a lower cost of capital product. If you're offering a higher capital cost of product, people will naturally go elsewhere. So you have to deliver a competitive product, and that's not just the initial investment but also maintaining that product or service and continuing to iterate on that.

Another way to think about it is, will this new offering contribute back to your growth function. Let's say that for a marketplace, growth is a function of GMV, take rate, frequency of orders, size of orders, AOV, all that stuff. The new product offering should have a neutral to positive impact on those variables. It can be a loss leader. That's okay because the loss leader might drive GMV, or it might allow you to improve your take rate or something along those lines. So we think it’s imperative to be strategic on these fronts.

When you're looking at these businesses from a financial perspective, how heavily do you weigh ancillary adjacent businesses outside of the core business?

We're seed stage investors, so we're often not considering this at the time of investment. We look at the initial core business, and we’ve got to believe that it’s going to be big enough on it’s own. Building a business is hard enough; building five offerings is very difficult. Now there may be a natural transition to support some of these other things, but at least at our stage, I’m honed in on the core, how they can own it, and in doing so, potentially kickstart a flywheel to build a more significant business. Given that often it's three, four or five years after we've invested that some of these adjacent squares get filled in, we don't have that great visibility into the probability of whether that will play out or not. So the level of precision on that forecast would be very low.

To what extent do you think B2B marketplaces can evolve into these end-to-end platforms? What do you think is the proper sequencing of product evolutions to get there?

As I mentioned earlier, I love these vertical SaaS solutions that solve some of the existing and potential challenges that the supply side has, or maybe demand, depending on the company. That's a way to get people starting to use a product in the flow, and then you layer marketplace in after. That’s not to say that all businesses start this way. Still, I do think that bringing the marketplace functionality too early can be a burden on the company, especially one that's not capitalized well.

That's why I go back to my earlier point: offer something with high intrinsic value and low marginal cost, start getting customers hooked into that workflow, and then expand into other parts of the workflow that leave you well-positioned to launch a marketplace. My personal opinion is that you need to be in the payments flow to be well situated to do so. I also think you want to see all transactions from either demand or supply, to get a better sense of what is happening ahead of launching the marketplace. That also gives you some indication of the type of supply or demand you need to bring into the marketplace to drive liquidity out of the gate.

We often see people starting on the demand side with a discoverability and presentation layer to help surface products and the unique supply you may have. How do you make it very easy for sellers to onboard very quickly on the supply side? That's everything from just being able to promptly upload SKUs and facilitate transactions to the actual operations of the marketplace.

Some suppliers and makers we've spoken with said they still prefer using Amazon over Faire, because, one, Amazon fulfillment is easier than Faire's dropshipping and, two, suppliers have customer details on Amazon whereas they lose customer details on Faire through wholesale. What paths do you see for B2B marketplaces to help their merchants build better end-customer relationships and provide better support on logistics and infrastructure?

We've learned over the years that B2B marketplaces are poorly positioned to own customer support on behalf of supply and demand, given the complexity of what follows a transaction. For example, in B2C marketplaces, DoorDash can sit between myself and the restaurant, but we’ve all had the experience where DoorDash directs us to contact the restaurant directly and have them deal with it themselves. Something is happening that's a local problem, and DoorDash as an intermediary slows things down. Now imagine what happens with a far more complex transaction, where what happens behind the scenes is opaque to the operator.

I think it's about creating communication channels and allowing both sides to connect through the appropriate mediums. For example, SMS is the natural channel in some field service marketplaces since bringing a computer is cumbersome or unnecessary. The marketplace needs to figure out the suitable mediums, and there may be different needs on either side. It's solving for that. It's allowing both groups to communicate naturally, the way they are already accustomed to. Otherwise, there's just more friction to teach many different parties an entirely new workflow. That's why we are big fans of “Can I go to where people already are?” If they're already text messaging, just help facilitate that and capture the relevant information appropriately.

How important is the emergence of API-driven infrastructure for things like fulfillment via companies like Nautical and Swyft?

