Marketplaces - Part "2" : B2B&2C&2R&2E = 2B or 2E that is the question!

Watch Time: 28 mins

 

This episode is part 2 of the episode we did earlier on Marketpalces. Joining us for this podcast is Rajinder Balaraman (Director, Matrix Partners India) and Avnish Bajaj (Founder & Managing Director, Matrix Partners India).

Rajinder:        

 

This episode is part 2 of the episode we did earlier on Marketpalces. Joining us for this podcast is Rajinder Balaraman (Director, Matrix Partners India) and Avnish Bajaj (Founder & Managing Director, Matrix Partners India).

Rajinder:        

Hi and welcome to Matrix Moments. We did a podcast earlier this year on marketplaces and this one we’ve titled Marketplaces 2, to B or to E, that is the question. Avi, I’m going to ask you, what’s the story behind this title.

Avnish:           

Yeah, and I’m going to take off my mask since we’re I think reasonable distanced. I don’t know if it’s creative or nerdy but the point is there are so many tools that I’ve been hearing between B2B, B2C, B2E, B2R. So I myself have had to figure this for out and then again thanks to you and Salonie’s research but net-net I basically reached the conclusion that if you’re starting a business you have to decide whether you want to B or you want to be everything which is the to E and as we go through this we’ll kind of figure it out.

Rajinder:        

Yeah. So let’s start from where we left off the last time. We covered various types of marketplaces already, why is there a separate framework needed or separate mental model for B2B marketplaces.

Avnish:           

And I think by the end of this episode we may reach the conclusion that we don’t, but I’ll tell you that today where we stand and looking back ten years or twenty years of marketplaces we do.

Let me first start with a personal story, so Baazee was clearly an auction site now known as a B2C kind of marketplace, actually known as a C2C marketplace in those days, then became a B2C marketplace but there was no market in India when we started, this was 2000-2001. So we had to hustle, we had to figure out ways to survive. So consumer stuff was happening very little – that was the first time I learnt about B2B marketplaces. In the US they were started as procurement hubs so most companies and this is the late ‘90s, there was a company called Commerce One, there’s a company called Ariba and believe it or not those companies in those days had reached market caps maybe between these two itself of $100 billion, this was obviously the zenith of the dotcom bubble also. They were procurement so most businesses procure so they were doing that.

I remember I think it was Niren Shah who now runs Norwest and there’s Rajan Mehra who now runs March, so we didn’t have the privilege to have them with Gautam in our management team. And we were supposed to generate revenue and Niren said because he came from a banking servicing background from KPMG he said I think we can use auctions to save people money on procurement. And I still remember our first auction was for StanChart Bank’s cheque books that they were procuring and they saved 27 percent and we used to charge 20 percent of the savings and it was like in maybe 2000 like a 2 crore contract so it was serious revenue.

Rajan always had a background with autos and he had taken over a site called Bid or Buy where auto was a strong category. And his thought was banks are repossessing and by the way it was recessionary times. After banks repossessed autos how do they get rid of it. So we started Bank to dealer option, so that was the first exposure to this with the thought being that how do you do this without being exposed to internet penetration in the country. So now therein lies to difference that B2B tends to be few to few, B2C tends to be many to many, C2C tends to be many to many and that’s you can do this in a more controlled environment and it tends to be a full stack experience.

We used to actually tell people the auction event is happening between this time and this time, call the bidders sometimes bid on their behalf because they don’t have access to the internet. Believe it or not the INOX in CR2, the first INOX in Mumbai, all the seats are procured through the Baazee auction platform and we had international bidders coming in. So why is B2B different, because it is different, it used to be much more full stack, you’ve to provide logistics, procurement was one piece of it, payments, trust issues are different, opacity is different. So very different structurally but as we talk through the rest of it and the title you realize that things are converging.

Rajinder:        

No, I think the procurement hub analogy is very, very relevant but in some ways the whole conversation has shifted to more marketplaces and then when it comes to managed marketplaces you almost start thinking through what the various services are. But I guess the most famous B2B marketplace was really Alibaba, right?

