B2B Marketplaces part 1 – why now for B2B?

in this episode, we discuss the what, why, how of b2b Marketplaces. Tune in to know more.

Nitisha:

Hi, everyone. Welcome to Matrix Moments. in this episode today we will be talking about B2B Marketplaces. We shall cover aspects around what is a B2B marketplace, why is this sector so hot, what are the different themes that we have been looking at. How does a good B2B business look like, what are the fundamentals. And we will share some portfolio learnings that we have seen across the companies that we have invested in.

And for this discussion i have Sudipto with me who has been leading B2B Marketplaces and have been tracking the sector very closely since past six years. And even at my time here i have looked at the sector and the idea was just to bring together all the learnings and share it with the viewers.

Sudipto:

Thank you so much, Nitisha. i think as a fund we’ve spent a lot of time on B2B. i remember when i joined in 2016 the first sector that i started looking was B2B and logistics. And it has been six years looking at these sectors and i think the time for B2B has truly arrived in the last 12-14 months. i think not only in terms of funding but also in terms of quality of the founders who were coming and building the business, adoption of tech and digitization across MSMEs and sort of small factories and stuff so very exciting time for india as a whole and some of that is powered by what our MSMEs are doing which is why B2B is booming.

Nitisha:

Of course. So actually since there’s so much hype around the term B2B, right, so just for the interest of viewers who are probably not acquainted with this space if you could just talk about what is a B2B marketplace, what is B2B?

Sudipto:

Sure. So B2B is business to business transaction, right. Typically most of the famous names we’ve seen in the startup world are B2C businesses which is business to consumer. if you’re shopping from Flipkart that’s a B2C company you’re buying your clothes from. if you’re ordering say food from Zomato or Swiggy you’re essentially that’s again a B2C company in the food leverage space. if you’re getting a cab from Ola that’s a B2C company in the ride hailing space. So these are all B2C companies with end customer is the consumer.

But before a consumer can consume a product or service there are multiple layers in the supply chain where a lot of business to business transactions which we cover in B2B. For example take for example the clothes that we’re wearing, right. Either we would have bought it from a brand or we would have bought it from a retail store. So the retail store to us or from the brand to us directly through the D2C channel, B2C channel is D2C commerce or B2C commerce.

But where is the brand or retailer getting the product from, they’re getting this product through a factory and in between the factory there are multiple different middlemen. So the factory to the brand or the factory to the retailer is one B2B commerce that’s happening. Now think about the factory, how is the factory producing the shirt. They’re getting obviously yarn, raw material from another mill, they’re getting machinery from someone who is providing them, they’re getting MRO packaging material who are providing them to the factory.

So the B2Bs now, the factory is now engaging in multiple B2B transactions as well. And if you continue to go downstream you will end up with either imported products or pure raw material, organic raw material, inorganic raw material getting produced and everything finally coming together to give the end customer a product. All these individual transactions in between constitute B2B and when we look at B2B Marketplaces we look across all of them which is your retailer to the end consumer, then finished good marketplace which is from factory or the farm to the brand or the retailer and then the raw material marketplace as well.

Nitisha:

Of course. That makes a lot of sense, Sudipto, that there are so many middlemen involved that there’s so much scope for disruption in each of the part of the supply chain. And probably that’s why we hear thatB2B is like 4-5 times the size of B2C market, not just in india but even globally.

Sudipto:

So just if you look at the stack, right, as an indian consumer we broadly consume say trillion dollars of goods every year. And this is like a broad estimate but we consume a $100 billion of milk and milk products. Then we consume $100 billion of fruits and vegetables. Then $70-80 billion of animal protein which is sea food, fish, eggs and sort of poultry and meat and stuff like that. Then you add another $100-120 billion of staples which is rice, wheat, paddy, soya bean. Then you add another $100 billion of FMCG which is your biscuits and chocolates and stuff like that, that’s broadly $500-550 billion.

On top of that there’s the lifestyle products of $150 billion which is your sort of apparel, footwear, accessories, watches, and another $150 billion of electronics which is smart phones, TVs, appliances and then pharma and then home décor. And if you do that there’s a trillion dollar stack of what the indian consumer consumes.

