The $100 Trillion Opportunity in Marketplaces
Examining B2B Marketplaces
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The $100 Trillion Opportunity in Marketplaces
Last week, I wrote about how mobile and cloud have been the two major technology tailwinds of the past decade. I argued that much of the hype (and ensuing venture capital investment) in new technologies and vaunted ‘platform shifts’ today—virtual reality, augmented reality, web3, and so on—derives from anxiety around mobile and cloud being…old. AWS launched in 2006; the iPhone came out in 2007. Neither mobile nor cloud are saturated, but they aren’t as ripe for greenfield opportunity as they once were.
Yet there are still massive markets relatively untouched by mobile and cloud. When we think of marketplaces, we tend to think of business-to-consumer (BTC) marketplaces. Uber and Airbnb. Amazon and Ebay. In recent years there have been fewer breakthrough startups in consumer marketplaces (the category is more saturated than it was in its heyday), but most of the innovation in marketplaces over the past 25 years has been consumer-facing.
This isn’t a surprise; the painpoints addressed by consumer marketplaces are widespread and easy to understand. It makes sense that entrepreneurs would address them first. Less obvious, though, are the painpoints in business-to-business (B2B) commerce. But B2B is an even bigger prize: an estimated $100 trillion flows between businesses each year, a 4-5x multiple of transaction volume between businesses and consumers.
B2B marketplaces are a massive opportunity. Only about 5-10% of B2B transactions happen online and—in the year 2022!—about 50% of transactions are still done over the phone, over fax, or via in-person meetings with sales reps. The entire B2B ecosystem is inefficient, opaque, and convoluted.
One of the most successful B2B marketplaces is Faire, which also happens to be where my partner Ian works. Faire serves end markets that should be familiar to everyone, and its business model offers good lessons for emerging startups. As a result, we can use Faire as a case study for B2B marketplaces more broadly.
Faire is a wholesale marketplace for independent retailers and brands. But what does that mean in layman’s terms? At its simplest, you can think of Faire as the business-to-business version of Etsy. Faire connects physical retailers—think: that cute mom-and-pop shop on Main Street—with brands that they can sell in their stores.
At Index, we’re investors in Ankorstore, which operates a similar business model across Europe. If you think of the cute boutiques you pop into while in Paris, many likely source products through Ankorstore’s marketplace. (You can read more about Ankorstore, which is Paris-based, from my partner Martin here.)
For the purposes of this example, I’ll focus mainly on Faire, since most readers are based in the U.S. and since I’ve had a front-row seat to Ian’s experience scaling the business.
Every year, U.S. consumers spend about $3.5 trillion buying stuff. Independent retailers (small businesses with only a handful of employees and often just a single location) make up $750 billion of that spend, or about 25%. We’re all familiar with the narrative that Amazon is eroding local retail, but that narrative is actually false: while midsize and large chain stores are reeling (Sears, Macy’s, JCPenney, and so on), local retail is thriving. As one datapoint, the number of independent bookstores in the U.S. increased 49% from 1,600 bookstores in 2009 to 2,500 in 2018.
Part of Faire’s mission is to leverage technology and data to better equip independent retailers in the fight against Amazon. Consumers still want to shop local; retailers and brands just need the tools to compete on an equal playing field.
To understand what Faire does, let’s take an example of a real-life Faire retailer.
This is Giselle Gyalzen, the owner of a boutique gift shop in San Francisco called Rare Device.
Giselle has been running Rare Device since 2011 and focuses on selling products made by women and people of color. Giselle is an actual retailer on Faire (I found her via Faire’s blog), but the example here is largely hypothetical. The goal is to explain how Faire works.
In the past, Giselle would need to go to an in-person trade show to find products to sell in her store. An average trade show has 500 exhibits and 10,000 attendees. Discovering new products is cumbersome, and it can cost $10,000 or more to attend.
With Faire, though, Giselle can sign up as a retailer and discover brands through the online marketplace:
Giselle can filter by specific brand characteristics—here, for instance, she can specifically browse products that aren’t sold on Amazon:
Let’s look at three reasons Faire’s marketplace is so successful, which double as three learnings for other B2B marketplaces.
High fragmentation on both sides of the marketplace
Both the demand-side (retailers) and supply-side (brands) of Faire’s marketplace are highly-fragmented. This makes the marketplace a crucial intermediary, and reduces the risk of disintermediation (a retailer and a brand taking their relationship off the marketplace).
As a general rule, the more fragmented the market, the better the opportunity for a B2B marketplace. Aerospace parts, for instance, may be a large market—but if Boeing and Airbus only have a handful of relationships with suppliers, the marketplace provides little value to justify its take-rate. Boeing and Airbus might prefer negotiating deals with suppliers directly, forgoing the marketplace altogether.
Discovery is mission-critical and data-driven
Related to fragmentation is the fact that discovery is core to doing business as an independent retailer. Retailers need to be constantly on the lookout for new brands that might boost sales; brands, meanwhile, need to be discoverable by retailers.
An online marketplace like Faire has a compelling advantage over the offline alternative: data. Faire can tell a gift shop in Milwaukee, “Hey, this other gift shop in New Orleans is a lot like you, and they had luck selling Emily’s Candles. You should give Emily’s Candles a try.” Faire amasses an enormous dataset from its 600,000 retailers and 85,000 brands in 15,000 cities, then wields that dataset to equip boutiques with personalized recommendations and insights that help them compete with Amazon. Ankorstore does something similar with its 200,000 retailers and 15,000 brands across Europe.
Discovery isn’t so central in every B2B marketplace (Faire and Ankorstore have some elements of consumer marketplaces in how fragmented both sides are), but there is typically some element of discovery. Bringing relationships online reduces friction to linking up with counterparties on the other side of the aisle. This dovetails with networks effects—more on that later.
