B2B Marketplaces | Sector Summary
Investment Thesis 1.0 | Part 2 of 5: Sector Summary
The following few sections in Part 2 will discuss the investment opportunity in SaaS-enabled B2B marketplaces and why I think there is incredible upside. To recap, B2B marketplaces are startups that transform goods or service marketplaces via technology. For more on the investment thesis overview and why I am interested in the space, check out Part 1 of the series.
The Rise of B2B
Over the past few years, we have seen a rise in B2B investments within the private and public markets.
Higher accelerator acceptances: Y Combinator was an early indicator of the B2B era. In 2007, consumer startups made up 80% of the YC class. After 2011, B2B startups made up the majority of the class almost every year with as much as 75% in 2016.
More venture investments: In 2019, according to PitchBook, B2B companies received $30B in funding. In comparison, that is ⅓ more than the funding to consumer technology companies. 2019 was also the first year there were more seed deals in B2B vs consumer. When we look at the 2014 / 2015 vintages, we see just as many Unicorns in the B2B sector vs the consumer sector.
Sustainable growth paths: One of the likely reasons for this switch is that unlike consumer businesses, B2B startups have lower acquisition/growth expenditures and higher win rates. The sales forces in B2B startups can be more targeted based on customer pain points and clearer user segments rather than burning through high marketing spends via Facebook, Google, etc to acquire fickle consumers.
SaaS dominating the B2B space
The new wave of SaaS has arrived and already has a number of success stories. Previously, I have shown the trends towards B2B startups over consumer startups. The following facts show why SaaS platforms are the future of the B2B space and why SaaS has become synonymous with B2B in some minds.
Technological advancements: Cloud infrastructure (e.g. AWS) along with API-driven architecture has unlocked new opportunities and easier data sharing across the entire value chain. According to Forrester, nearly 60% of US enterprises rely on cloud platforms, which is 5X what it was 5 years ago. As I have noticed first-hand in the travel industry, the initial wave of B2B companies has aged and has opened the door for new companies to capitalize on sub-optimal user experience, outdated technology, software tech debt, and poor business models.
High reward, lower risk: SaaS is no longer a small yield sector with many proven home runs like CrowdStrike, DocuSign, Okta, Shopify, Twilio, Zoom, etc. According to a Deutsche Bank report, during the last decade, the SaaS market has grown 11X in market cap value.
Rising from the ashes: B2B marketplaces
Almost 20 years ago, when the internet reached an inflection point, there was a wave of B2B marketplaces being founded and infused with capital. However, the majority of these startups failed and the concept of B2B marketplaces was put to the side. Now, a resurrection is among us as you can see in the outline below:
Big exits, big funding: In the first wave of B2B marketplaces, there were a few large exits even if sparse:
- Iron Planet: 2017 acquired by Ritchie Brothers for $777M
- Coupa: 2016 IPO at $866M post-money
- Coyote: 2015 acquired by UPS for $1.8B
- Veeva Systems: 2013 IPO at $2.2B post-money
- Ariba: 2012 acquired by SAP for $4.5B
So far, in the new wave of B2B marketplaces, there have been many startups with large rounds of funding:
- Convoy: 2019 $400M Series D at $2.75B post-money
- Faire: 2019 $150M Series D at $1B post-money
- Opendoor: 2019 $300M Series E2 at $3.8B post-money
- RigUp: 2019 $300M Series D at $1.8B post-money
- Transfix: 2018 $50M Series D at $800M post-money
- Zenefits: 2015 $513M Series C at $4.5B post-money
Large, untapped market: B2B marketplaces have very large TAMs. There are multiple sectors within the B2B marketplace arena with large GMV: A) $10B to $50B for dental supplies, beauty supplies, etc, B) $50B to $100B for airplane parts, furniture, etc, C) $100B+ for restaurant supplies, building products, trucking, etc. Amazon’s B2B marketplace now makes up 60%+ of total Amazon GMV, increasing from a share of less than 5% in 2000 and around 25% in 2010. The industries within the B2B market have remained relatively untouched in terms of digital innovation and are ripe for purchasing and supply chain transformation. Many of these industries are seeing an infusion of new executives and employees that have grown up in the new digital-first world as consumers. In comparison to 69% digital consumer spending, the Bureau of Economic Analysis estimates only 7% of B2B spending is primarily digital.
Massive scale of the internet: 20 years ago during the first wave of B2B marketplaces, there were only ~300 million internet users. This has since scaled to almost 4.6 billion internet users in 2020 introducing a seismic change in enabling B2B marketplaces.
Payments and banking infrastructure: Unlike during the first wave of B2B marketplaces, over the past decade and even the last few years we have seen the emergence of payment services like Braintree and Stripe and banking services like Plaid. These services are enabling and accelerating the creation of B2B marketplaces. Without a service like Braintree / PayPal, we would have had to spend multiple quarters building an internal service at dscout and even more time across our existence maintaining the complex, security-heavy service.
Payments as a revenue source: Not only have these payment services enabled the creation of marketplaces, but they have also created a new revenue source for these startups. At Rocketmiles, we worked through complex payment experiments to optimize pricing. This increase in revenue potential also boosts TAM for more GMV conservative verticals.