Now behind this trillion dollar stack that is $1.5-2 trillion of B2B transactions that’s empowering the trillion dollar stack. And from 2005-06 to 2017-18 all the innovation that the country saw was in the end consumer stack, why, because the end customers obviously got digitized first, they’ve the propensity to pay more, which is where all the companies that were created were catering to B2C. As the B2C customer got digitized slowly the B2B supply chains also started getting digitized. And although in B2C and we’ll discuss some of it you generally have large horizontal Marketplaces.

in B2B you can have multiple vertical Marketplaces. So here we’re seeing $2 trillion of B2B transactions happening with multiple different cuts where there could be a lot of Marketplaces created which is why the sector is so interesting now.

Nitisha:

Of course. With so many models and like in the podcast we’ll talk about how do we think of those models. But even before that, Sudipto, one thing that i really wanted to understand was that record funding has gone into the sector in the last 1-2 years and we have seen multiple unicorns come up. Our own portfolio OfBusiness or even Zetwerk, right, multiple companies that have come up. And even at Matrix we have doubled down in this particular sector in terms of our investments.

So because you were explaining business to retail, you have taken multiple bets like Captain Fresh, VeGrow, FarMart, Saveo, Bijnis, right, there are so many bets that we’ve taken and even in the cross border there are bunch of them which are in stealth right now but why so much of this focus on this sector, now, right, what is the why now of this space. We talk about Covid but how much of it is sustainable. So what do you think are the different factors and out of them which are the ones which you think are there to stick?

Sudipto:

So we discussed the trillion dollar of indian consumer spend, that’s huge, like a trillion dollar of consumption spend is very rare across different geographies which is why india as a startup hub is very exciting and promising. And that trillion dollars is obviously growing rapidly as india’s GDP continues to scale. Now the backbone of india what has always been MSMEs it could be your end retailers of the kirana stores and india has anywhere between 40-60 million kirana stores empowering this trillion dollar of retail. Or these are millions and millions of farmers who work in agri and who help in producing all the agri commodities we consume. Or there are hundreds and thousands of MSMEs or small factories which are actually producing and manufacturing goods either for domestic consumption or for exports.

Now if you look at how technology evolution has happened in the country in the initial period obviously the end customer started using products, tech products for their own used cases. it generally starts with entertainment use case, then you have e commerce and sort of then different other products start coming. Now what has changed in the last 5-6 years, if you look at the MSME the multiple different things that have happened to them they used to be in a very informal economy where they used to do transactions with people they already knew and they used to do most of those transactions in cash.

Now in the last 4-5 years what has happened first there was GST, because of that a lot of SMEs had to formalize themselves to take GST input credit. Second there was demonitization and UPi that happened together which meant a lot of cash transactions that they were doing now actually ended up becoming digital payments that they started to do. Then, third, JiO happened. Now A, they were part of the formal economy, they started doing online transactions and now they’ve access to cheap internet. And, fourth, Covid happened.

The middlemen that they were used to actually working on a daily basis because of Covid unfortunately could not do face to face sort of transactions and meetings. So combined because of these four, five shops in the last sort of five, six years the indian MSME changed. Now they had technology and the smart phone, they had cheap data, they had become part of the formal economy because of GST and they were comfortable now transacting on online Marketplaces and trusting sort of online tech enabled Marketplaces which was never possible 4-5 years back.

For example in 2016-17 when i had just joined Matrix and when i used to go on the ground meet these factories, do diligence for Startups you enter a factory and there was no technology, there was this one desktop and because we as investors used to go then the owner of the factory would say go call this particular guy who knows computer science and that guy will come and open the desktop and show dekho hum itna saara tech use karte hai Now i’m sure and you should also share with people but now when we go and do diligence on the run, right, you go to a factory everybody is on their smart phones, they’re scanning barcodes. They’re uploading documents directly, they’re taking orders real time.

Nitisha:

Yeah.

Sudipto:

So on the ground things have changed, it’s not only startup environment and funding on the ground factories have actually adopted tech. On the ground farmers have actually adopted tech and that is seeing so much of disruption in this space.