Bringing existing relationships online
Most of the retailers in Faire’s network already had existing relationships with brands, and vice versa. Faire allows retailers and brands to bring these relationships online, with heavy incentives to do so.
One of the key pieces of Faire is its growth loop. Faire is built on referrals. Here’s a graphic from Anu Hariharan at YC Continuity that captures it well:
Incentives go beyond the benefits in this graphic, and are also financial:
Say that Giselle, the retailer behind Rare Device, already works with a dozen brands. For every brand that Giselle refers to Faire, she gets a shopping credit. Faire also won’t take a commission on that brand-retailer relationship. Ankorstore has a similar viral loop with its European brands and retailers, which are encouraged to invite one another onto the marketplace. The platform is designed so that everyone wins. Brands want all their retailers on the marketplace, because they benefit from managing their entire business all in one place. Retailers benefit because they get access to free returns, net-60 payment terms, and better shipping rates (more on that below). Incentives turn the flywheel faster.
The elegance of marketplace businesses is in how network effects kick in: as more retailers and brands join the platform, the marketplace becomes more valuable to both sides.
Bonus: Financial Services
There’s a saying in tech that’s caught on the past few years—“Every company is a fintech.” And there are elements of truth to it, particularly in B2B marketplaces.
Embedding payments into the marketplace removes a huge painpoint while also preventing disintermediation. Faire goes a step further by offering net-60 payment terms. In short, Faire will give retailers 60 days to repay purchases from brands, which improves working capital and reduces risk. If a retailer can’t sell a brand, it can simply return product. In a pre-Faire world, retailers limited new products to 20-30% of total inventory, worried about inventory risk. Faire removes that risk and allows retailers to experiment with new brands in a data-driven, risk-free way.
Building in financial services is also a playbook in vertical software, which shares many commonalities with B2B marketplaces. At Index, we’ve invested in a wide range of vertical SaaS companies—
ServiceTitan for home services (plumbers, electricians, etc.)
Shopmonkey for mechanics
Boulevard for salons and spas
Seso for agriculture
Built for construction
Tekion for auto dealerships
Best-in-class vertical SaaS companies tend to integrate payments over time 1) to lock in customers, and 2) to better monetize transaction volume. Check out this piece from my partners Nina and Paris for more detail.
B2B marketplaces often resemble vertical SaaS. Faire, for instance, offers brands tools like invoice management and a CRM through which they can run their businesses. Brands are checking Faire daily to fulfill orders, while retailers are likely returning multiple times a week to replenish inventory and discover new brands. This behavior is similar to what we see in vertical SaaS companies like Boulevard, which helps hair salons manage appointments and payments, or ServiceTitan, which is the one-stop-shop for home services professionals (electricians, plumbers) to run their businesses.
The Rise of Vertical B2B Marketplaces
Over the past few years, we’ve seen more and more B2B marketplaces emerge. Given how specialized and complex different sectors are, B2B marketplaces tend to be vertical in nature—tailored specifically to the painpoints in a single (yet often deceptively-large) market.
Mable, for instance, extends the Faire model to independent grocery—a $250B segment of the grocery market in which inventory orders are still 90% done by phone and email.
Odeko, meanwhile, is a B2B marketplace for coffee shops. Cafes can order coffee beans, milk, paper products, and everything else they need from suppliers. Choco, based in Berlin, is another food-related B2B marketplace and serves restaurants. Frubana, meanwhile, also serves restaurants but focuses on Latin America. As the name suggests, the business started with fruits and vegetables; Frubana’s founder is the son of a mango, lime, and papaya farmer. (This is a common theme in both B2B marketplaces and vertical SaaS: an entrepreneur who has directly experienced or witnessed the painpoints and intricacies of that industry.)
One B2B marketplace that we recently invested in is Rooser, a marketplace connecting fish processors with wholesalers 🐟 The fish market is unique because the product has a very short shelf-life. A marketplace needs to operate in real-time to get fish from the sea to your plate efficiently. Suppliers on Rooser can quickly upload, price, and profile their daily stock of fish; buyers can search, negotiate, and transact quickly. The European fish market is a ~$150B market and Rooser is live in 13 countries. My colleague Georgia wrote more about Rooser here—and here’s a picture of Georgia rocking some cool yellow boots on a fishing boat in Scotland:
B2B marketplaces go beyond food, of course. The global chemicals industry is $3.8 trillion in revenue, powering industries as diverse as pharmaceuticals, cleaning supplies, and beauty. Knowde is a B2B chemicals marketplace for ingredients and raw materials. Moov, meanwhile, is a marketplace for used semiconductor equipment, a $105B market growing to $168B by 2026.
Virtually any industry that’s large, fragmented, and offline is ripe for reinvention with a B2B marketplace.
Given the size of the opportunity in B2B marketplaces, it’s surprising that we’ve seen relatively little startup formation. But the timing might (finally) be right, for a few reasons:
The groundwork has been laid. For instance, new startups make it easier to integrate payments or to manage complex shipping logistics. The tech infrastructure is now ready.
Just as COVID accelerated e-commerce penetration in B2C, it did the same in B2B. Every market is digitizing.
Millennials are beginning to dominate the workforce, and these are digital natives (or at least early digital adopters). They expect seamless, online workflows—and as they realize how archaic enormous industries are, they bring those industries into the 21st century.
The 2020s will be a marquee decade for B2B marketplaces. If there’s one I missed above, or if you’re building one, I’d love to learn more about it.
Sources & Additional Reading
Reimagining B2B Commerce with Faire—a great piece written by YC’s Anu Hariharan a couple years back
Ian Spear, my much-smarter better half and my go-to expert on everything B2B marketplaces 🤓
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