Avnish:           

And which was thin stack, which was horizontal and thin stack and you know, the interesting thing is everything in life is about context, so China joined the WTO in 2001. They started becoming a manufacturing hub through the ‘90s starting in the late – you know, when ’79 the revolution happened so they had built up the capacity. Then they had to plug in demand, till then they didn’t join WTO. As soon as they wanted to plug in demand they joined WTO and next thing you know the world wants to buy, they have the supply, how do they buy, remotely.

China at that time was still a little bit-controlled market, Alibaba stood out. So it was just exports from China were huge especially the smaller value, the larger ones would obviously probably be all in-person buying. So I think people have to keep that context. Now flip that context for India, what has happened. China they’re going through issues, Vietnam is leveraging it, Bangladesh is leveraging it, hopefully we’ll leverage it. Government is very seized of it, there is Make in India, now there is MSME incentives, there’s Covid. What has Covid done by the way it has made tech go very deep so now we can also have these kinds of marketplaces that can do it. But I think Alibaba is very, very context specific. Indiamart in India is also a little bit context specific. The reality is today if you have to do it you have to be much more full stack.

Rajinder:        

So let’s get the definitions out of the way. Context, understood, what’s fundamentally different about B2B versus B2C? I think the few to few, the few to many, many to many rationale I understand but if we think about the actual services that you’re thinking of plugging in what’s the biggest difference?

Avnish:           

And I think our usual caveat applies for all our Matrix Moments episodes we’re not coming up with new insights sometimes we’re just helping people – doing work to bring things together.

So I think in this there are a bunch of articles that we should include which give these definitions but at a very high level it is a buying process light touch versus deep touch. Does it require a lot of hand holding, how many buyers. I mean most businesses would not buy anything without an approval committee, without multiple levels of approval. When you’re buying on Amazon I mean maybe we ask our wives for approval but other than that there isn’t a committee like that.

Volume versus value, generally B2B ends up being long sale cycle, higher value but once you get it there’s potentially lot of repeat, B2C higher volume lower value. Pricing, very important, is it fixed or is it negotiated, is there a contract. B2B will often have volume discounts, will often have negotiated bespoke pricing. Some of the others, people can see in the articles but I would say net-net reliability is more important than speed in B2B and it’s vice versa in B2C.

 So if I have a mission critical -- if I have a factory running where for my factory to run certain ingredients are mission critical and I’m running it just in time. I need it to come the previous day, I don’t care when it was shipped or when I ordered and I can plan it in advance, B2C is typically not that. So I think those are on the structures that go to market tends to be different but like I said these articles have good information.

 I think in our framework the founder architect tends to be very different. B2C tends to be more C, B2B tends to be more B. So a founder who would typically start a B2B marketplace comes from that domain. So I think domain becomes critical, consumer guys, the B2C guys more customer insight, emerging trends they tend to think differently. Business models, very different. In B2B if you’re providing logistics, payments, you can monetize all of that. In B2C typically that’s taken as part of the service. So I think those are the differences even though they’re converging I think they’re significantly different.

Rajinder:        

And I know we’re going to cover this later but as you were speaking I was thinking of – OfBusiness is a company that we’re privileged to be in business with, pioneers in some ways in the B2B commerce space. The entire purchase process that you described in B2B seems like a very complex decision which probably requires a lot of offline intervention, sales, account management, all of that. And I was just thinking in some ways companies like OfBusiness they’ve been able to bring a lot of that on tech. So I guess --

Avnish:           

Why don’t you, I mean since you’re the lead on it why don’t you explain what they do and then I’ll add whatever I have to.

