Over the last few months, the Bowery Capital investment team has seen a heightened pace of new company formation in the B2B marketplace ecosystem. More specifically, we track ten industry verticals each year through our Opportunities In Vertical Software piece and have seen more and more founders building a successful B2B marketplace in specific industries (we call the verticals) like Oil & Gas, Agriculture, Transportation, and others. We recently reviewed over 100 B2B vertical marketplaces and did a deep dive on 35 companies that fit our areas of focus. Below are some of the key insights and hypotheses regarding the data, as well as some tactics and thinking as to how any entrepreneur can navigate building a successful B2B marketplace in their vertical.
1. Watch Out For Incumbent Digitization
For many verticals, non-software powered, large incumbent B2B vertical marketplace players remain a big piece of the puzzle. In recent years some have gotten smarter and moved away from traditional services businesses into technology enabled services businesses. They launch things like supplier portals or eCommerce-like purchasing sites. In verticals where one or two players control a large volume of the spend (i.e. DNOW + MRC make up 40% of the purchasing flow in the Oil & Gas industry), their digitization efforts only contribute to IT buyer inertia. What 10x improvement is your product making in an IT buyer’s life that gets them to switch off of their existing B2B vertical marketplace?
2. SaaS Enabled Marketplaces Make Sense
Smart investors like Tomasz Tunguz and Chris Dixon have written about the benefits of building “SaaS Enabled Marketplaces” and for the most part we agree. SaaS Enabled Marketplaces, such as Contently and Zenefits charge for both software and access to a marketplace. We’re encouraged by the number of companies taking this approach (over 10% of companies in our analysis) and believe that every founder should think hard about the combination of software and marketplace revenues to drive ultimate business success.
3. The Manufacturing Vertical Remains The Most Crowded Space
One of the most interesting data points we found was that the Manufacturing vertical continues to have the most B2B vertical marketplaces by company count. We count eight large companies in and around the distribution ecosystem (both raw materials and finished goods) including companies like MFG, GlobalSources, GlobalMarket, and ThomasNet. They remain large and growing companies in the space and we caution founders to tread lightly in this category.
4. There Is Limited M&A & IPO Volume To Date
Categorically this grouping of companies is still a relatively new business model. Of the 100 companies we looked at, roughly 80% have been created in the last ten years with the majority being founded in the last five years. We count no IPOs yet in the space and other than IronPlanet in Construction ($758MM sale to Ritchie Bros. Auctioneers) there has not been much M&A activity. While there are some large companies with scale like Joor (Retailing), Zhaogang (Steel), PluralSight (Education), and uShip (Transportation) there are still relatively few with traction. This presents great opportunity for any entrepreneur looking to build a company in the B2B vertical marketplace segment.
With significant value to be created by disrupting the distribution channel we remain encouraged by the B2B vertical marketplace segment here at Bowery Capital. If founders think smart and provide substantial improvements above and beyond the existing “offline” ways of doing business, we believe there will be multiple billion dollar companies created in a variety of verticals. In our next post off of this research, we will talk about a concept here called “special incentives” and the idea of getting demand or supply to get on and stay with your platform.
If you liked “Insights To Building A Successful B2B Marketplace In Your Vertical” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog.
Below we have compiled a list of metrics that could be relevant for most B2B marketplaces and hope that it serves as a framework for tracking KPIs for success.