Nitisha:

No, i mean i completely agree, right, and as we also discussed earlier that there was this one company and i had to do diligence and i visited some factories. So even i’m seeing the change in the two years only. Earlier it used to be us going and asking how are you liking this product and then telling that, okay, we’ll probably use or maybe not. Right, this time it was right opposite, like the factory owners sat me down for an hour and said that this product is good, like we’re already using this but can you also give me these other 4-5 things. Don’t you meet companies which are also probably doing something on this end.

So not just they have payment intent but even the type of products that they want more than a push rather now there’s a pull from the factory. Can you please help us with these x, y, z things also, we’re ready to pay, we’re ready to experiment and we’re already there. My son with me who can teach me all those things, the second generation come in which are ready to take up all of this. And even in terms of Covid i think some of it is already even reflecting in the numbers, right, in December ’21 india recorded its highest ever exports and most of it was coming from MSMEs.

So i completely agree with you that even the Covid tailwinds or the globalization part, the formalization part that’s very much true and it’s there to stay.

Sudipto:

That’s a veryinteresting point you touched. So first we discussed about the indian economy and digitization of indian SMEs right, and now it’s clear that there are so many SMEs they’re using technology, they’re ready to be part of the formal economy and they’re trusting online Marketplaces. Add on top of that what’s happening globally, geo politically. Every major economy is looking at China plus 1 strategy post Covid. And China has been for the longest period of time the manufacturing hub for the entire world.

Now you’re looking for countries which can do manufacturing well, has cheap sort of cost of labor and resources abundant, right, and india becomes a hotspot, that’s one. Second, we’re in the middle of the Ukraine Russia conflict, add that on top and every country is realizing that they need to diversify their supply chain. So there’s a broader realignment of supply chain that’s happening and india because of her ability to sort of now manufacture well our raw materials, Startups sort of coming, digitization, tech, push from the government is at the center of that.

So not only are we digitizing existing supply chains actually the production for the country is significantly ramping up. And you have this increased amount of demand that the world wants from india and where lot of new innovative companies are coming and saying we will get this demand done from india, we will create this layer of trust and quality and there are enough number of indian MSMEs which are actually hungry to go and do it.

For example you should look at the stock prices of all the specialty chemical companies. They have been booming over the last 2-3 years. if you go in the chemical industry you’ll realize that people are actually now putting up factories with excess capacity anticipating the demand will increase. So indian MSMEs have also become smarter, they’re sort of setting up capacity ahead of time. How do you fulfill this capacity, you need new sources and new channels for it which is where all the B2B market is actually coming to the picture.

Nitisha:

That’s very fair and even in all our conversations with the global sourcing heads of all the companies they have all been talking about de-risking their supply chains, increasing their sourcing destinations and like if the share has to move from China then as you said like india because of all the advantages that india has it’s a perfect land grabbing opportunity some of which is already reflecting in our manufacturing numbers and the like $400 billion exports that the country is supposed to lock this year.

Nitisha:

One thing, Sudipto, we’ve talked about all the value that the marketplace has to add, right, but the one thing that probably in general is not focused a lot when it comes to B2B is tech, so probably the online penetration or the digital penetration in B2B business in india is .5-1 percent, far less than what it is in US probably around 13 percent.

Still we have seen large businesses getting created and even the companies which are unicorns or $5 billion, $7 billion whatever, right, even that use of tech in today’s time after they have become so big is not as much.

So as investors generally if it’s any other sector we’re over indexed on what’s the tech, what’s the network effect rate, how does it grow exponentially. When it comes to B2B if we answer that tech is not as important, i mean you can build it later initially it’s all about getting the transaction done and getting the ops right or is there really a role of tech which in today’s world is getting under indexed, right. So what do you think is going to be the eventual role of tech because as of now it hasn’t been highlighted a lot in the investor conversations or the founder conversations be it whatsoever.

Sudipto:

All of this is happening because of tech, there’s a why now to it and the beginning of the why now was formalization of the economy and adoption of tech. Without tech you cannot scale, you cannot be nonlinear and i’ll cover a little bit of it. Now are these tech businesses, no, these are tech enabled businesses. Ola, Swiggy, Flipkart are also tech enabled businesses. You have a technology or an app on the customer facing side on which through which the customers actually order but everything that’s happened is the operation from the ground. These are all full stack businesses, right, full stack businesses will always be operations heavy but because of tech you can actually scale full stack businesses and do them well.