I think it's becoming increasingly important. Marketplace operators need to decide where they want to specialize and the upfront investment they want to make. We love asset-light or asset-less B2B marketplaces that use existing infrastructure and think building endpoints to access that infrastructure is the future. For example, comparing the cost of programmatic access to fulfillment using existing infrastructure vs. the cost of building your network is significantly lower. We believe that you can incentivize the existing players to embrace your technology and derive benefits -- because of all the additional high margin business you can facilitate. We like that model better.

Does it matter if suppliers are promiscuous between different wholesalers today?

I think you will see some level of multi-tenanting in a vibrant b2b marketplace due to different customer segments, the geographies they can serve, and the uniqueness of their product lines. It could be localized; it could be across multiple online channels; it could be bundling with products. I don't see that as an issue.

Etsy shut down its B2B wholesaling business in 2018. What challenges made it hard for Etsy to get into this business, and how might conditions have changed since then?

B2B marketplaces are so different than B2C marketplaces. B2C marketplaces are fundamentally about the ease of transaction, primarily through commoditizing highly fragmented supply. That's why all these on-demand models have worked so well. Price and price predictability are crucial on the B2C side because customers will move elsewhere if it’s a commodity product. B2B marketplaces are just far more nuanced.

I haven't looked at Etsy very closely by any means, so I'm speculating here, but when I think about their original business and what wholesale would look like on their side, I think that's a difficult leap to make. They were early in the market, and wholesaling online has only become more popular recently. If wholesaling required a significant shift in mindset and process for the makers, I wonder if their tech fully addressed those needs and made it a seamless transition.

Today, I think there’s a lot more maker-centric infrastructure to support wholesale businesses. Makers have better access to financing, logistics, cloud-based CRMs, and even online communities for additional support. There’s also an increased interest in buying these wholesale businesses, so other liquidity options make the space more attractive.

How important are net 60 terms in terms of encouraging merchant participation? Are these kinds of terms now table stakes for wholesale marketplaces?

I think it depends on the type of marketplace and comes down to the various dynamics between supply and demand. If it's a super low margin business -- if demand can only buy more from the supply side once they sell the goods because of balance sheet limitations, then payment terms are really important. Or imagine I have a manufacturing run, and it costs X amount of upfront dollars to do that -- a lot of businesses run into cash flow problems. So providing capital markets access for SMBs and Enterprises is an ample opportunity.

Powered by People is an excellent example of a company helping facilitate payments to some of these smaller producers in the market and allowing them to work with much larger brands. They're offering that because these makers don't have access to capital. Many traditional lenders can’t underwrite loans or provide credit due to a lack of data or understanding of the SMBs. The business might be too early, it may not have historicals, or they just don't understand the business model themselves, so it's challenging.

I think there's an exciting opportunity for B2B marketplaces to offer some of these new financial products because they have access to a lot of the data on both sides. There’s information asymmetry through direct access to historical payments, on-time payments, and intimately understanding both sides of the marketplace.

Moving over to marketplaces, can you talk about how businesses build their inventory today, and how are B2B businesses able to expand their access to new SKUs?

I think there are different strategies that different marketplaces use. More often than not, there's a unique insight that the entrepreneurs or the operators have that allows them to bootstrap demand or supply. Everyone's got this cold start problem that they have to figure out, and you want to kickstart the supply or demand side for the marketplace. Our general belief is you've got to find a wedge to deliver a superior buying experience for the demand side. As an example, if my current buying experience is that I have to phone in an order, there are many obvious ways that I could streamline that and make it better for the demand side.

Creating a better experience with the demand side can potentially overwhelm the supply side. So this represents an opportunity to create a product or integration for the supply side to make it easier to process the new demand. I think that's a way to start facilitating some part of the transaction and start building trust on both sides. Then, once you've done that, and that piece is working, and you've got mutual trust, then you can start expanding beyond that.

We believe it's challenging to aggregate supply without a ton of demand coming in. So why wouldn't I just keep doing it the old way versus this new way that's unproven? We believe that you use the wedge mentioned above to aggregate demand, which gives you more leverage and makes it a bit more compelling for the supply side to onboard all their inventory. If it's facilitating a transaction more smoothly, you can start taking advantage of a channel. 