Rajinder:        

Yeah, so I think first and foremost Asish, Ruchi, Bhuvan and the entire founding team that is just phenomenal and we’ve learnt most of this through them. But the core of the idea is that there are a lot of SMBs in India who need both procurement as a service as well as financing around that procurement as a service. And the reason is they typically manufacture or they have a project that they need to complete, they need to purchase raw materials for that particular project but then they get paid by their end customers in call it 90-120 days. So there is a clear working capital mismatch but there is also a procurement problem that they have wherein if they don’t procure at the best prices either they’re going to be uncompetitive in the market and they’re not going to win the contract or their profitability is going to get impacted. So when they come to OfBusiness as a platform they’re looking for the best product at the best price with the best fulfillment because they need to be just in time in terms of their project completion as well in addition to financing as a service. So it’s a complex product --

Avnish:           

Yes. And it’s almost – I don’t want to jinx the investment although I think Asish would like to hear this, it’s almost the perfect B2B marketplace and it goes to a lot of trends. So you talked about commerce, that commerce, so we don’t lend to anybody who’s not on our off commerce platform. That’s the whole – there’s a a16z podcast we should refer to which says there’s a fintech in every company or some such thing and I know when you guys went to China you came back with – so it’s almost OfBusiness has perfected that piece where you’re doing commerce, you’re getting disproportionate data. If I’m lending to a vendor on that platform I being a OfBusiness I know how their payments are coming in, I know how their orders are going, I know their health, I know their financial health. So I’m taking so much risk out of lending, right. I know they do logistics, I know they’re now doing marketing tool. So I think one of the things about B2B which again is very different, which is why I think OfBusiness is a great example, is then you surround that B with services. And that’s where monetization becomes so important. So you’ve got commerce, then you started financial services, then you’re starting -- you’re obviously doing logistics, then you’re doing marketing effectively for them with the bidding. So I think that’s a great example and also why this is so different.

Rajinder:        

I think we’ve spoken of different terms, I think some of the terms I heard from you around like recurring revenues, those are more like SaaS kind of terms. Some of the terms were definitely more like B2C marketplaces terms. Some of the terms were like things that we talk of in D2C and in consumer products. All of these models how does one piece these things together?

Avnish:           

And therein lies the big idea. I think the big idea is these are converging. If there is one – we’ll hopefully come to a few takeaways from this session but if there’s one takeaway it is that these things are converging.

And the megatrend is that something called consumerization of the enterprise also known as prosumer which is producers are also consumers or professional consumers. SaaS is also going towards there’s a DIY trend. Why, because individuals now are using technology so pervasively in their lives, they’ve become so comfortable that the organizations that they’re part of they’re pushing in that direction. And I think that’s where the enterprise is starting to behave like a consumer. So the trend is really the enterprise starting to behave like the consumer.

The flip is also true. Consumers have become so well researched and so demanding that they’re behaving like an enterprise. I want logistics like this, I want easiest payment, so it’s really that’s where these things are converging and truly that’s where there is a term I read, I’m just looking at my notes, that to this point of consumers being very researched there used to be this concept in marketing called moment of truth. You know, you open something and it’s now called ZMOT, Zero moment of truth. The consumer has fully researched everything, it kind of takes the fun out of it but that’s – so the point is that’s how things are converging. So the consumer is becoming much more researched.

Look at our companies that in India even, Udaan obviously a well talked about good success in B2B has launched a B2C app called Pickily. I heard ABB India which it doesn’t get more industrial than that has launched an e-mart where you can go and buy. HUL was trying to do D2C. Practo in our portfolio started as doctors first, now more consumer first but is powering the hospitals. So this is the whole to be or not to be. It’s B2B2C back to D because it is a dealer in our auto marketplace, it’s everybody. It’s really the B2E. The other thing you had mentioned earlier about this Shopify for X I think that is also this because if you look at it one thing that I think of when I think of B2B2C is market networks, the definition of market networks where you have a software that runs on a B that enables them to go to the C but you are therefore selling to this B that software but your software has to be good enough to sell to the C and that’s how you have to think about the business and I think that’s what Shopify did. And that’s where we have investment, you’re in Dukaan, I think Shopify for X is definitely a trend we’re seeing but I think it’s all coming because of this. And the Covid tailwind.

Rajinder:        

No, no, this is I think the takeaway that you kind of slipped in there was the convergence of these models. And if someone has to really think through the PMF of this I think you can’t like pick one model to really kind of sit an architect the PMF around, you have to almost borrow from all so how would you think of --?

