The rise of B2C ecommerce is well documented. But there’s a still greater opportunity to bring B2B commerce online. B2B ecommerce is reportedly worth $12tn globally, having overtaken B2C in terms of volume in 2019 – but we remain in the early stages of its move online, and are yet to achieve the promise of seamless B2B ecommerce at scale.
As B2B marketplaces have evolved, many variants have emerged – from broad offerings offered by incumbents such as Amazon and Alibaba, to increasingly specialised offerings such as Faire and SaaS-enabled marketplaces like cargo.one. As investors, we are particularly excited about this new wave of companies and the opportunity to increase the penetration of technology in underserved industries.
A market in motion
We’ve been students of B2B commerce for many years going back to early investments in Etsy and Alibaba, in pre-Mosaic days. B2B buyers’ preferences and habits have evolved from bilateral offline relationships (pre-1990) to legacy shop platforms (~1990 onwards), and finally bringing indirect spend online through supplier networks and procurement automation solutions (~2005 onwards). Meanwhile, consumer habits have shifted from purchasing national brands at big box stores to purchasing through online marketplaces. In the B2C world, these marketplaces can be managed like offerings from Amazon and Walmart, or fully open like eBay / Alibaba. We believe the next frontier of B2B purchasing is undoubtedly the open online marketplace due to the stronger network effects on both the supply and demand side, the benefit of increased selection and larger gross merchandise value (GMV) volumes for sellers.
Two main strategies exist for B2B purchasing platforms: closed or open. Centralisation and digitisation of processes is a feature of marketplace platforms – but our view is that Open Bazaars have many advantages over the closed format. For emerging B2B marketplaces, the goal is to own the buyer workflow while maintaining a high degree of openness – hence maximising take rate as well as the size of the pie.
*Past/present Mosaic team investments, ~1/5th of Etsy’s business is B2B
Why now?
On the demand side, this digitisation of B2B commerce is driven by demographics. Millennials account for 73% of all B2B purchasing decisions, but the market hasn’t kept pace with their expectations. Digital native users are poised to influence and “consumerise” B2B buying the same way they’ve been influencing other tech markets in the past few years. Platforms that emulate modern consumer shopping experiences will win. Additionally, supply chains are strained, with pressures ranging from geopolitical forces to raw good shortages to labour market tightness.
Even so, latent demand and potential don’t necessarily translate into instant adoption. From our discussions with founders who “live and breathe” B2B commerce, there are three main challenges that marketplaces can help to overcome:
Aggregation of supply: more and better
Big-box retailers and dominant B2C eCommerce platforms offer enough selection to give consumers confidence that they’re making an informed buying decision. This is rarely the case for B2B purchasing teams. Few sellers capture enough of their market’s products to provide this level of comfort to B2B buyers. Supply is often split up between a very fragmented seller landscape.
While a consumer shopping in store or online can reasonably expect the price they’re paying to be comparable at every retailer, B2B buyers don’t always have the same experience. Goods and services sold B2B (especially commoditised items) are quoted on a one-off basis. Buyers have limited visibility on availability without contacting suppliers directly. Prices and volumes aren’t visible in real time, creating friction for both buyer and seller. Other considerations like delivery timing, shipping costs, insurance, and trade credit terms are often afterthoughts for consumers but are negotiated bilaterally between businesses when there isn’t a platform to standardise trade.
Lastly, the mechanisms that create trust online in the consumer world (e.g. Trustpilot, user reviews) aren’t as pervasive in B2B with little data on counterparties pre-transaction. Aggregation of supply is the solution to all these problems: with a critical mass of transactions, ratings and reviews can be introduced to enable trust.
Meeting users’ needs: from discovery to workflow to finance
Behavioural inertia can be one of the biggest barriers to technology penetration in B2B purchasing. In categories that have been slow to move online, it can be difficult to catalyse adoption on both the sell side and buy side. To overcome user inertia, B2B marketplaces need to offer more than a “re-skin“ of the product catalogs / forms available online today. To realise the potential of online commerce, B2B buyers must move beyond product discovery and platforms must handle transactions end-to-end.
Businesses that sell B2B, especially SMEs, are vulnerable to delayed payments and working capital swings. Marketplaces that solve these challenges are positioned to delight B2B buyers and sellers: SaaS that solves a painful workflow becomes a great insertion point into the transaction flow. The best B2B marketplaces should improve productivity through workflow software while also smoothing cashflows through trade financing. An example of a B2B marketplace successfully incorporating financing is France’s Ankorstore, whose single checkout and flexible payment terms (powered by our portfolio company Hokodo) enable small businesses to source goods from multiple suppliers without multiplying complexity and working capital requirements.
On the buyer’s side, lower friction naturally makes purchasing more accessible. Lowering the bar for a B2B transaction also increases the total GMV a marketplace will process - a win-win scenario and an example of network effects in the wild.
Specialising by category: not one size fits all
Goods purchased by businesses are less standardised than those sold to consumers and more complex. Handling this complexity and heterogeneity is challenging for commerce platforms. For example, it’s tricky to build a platform to sell both tractors and pencils. Tractors can be customised and require specialised transportation while pencils can be sent via any parcel service with no other SKUs tacked on.
The specificity of B2B goods reflects the diversity of B2B buyers - with specialisation also likely for the marketplaces that serve these customers. Xometry for example, a B2B marketplace for manufacturing capacity, enables users to create custom parts from a list of pre-determined processes from a large base of contract manufacturers. With the workflow fully contained in their software, they’ve streamlined the mapping of requirements and vendor qualification – enabling companies to scale up manufacturing from prototype to mass production. By contrast, the commodities traded on Farmer’s Business Network call for advisory services to manage market complexity. Value-adding services vary by category: there isn’t a “one size fits all” model.
What comes next?
While the transition from offline to online will be gradual, a significant proportion of B2B commerce moving online in the next decade is inevitable. The benefits in terms of selection, information and transparency are hard to ignore. Amazon aside, it’s also more likely that there could be many specialised B2B marketplaces as opposed to a single dominant marketplace due to the idiosyncrasies of B2B commerce.
Will every B2B purchasing vertical be served by a specialist marketplace? We don’t know for sure but we believe that is unlikely; many industries are either highly resistant to change or have too few participants to be truly open marketplaces. Nevertheless, the changes underway are driven by users being accustomed to better experiences. The platforms who accomplish this and do the most to improve their user’s daily tasks are best positioned to win.
If you’re building a B2B marketplace business, or software solution enabling B2B commerce we’d love to hear from you!
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