Now let’s see where does tech come, right. The first thing is obviously people think tech is ordering and what do you order on, for me tech is what enables you to scale. in B2B companies typically if you see in india there have been a lot of 1000 crore, 2000 crore B2B companies, nobody has been able to scale. Why are you not able to scale, you’re not able to scale is because if you want to scale beyond a certain point in time what all you need to do. You need to aggregate supply, you need to monitor quality inventory of level in that supply. You need technology to do QC, you need technology to keep order management. Then you want to transport that product from point A to point B. You can manage 20-30 trucks in Excel, you cannot manage 400 trucks a day on Excel, you need technology to figure out where logistics is happening.

Third, you will always give products to somebody, you need to figure out what does the customer want which is demand prediction, figuring out what is the right product and recommend the right product. There is tech in that. Then in B2B whatever you do there is an element of collections because once you have provided the product you need to collect the money back, underwriting collections is tech driven. So each part of the supply chain is actually orchestrated through tech and without tech it would not have been possible. For example in our portfolio VeGrow and Captain Fresh at the core are perishable supply chains, in perishable supply chains you need to do two things very well. One, you procure at scale but more importantly you do QC and you grade that supply.

Once you’ve graded that supply then you can do match making, gradation of supply is pure technology and without tech you could not do it which is why VeGrow and Captain Fresh five years back would have been very difficult to build. if you look at FarMart, FarMart is in the business of procuring from the farmers without procuring from the farmer which is done through their SaaS tool. You take that SaaS tool out of the picture FarMart could never have been created and $0-100 million profitability in a year would have never been created.

You take Bijnis, Bijnis is in the business of A, digitizing the factory but more importantly mapping what a factory needs with the right retailers. Now to understand what does the retailer in a small part of the country want and then showing that right product from a catalogue of hundreds of SKUs and thousands of SKUs is actually tech. OfBusinesses is heavily focused on underwriting credits, it’s transactions but on top of that also providing credit on top of it. This level of credit underwriting could have never been possible without data and using technology to underwrite using that data.

So when we invest in a company the simple rule of thumb that i see is if i leave my job today and go try to build it tomorrow will i be able to build it. if the answer is yes then there’s no reason to invest. Most of the companies we’re invested are founders with ten thousand hours in the space with unique insights about that space that nobody else had who’re ready to get their hands dirty and were using technology. Not in the traditional sense of creating an app through which you order but using tech to orchestrate the supply chain and solve for pain points which offline businesses have not been able to solve yet. And because they were using tech and people were adopting tech they were able to do it and create their models

Nitisha:

Sudipto, just a sub part to it, right, like so there are two kinds of models that we’ve seen emerging especially if we talk about the seed stage companies, right, wherein the model is still emerging, seed or series. There are a couple of companies which are product first which start with a tech product and once people are sticky on that platform then they start the trade process. And then there are second kind of companies where probably 99 percent of the focus of both the founders and investors have been, wherein you start doing the transactions in an offline way and once you have enough going then you build tech enablement around it as you rightly said.

So by far the focus has always been in the second bucket, right, do you think the time for the first bucket is here and now, what do you feel about it?

Sudipto:

So it will always depend on the supply chain that we’re building for, if it is towards the retailer a retailer almost behaves like the end customer. So if it’s closer to the retailer then tech from day 1 is very easy. However the further you go deeper into the supply chain, right, on day 1 asking somebody to order from an app or using technology is very difficult. And there probably you will start more offline and then go on. So on day 1 you don’t need to have technology, you can do things on Excel till you get to a particular scale.

But the large company happens because there’s something that tech is doing that the offline world can’t do which is critical. And knowing that beforehand is very important and any supply chain you want to scale, finally scaling a supply chain is a working capital credit management company and a QC logistics management company. And for doing both of these two things properly you will need technology. But how you start is a function of where you’re starting the founder background and we’re very open across all of that which you’ve seen.

Nitisha:

Yeah.

Sudipto:

The end state you need tech, you don’t need tech on day 1 which we’re fairly cognizant of.

Nitisha:

Which is fair.