Avnish:           

You do but – by the way there is this article we should again references which talks about B2E. I think it is a little bit more deterministic and if you take OfBusiness’s example they went – so I think if you’re going B2B2C you have to get it right for the B.

But I think there is something that again I don’t know if I read it here or somewhere, I think maybe it was in the A16z podcast which I thought is an outstanding podcast. You can think of B2B2C in two ways and I think I’m mixing up our flow but that’s fine. So, one, B is in the middle and C here and B here. And you’re the B and you’re selling to B and you’re selling to C. Or you can think of it as a triangle or flywheel actually more like a flywheel. B which is you, C, B and C and it’s rotating. What does that mean, what that means is I’m only enabling B to do more C and in doing more C I’m enabling myself to do more B, so some level of data network effects are kicking in which is the OfBusiness example. We’re only lending to people who are doing commerce with us. We’re not lending separately and commerce separately. We’re also if you look at – we spoke about DealShare in the other episode, they’re only doing B2B where they want to get higher margins and can do the C.

One other  other point that I’m going to make on B2B and how the PMF in my view is different, you know, I was chatting with Kunal Bahl and he made this point that you know, India mein sab dhanda chalate hain 10% - 12% take rate ke saath. You can’t build a business, our inefficiencies in the offline world are such. In his view it has to be 22-25 percent margin even in a B2B business. You would see in most cases you would see that people are saying 10-12 percent take and we know we’ve started pushing them harder. I think 18-20 percent is minimum. And remember in B2B unlike B2C you can’t make it up on volume. In the operating leverage typically you get in a B2C business you don’t get here because your cost structures are, a) your buyer is sophisticated, they’re not going to let you make disproportionate margin and start increasing pricing over a period of time, very hard to get pricing power because substitution is easier because moats are fewer, don’t have those network effects, it’s very, very different. But I think the biggest thing to think about is this 18-20 percent I think the biggest thing to think about is this 18-20 percent at least in my view in the take.

I think the other big idea, Rajinder, is if we say what is that one big thing that makes B2C succeed and is it the same for B2B I think it’s very different. Again this came from one of the podcasts, that hyper linearity in B2C typically comes from network effects and virality and maybe ultimately economies of scale which Amazon has shown and therefore the moats and all of that. Hyper linearity, so new customers and getting newer and newer customers. Hyper linearity in B2B comes from existing customers and we’ve seen this in OfBusiness. I think that’s a big thing which is retention, retention, retention. So the most important metric in B2B is net revenue retention. Because your sales cycle is wrong you’ve made this wholesale are people coming back, are they sticking? If they’re sticking and you have a value prop for them you can surround them with the other services and that’s where you get your hyper linearity, up sell, cross sell, expansion into other services which I think is a big difference in the GTM and the metrics that are important in the two businesses.

Rajinder:        

No, I think the point is fully taken. You alluded to the fact that moats in B2B are lower, I mean maybe we should think harder. There have to be moats matter.

Avnish:           

I could argue it both ways. I actually believe they can be deeper because remember in B2B you also have the ultimate moat in your favor, inertia, businesses don’t like change. Individuals also don’t like change but businesses really don’t like change and they’re setup to not change. They’ll have processes, systems, this, that, I mean we struggle with it at Matrix, driving change is so hard. So I could argue that inertia is your biggest moat but remember the biggest difference is few to few versus many to many. I can if I had to target your B2B business I know which businesses to go and target to try to steal them from you. And then I may run into inertia, then I may run into your moats that you’ve built with that business because you may have data flowing, you may be doing – which is why I think wallet share is critical. So again in B2C number of customers even if you have lower wallet share. In B2B if you don’t land and expand and you don’t increase your wallet share you’re at risk because your customers can go and target. It’s much harder to target so precisely in B2C because there are so many. You have to get inside the psychology.

Rajinder:        

So if inertia does and I agree inertia is a big moat and if inertia is truly that important given that there are a set of companies that have already entered and acquired some place in the market is this market also going to have winner take most characteristics like we saw for example in B2C with flipkart and Amazon?