Another way to capture orders or inventory is to focus on a specific order type. For example, there are high-touch orders, and there's the self-serve or “street business”. A lot of legacy systems treat both orders the same. Everyone taking a call for what could be self-service acts as a low-value order taker, so there's no reason software can't do it. The analogy I like to use is -- are you a The Office fan by any chance? Do you remember the episode where it's Dwight versus the website, and they're going at it head-to-head? Both Dwight and the website should co-exist, and there are certain types of orders that Dwight was able to close and manage himself, and there are certain types of orders that the website can just facilitate itself.

One of the immediate problems you run into is that if the supply side sniffs out that this is going to be a marketplace, “Well, why would I bring my supply on if you're going to cannibalize my customers?” I think that's where you have to get very innovative and help people say, “Look, whatever customers you bring on, you own. We're never going to take anything off the top of that. We might charge a processing fee or something like that, but those are your customers. But, understand that there are going to be other options available in the marketplace.” But you only do that once you've proven out that you're a better solution for both groups.

How do B2B marketplaces tend to monetize? What does the breakdown look like between, for example, interchange on payments, interest on lending, ads, data and volume-based discounts?

Most marketplaces start with a take rate on the actual transactions. So that's why GMV is such an important metric, because you're trying to say, “Okay, there's a fixed percentage of a transaction that will be captured, and that number will vary by vertical and how much you're able to capture from there.”

After taking a cut on the transaction itself, I think there's a whole set of ways that you can monetize. Other things include capturing a portion of the interchange on payments, trade financing, traditional SaaS for vertically integrated solutions, professional services (account management, curation, recommendations), monetizing the float. As mentioned earlier, in B2B marketplaces, you take a smaller margin than the product producer, so you have all this incentive to layer in additional services, which boosts your margins over time. That's the role of automation: to drive the potential for increased margins or savings.

How do you think about the difference between managed services and higher friction marketplaces like Convoy Trucking versus vertical-specific marketplaces for wholesale like Faire or Provi? Is one approach better than the other?

I feel a bit of a broken record in the sense that I'm like, “Look, it always depends.” There are specific dynamics at play in each of those marketplaces you mentioned, and I think each model works because of the uniqueness of the market itself. An efficient B2B marketplace abstracts away all the complexity from both the supply and demand, making it easier for people to transact with others.

The product or service being offered determines what functions the marketplace operator needs to take on to create that efficiency. If I use Faire as an example, most of the complexity in the market was automated through software. But for something like Trucking, which still involves humans, needs to be highly curated and, therefore, managed to drive the right type of liquidity. The software layer presented to the humans and how they interact with it is critically important. At the end of the day, when I think about where the opportunities lie and the ones that get me most excited, I'm always looking for B2B marketplaces that are going after just total commoditized, homogenous products with high frequency. From that perspective, you want lots of purchases and create that pattern, that habit.

We talked a bit about promiscuity on the buy-side and whatnot. I think you want that. Suppose I have an established buying relationship with a small set of vendors. In that case, that’s relatively easy for me to manage without the assistance of software, nor does it necessitate a marketplace. When I have an incentive to potentially swap vendors because it's a highly commoditized homogenous product, that's where I think marketplaces or B2B marketplaces are well suited.

Can you talk a bit about the unit economics of B2B marketplaces and how they differ from consumer marketplaces, specifically GMV, margins, frequency of use and LTV over CAC?

I think there are a lot of similarities at the highest level. You probably start with GMV (gross merchandise value) in consumer markets. In B2B marketplaces, since you're often getting involved in the transaction, I think you start with gross processed volume or gross sales, or whatever you want to call it -- the total dollar amount running through the platform. Not necessarily in your marketplace, but more about the potential volume that the supply or demand side could bring. We typically see lower percentage take rates in B2B marketplaces due to the higher GMV, AOV and throughput. There's an inverse relationship between AOV and frequency of purchase.

Typically, the AOV in B2B marketplaces is much larger than in consumer marketplaces. For example, my Uber ride of $12 vs. a wholesale purchase of $10,000 worth of ingredients. The AOV is generally much higher because you deal with SMBs and enterprises. B2B transactions are more complex and require more stakeholders to buy-in. We expect CAC to be much higher and close a customer much longer to start. Consumer marketplaces thrive on high frequency, and B2B marketplaces need tons of volume. Volume exposes the issues that both sides face and forces you to address them in a novel manner.

