B2B marketplaces: the next wave
Published:
Jun 02, 2023
Authors:
Samantha Wulfson
Carlos Alonso Torras
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For two years B2B marketplaces were on a tear – a constant topic of conversation and TechCrunch announcements, raising a combined $1b+ in funding throughout 2021 and 2022. The current market environment has put a damper on this unbridled enthusiasm, but there is still an enormous opportunity to combine tech, financial services, and trade to enable supply chains to operate more efficiently. There is now a clear line between those companies who can scale at a reasonable cost while maintaining strong, sustainable financials, and those who cannot.
In 2022 we invested in Sabi, a Nigerian B2B marketplace that has proven to be among the outliers. Even at the time of our Series A investment, they had already reached breakout scale to challenge near decade-old competitors within just the first fifteen months of operations. Since then, the company has maintained a laser focus on unit economics while building its digital commerce infrastructure for the informal economy, reaching more than $1b in GMV – the first on the continent to hit this milestone. All of these factors contributed to the success of the recently announced Series B raise.
Marketplace primitives
Rewind to 1999. Among the first and fastest movers was, of course, Alibaba. The first iteration of marketplaces made immediate waves by bringing offline transactions online for the first time. Newfound product optionality, information transparency, and fulfillment certainty created an immediate appeal.
Only after Alibaba had raised $9.8b in private capital, followed by a $21.8b IPO in 2014 did similar models begin to proliferate in earnest. Udaan was founded in India in 2016 and reached unicorn status in 2018, just two years post-incorporation and one year post-launch. The company achieved this milestone on the back of $286m in total capital raised, and has since scaled to $1.54b in total capital raised to date and is valued at >$3b.
Fragmented and competitive industries ranging from consumer goods, to agriculture, to construction were ripe for disruption, and verticalized solutions for trade created digital procurement networks through which all supply chain participants could benefit. Demand-side counterparties unlocked access to a wider array of SKUs at more competitive prices. Suppliers enjoyed a one-stop platform to expand sales across diverse regions and customer bases.
This was just the beginning.
Emerging market applications
Africa and Latin America have also proven to be particularly attractive stomping grounds for B2B marketplace innovation, where the overwhelming majority of transactions are informal and offline, occurring across fragmented retail landscapes among stakeholders with no access to traditional providers of credit. These pain points are often ubiquitous across countries.
As such, B2B marketplace models have proliferated throughout industries ranging from FMCG (Sabi in sub-Saharan Africa; Chiper in Colombia) to food and beverage (Twiga in Kenya; MaxAB in Egypt; Clubbi in Brazil) to construction (Tul in Colombia, Oico in Brazil), to restaurants (Vendease in Nigeria, Frubana in Colombia),
Figure 1: B2B marketplace landscape - emerging markets
In many of these regions and industries, the market opportunity is so large that a winner-take-all dynamic is not a significant risk. For example, the informal economy in Africa amounts to more than $800b in contribution to total GDP. In Nigeria alone, the informal economy accounts for $240b of the $440b GDP. Meanwhile, two-thirds of Africa’s >$1.4t retail spend is on FMCG goods, which dominate nearly all of Africans’ household expenses. Wasoko and Twiga were both founded in 2013, and TradeDepot was founded only two years later. As the first generation of B2B marketplace players has begun to attract international attention in recent years, a second generation emerged concurrently.
These business models often see promising early traction with immediate improvements to tech-enabled user experiences and product procurement. The resulting efficiency gains are sufficient to capture low hanging fruit across these markets, but much remains to be built to create a sustainable business at scale.
An expanding scope
The marketplaces’ core value proposition has endured, working to remove operational friction and reduce indirect sales. Taking a step further, value add services such as ERP systems encompassing inventory management, digital invoicing, and CRM created the launching point to facilitate granular, recurring data collection on marketplace participants and their transactions.
Those marketplaces that have succeeded in embedding themselves within the customer workflow have become the best positioned to assess customer risk profiles via software engagement, transaction volumes, and selling and purchasing habits. Data in hand, B2B marketplaces have begun to complete the flywheel of goods, data, and finally, capital. Enter financial services.
Financial services – most often in the form of credit, payments, and insurance – create a stickier user base, further expand AOVs, and catalyze uptake of digital payments. B2B marketplaces are uniquely positioned to accurately and cost-effectively underwrite risk for capital-constrained merchants, in turn increasing retailers’ purchasing power, sales potential, and overall profitability. Especially among the otherwise low margin industries, embedded finance offers a compelling opportunity for take-rate expansion.
The path forward
Despite the outsized growth of numerous B2B marketplaces around the world, a few questions still linger. Many businesses sell the story of disintermediating value chains, through which take-rates can expand (at times only 1-2% in highly competitive, fragmented industries) once the platform reaches a critical mass of transaction volume. Absent monopolies, there is no concrete example that supports this belief. If strong unit economics do not necessarily come with scale, then what is the alternative to disintermediation?
One secret lies in focusing further up the value chain, with the players who can provide higher AOVs, further geographic diversification, and fewer last-mile logistical complexities. Wholesalers and distributors participate from the traditional value chain, as well as agents within the reseller flow - all of whom are otherwise known as the primary targets for disintermediation.
Beyond the customer segment, we see winning models shifting the narrative from a marketplace to an enablement play. One of the best ways to add value in traditionally offline markets is by directing the coordination and optimization of the value chain. This doesn’t involve cutting out or competing with the middlemen, but rather working with them to improve every aspect of their operations.
Throughout all of these structural and strategic adjustments, the importance of financial services as a core pillar of the business model endures. Those marketplaces that realize their roadmap to layer in financial services stand to benefit immensely. A large and persistent credit gap and lack of widespread digital payments infrastructure throughout emerging markets create the prime conditions to not only act as a procurement platform, but also to become the primary financial partner for informal supply chains.
While credit solutions including trade and inventory financing, invoice factoring, and BNPL are often among the first embedded finance applications to emerge, local and cross-border payments, forex, digital wallets, and insurance are all logical follow-ons. In cross-selling these financial solutions as value add services, marketplaces can benefit from diversifying revenue streams and expanding margins, and as a result, improving multiples.
As top players in the space continue to scale, exit opportunities are a persistent consideration. Aside from an IPO once markets reopen, M&A is an actionable route from several angles. Potential acquirers include global ecommerce companies eager to build an African footprint (e.g. Amazon), incumbents operating within an aligned product vertical (e.g. Walmart), payments and lending companies working to expand their business customer base, and potential consortium models hoping to gain data and control over fragmented industries.
Approaching the opportunity set from any of these vantage points, one common thread stands out: precedents such as Stripe’s acquisition of Paystack, BioNTech’s acquisition of Instadeep, and WorldRemit’s acquisition of Sendwave reinforce the preference of foreign companies to create a footprint on the continent via acquisition rather than attempting to navigate the complex local operating environments to build from scratch.
Africa is on its way to becoming home to a quarter of the world’s population by 2050, and the strategic importance of the continent is only just beginning to heat up.