Sudipto:

We’re not investing in a company because it has better user experience.

Nitisha:

Exactly.

Sudipto:

So it is not user experience, it’s technology that is enabling scale, it has nothing to do with how fancy the user experience is. Actually in B2B the less fancy, the more simple the user experience is the better it is because the end customer wants functionality. They don’t care about what’s the color and the buttons.

Nitisha:

Fair. Now we just hear people like even in my discussions they keep on mentioning probably in B2B you do not even need tech and that’s what we’ve seen in companies. So it was very important to put it that you know, maybe starting with you do not but ultimately if it’s not tech enabled you can just not become big. Just the last question on this theme that we wanted to cover was and you actually briefly touched upon it around the founder archetype.

i think it has been very interesting that in the past one year whenever my colleagues from like say i mean past colleagues from consulting or like fellow friends from VC or the traditional industry they call and they’re like what are the white spaces in B2B and i’m like just a second, right, i mean this is not very normal, this is not the most sexy sector to build in. So how are you seeing the archetype of founders which are starting up in this space changing? i mean do you think people are just trying to startup here because they see that there’s a lot of funding if you just capture a white space toh seed toh mil hi jayega because that are the kind of answers that we hear.

So what do you think the change has been and given the change what are the kind of archetypes that you’re bullish on?

Sudipto:

So first i think it’s good that you’re getting those calls which means the sector has come of age.

And i genuinely believe and Avnish keeps on saying digital nation building, for the country to truly progress we need MSMEs and B2Bs and farmers the backbone of the country to progress. They need to become more profitable and they need to scale faster, they need to cater both domestic and international demand. So B2B doing well is core to the country doing well, so it’s really great that because of few sort of amazing founders who’ve built phenomenal businesses in this space there has been a lot of capital that has come which has created this vicious cycle where people want to build in B2B. So which is a great place to be, right.

Now B2B is not an easy business to build, it is not a fancy business to build, you have to spend a lot of time in the farms and in the factories and solving supply chain problems. So the only point that we keep in mind when we’re investing is does the person have enough exposure to that space. it doesn’t matter what background, which company that they’ve worked with. if you see our B2B portfolio we have --

Nitisha:

it has a mix of everything.

Sudipto:

it is a mix of everything, all different pedigrees but generally the people that we’ve invested in have spent some time in that domain. Like Sid and Chetan of Bijnis unke papa ki factory thi in this space, they had sort of internalized the problem. Captain Fresh before this Utham was with Nekkanti one of india’s largest sea food exporters. FarMart --

Nitisha:

They’ve been doing it since 5-6 years.

Sudipto:

They have been doing this for 5-6 years, their family background in farming and lending and collection. if you look at VeGrow you have Shobhit and Praneet who have years of experience in through iTC and both of them have seen this space. So we generally have looked upon founders, doesn’t matter what the background or pedigree is but are you truly passionate about this space, haveyou spent enough number of years to understand their problem and are willing to give the next ten years when things won’t be that easy. That’s the archetype, beyond that we’re respectful of founders across all backgrounds, pedigree really does not matter, what matters is your domain experience, having spent 10,000 hours in the space and your willingness to grind it out for the next 5-10 years when things are not that happening for B2B the way it is today but still building a long lasting enduring legacy company.

Nitisha:

Which is completely fair. And that actually probably helps the viewers and the potential founders who are looking to start up that it’s not the easiest space to build in, right, not something that you create a product, you launch it and then you see how it has been performing. That you really need to spend hours and months to understand what this space is, go on the field and then build something around it.

Sudipto:

And it’s not like in B2C you can AB test with a million customers and get to a result. in farming once cycle is essentially six months so you can’t AB test in a minute. So you need to have a lot more patience in B2B and know the lay of the land.

Nitisha:

And i think even in the customer persona, right, in other sectors people are free to experiment, say, if it’s Edtech like i’ll try an app and i’ll be like okay, is it good or not. So it’s okay for the customers to experiment. in a B2B for like a 100 crore company i can’t ask them that can you please give 5 percent of procurement to me a new player who doesn’t know anything about this space. So the trust and the magnitude actually of trust that you’re reposing on the platform is too important for someone to just give it a try out.

So that helps.