We pay close attention to the relationship between CAC, LTV and payback. We don’t know what LTV is in the early days, but we try to get comfortable around how long it will take for a business to 3x their CAC. Of course, the faster, the better, but we’re looking for something between 18-24 months as a rule of thumb.

Then the last one, which I alluded to earlier, is the concept of share of wallet: what percent of the volume are you capturing or seeing and could you service through your marketplace? Not many businesses jump to mind where you can capture 100% unless you are the procurement platform for the demand side. That's what makes businesses like Provi, ResQ, Notch and others like that very exciting because they are this single source. Customers do all of their purchasing through the platform, whether it's directly managed vendors or through the marketplace.

How do you think about category expansion for B2B marketplaces? What factors do you think are essential in determining whether broad horizontal marketplaces like Faire win out versus highly specific focused verticals like Mable and B2B food and grocery?

To me, it's the complexity and the fragmentation that exists in the marketplace. The more complex and fragmented the market, the more likely you will have these many-to-many relationships, which get harder to manage without a software layer. We try to assess how custom the workflows are between the various stakeholders and constituents in the marketplace? To my earlier point, can you prevent this constant multi-tenanting to create stickiness in the marketplace? And is the behavior in the market converging or diverging? As you add more and more participants in the marketplace, do they act the same, or does the behavior become more divergent based on the types of participants? 

For example, when you look at Faire, they aggregate a wide range of goods. The buyers and sellers themselves are highly fragmented, but the dynamics aren't that complex, although I’m sure they will disagree! They are more similar to a B2C transaction in many respects because you've got these SMB or solopreneur folks on one side. But when you look at someone like a Mable or Notch, with arguably larger businesses, there's just more complexity in the transaction. Even the breadth of SKUs is so much more dramatic. Any single player might potentially be offering thousands of SKUs. 

When we're trying to invest and looking at the opportunities, we start with an initial set of goods and SKUs. When we looked at Notch in their earliest days, they were focused on just produce, and we had to get comfort that produce on its own was a big enough problem. We learned along the way that produce is great if you happen to be just a produce vendor, but a lot of these vendors sell many other SKUs outside of produce. So there’s this pull from the market to service their entire business. As you add additional categories and coverage, the marketplace becomes more sticky. It starts with depth in specific categories and rapidly moves towards breadth. This phenomenon repeats itself in each geographic region you support.

How do you think about geography's carrying capacity for B2B marketplaces? How many winners would you expect to see in one region, and how does one marketplace among many escape this commoditizing competitive dynamic?

I think it comes down to three things: overall TAM of the opportunity, the potential geographic constraint, if any, of the market, and then the differentiation of demand.

From a TAM perspective, the definition of winners is subjective, but for this, let's talk about “venture scale winners.” Is it theoretically possible to capture some significant portion, if not all, of the market? Can this be an N of 1 type of company? 

Generally speaking, I think in most B2B marketplaces, there's room for multiple players, and we've seen a lot of evidence of that today. I'm trying to think if there's any true, single winner in B2B marketplaces at this moment? Nothing jumps to mind, but I need to think about that more.

Secondly, geographic constraints and local rules – whether regulatory, cultural or otherwise make it possible for focused groups to win there. Again, using a B2C example, if you look at the 15-min delivery companies out there, the JOKRs and Gopuffs compete nationally. Still, there are many local and regional players emerging as well. If you're a B2B marketplace, and let's say you're deciding, should I enter a brand new market? Let's say Canada as an example. It's like, “Well, I could also just win Texas. And winning Texas is roughly the same market opportunity size as winning Canada. And then you’ve got a higher concentration of people or customers that you're servicing in a specific area versus trying to win the second biggest country.” I think these are all things that have to factor in how you compete.

It also depends on how differentiated the demand is. Certain markets have some supply heterogeneity that allows multiple marketplaces to exist. For example, take a company like Spoiler Alert, which focuses on liquidating food that will expire soon. It’s unlikely to be 100% of your volume, but it could represent a sizable chunk of your spending.

B2B marketplaces in contrast to consumer marketplaces tend towards being demand-constrained. How does that change the dynamics of building a B2B marketplace, and how entrepreneurs have to think about getting started?