Avnish:           

No, because I think the opposite of inertia is that businesses also are always dissatisfied, they’re always more inefficient. As an individual I think we’re optimizing our life a lot more than an organization can all the time. So you as a business if you can figure out where that gap is I think there is disruption possible, finding what we call the thin edge of the wedge, what is that biggest pain point. We’ve invested in a bunch of companies in SaaS including Revv Sales which has been announced which is just trying to solve one part of that documentation contract piece of the sales process, that’s the thin edge of the wedge. I just met a company but will not invest in it but it is solving GDPR which is this privacy data loss related things that businesses don’t know how to cater to. So you can get the thin edge of the wedge. And jumping ahead I would say that there is a mega trend that is happening which is we spoke about consumerization, there is mobile and now there is video post Covid. I think that gets the thin edge of the wedge, most enterprises are not the softwares including the companies that are hundreds of billions of dollars. Who bought Slack?

Rajinder:        

SalesForce.

Avnish:           

SalesForce. Why did SalesForce buy Slack, so Microsoft had a product and which Slack saw by the way how quickly you can get disrupted also. They had the best product and you must have seen this graph, this graph shows that as soon as Covid started SalesForce was at something like I may be getting the numbers exactly wrong but deductionally correct. Something like 12 million MAU and Microsoft teams went from close to 0-75 just because of free bundling.

So that’s the risk and that’s where the thin edge of the wedge is always available and the existing customer can disrupt you. I think the big idea is mobile plus video plus consumerization and we have invested in one company that we can’t talk about right now that is going precisely after this. So my view is always because of the convergence similar disruption trends are playing out. The buyers I’ve got in this organization which are the decision-making unit have now seen this enough in their personal lives where they’re more open and organizations are therefore more open so I think the disruption will keep coming. It might be harder but consumer is no easier but the size of the price is massive because some of the most capital efficient companies are actually enterprise. But they also get disrupted, so therein lies the challenge.

Rajinder:        

And as always like you can’t speak to all investments but how are we placed across --?

Avnish:           

Why don’t you talk about that, we spoke about OfBusiness. Some of them I guess we cannot announce but --

Rajinder:        

So I guess the other ones that we have announces, Bijnis is obviously a company that plays to the B2R trend. It starts with enabling factories and manufacturers to really grow their business.

Avnish:           

And we have a pharma investment in the same space, we can’t announce it but yeah, it’s a pharma. Actually sorry to interrupt, Rajinder, I think the big trend just like Shopify for X is a big trend a supply focused app is a big trend. I’ll tell you what I mean by that. A pharma app which chemists can use, a factory app that factories can use. Khatabook and OkCredit and some of these PagarBook some of these companies have done a very good job with their SME app. But an app for X and in our portfolio business is factory app. We also have one in a pharma app. I think that’s a big trend.

Rajinder:        

Now I think frankly if you just look across different value chains there are multiple opportunities. I think there’s another one in the sea food space that we’re excited by. And then if I think about scooping out if I think about more from a Shopify for X this prosumer kind of trend, Dukaan of course but I think there’s another one that we’re looking at in the Ed Tech space again which is trying to tap into this trend. So multiple companies I think the convergence piece of it is still coming together but I can see people kind of plugging in the different themes that we’re kind of speaking of here into what they’re building.

Avnish:           

And you know, speaking about no business is easy to build but the pain points in B2B are so massive and have not been fixed and couldn’t be fixed earlier because people didn’t have technology. Covid has just changed everything here between manufacturing and we’ve also heard of fishermen in Kerala what I heard maybe two years ago after catching fish you would check the spot pricing in the different markets and then basically take their boat even if it is far away from their home to that mandi. Why do you need to do that with technology? You should be able to go to your usual place and some companies which is our seafood investment. So I think it’s a big deal and it is so broken that I think there’s a lot to create it.

Rajinder:        

Yeah. Thanks, Avi, enjoyed it.

 

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