I don't know if they're necessarily demand-constrained. But, again, I’d go back to some of my earlier comments around just finding the wedge. I think that the demand is there. It's just that how the demand side is consuming the products or transacting may not be the way you expect. It may be that they're doing it offline, or they're doing it in an archaic way.

Right at the start of the interview, we talked a bit about market failures and market inefficiencies. This is often caused by inefficient matchmaking between what the demand wants and who can provide the supply. I think about it slightly differently: how do you start with a smoother matchmaking process, and what can you do to facilitate that? Unless you're talking about just a fundamental shift in how they buy. But at the end of the day, if you're a traditional buyer, you're buying from a relatively small set of vendors. In a marketplace model, you can theoretically work with more vendors if they can deliver against your internal SLA. I think that reinforces the fact that you need to service both the existing vendors through this wedge and a set of net new vendors that provide either the same or additional products to you.

We touched on this a bit earlier, but how do you think about it when it makes sense for a B2B marketplace to get into embedded finance, e.g., leveraging their data to build Shopify Capital-like products for their merchants? What determines whether this is value-add to customers?

It comes down to just the ability of traditional financiers to underwrite and provide financing options. Whether those financing options make sense for the marketplace, they're serving or the businesses and the sector they're servicing. So to the extent that you have a unique insight or an underwriting advantage relative to other players in the market, that's where it makes sense. That's where it's crucial to aggregate data to effectively find alpha in that and use that to your advantage to create better financial products that suit your needs.

It's also just a general understanding of the customer segment. Like someone trying to build a financial product that serves everybody versus one targeting a specific vertical, the specialists will probably win because they understand the nuances of that transaction.

Marketplace operators have unique insights into the liquidity challenges and opportunities. It’s easier for them to provide data that can be used to underwrite specific transactions. They are uniquely positioned to take on more perceived risk than a traditional financier who may not have the same visibility or understanding.

As a general rule of thumb, the more homogenous the product, the easier it is to find a financing provider and provide competitive terms. But the more bespoke or customized the product is, or frankly even just how new it is to traditional financiers, it's harder to underwrite against that. So that's another way of saying that if there's some way to look at history or a pattern or something well understood, it's easier to finance. Then if you think about the vendors in general, if you're dealing with an SMB marketplace that just doesn't have a ton of balance sheet strength, it's harder for them given their working capital position.

What effect has COVID had on the procurement process, and how has that benefited B2B marketplaces or not? Are there certain types of marketplaces that are coming out of the pandemic better or stronger?

I think there are three factors here. First, COVID acted as an accelerant for all the obvious reasons. The second is related to the great resignation and the competitive nature of labor. Thirdly, there’s this generational shift occurring on the demand and supply side at the operations. A lot of these traditional wholesalers, distribution businesses, B2B marketplaces were being run by, let's say, people from the baby boomer generation. Now there's a transfer of ownership and jobs to a Gen X/Y, or millennial operator, and they demand a different set of tooling. They're not running this business on paper and pen, or they're not running off a spreadsheet. They want a more integrated workflow. They've grown up as digital natives, so that's their expectation. I think B2B is under-equipped for this type of transition.

Going back to Covid, when it first hit, many of these wholesale distributors relied on in-person outside sales. Then all of a sudden, you couldn't do that anymore. They ended up making reductions in the workforce and getting rid of their outside salespeople. At the same time, they needed to figure out how to establish an online ecommerce presence.

Now, once you're selling online, you're trying to shift at least a segment of your customers to this new online workflow. Once you’ve made that leap to selling online, B2B marketplaces make much more sense, and I think that’s part of why it’s having a moment. You’ve done the heavy lifting, and then it makes sense to create the most expansive surface area possible and capture new customers. They can theoretically aggregate demand more effectively than any one individual ecommerce player.

Finally, people realized that a significant portion of the orders that outside sales reps took were low-value add transactions. The order would happen without the sales rep showing up. So that segment of it is well suited for an online presence, and when that happens, a B2B marketplace for all sellers makes sense.

The other thing is that everyone had to figure out selling online very quickly, so they immediately trusted pre-established solutions in their industry. We've seen it too in our portfolio. Things that used to take months went down to weeks and then days because everyone realized this is the future, and we're not coming back from this.

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