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Investing In B2B Marketplaces: A.J. Rohde (Thoma Bravo)

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Michael Brown

July 09, 2020

The Bowery Capital team is embarking on a ten week journey to cover B2B Marketplaces. We are doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. Below is a part of our content series focused on insights from successful VC investors in the space. This week, A.J. Rohde, a Partner at Thoma Bravo, answers some of our questions.

A.J. Rohde is a Partner at Thoma Bravo and is based in its San Francisco office. He joined the firm in 2010 and is responsible for co-managing Thoma Bravo’s Discover funds, which focus on investing in middle market software and technology companies. Rohde is regarded as an expert in the space. Before joining Thoma Bravo, Rohde held investment roles at Saban Capital and Jefferies.

A.J. – you have a long track record in B2B marketplace investing. Tell us about the origins. How did you come across this theme?

It was born out of what our operational playbook could do in this space. We started looking at companies that could hold growth comfortably in the double-digits but could get even on margins at 50%. That’s how I was looking at the whole fund. There really aren’t many companies that have these characteristics, so these vertical marketplaces kind of become monopolies. If you ran a software company at a world-class operational level, these companies have the lowest standard deviation of revenue outcomes and the highest EBITDA margin potential. 20 years ago, the holy grail for what I was looking for was: market dominance, low standard deviation of revenues in which we could impute a lot of our good operational processes, and all the product management functions. No one else was thinking about it quite like that.

There are less consortium-led players today than in the 1990s-2000s and entrepreneurs are attacking more market problems. What are the market opportunities you’re looking at today?

Today, there are horizontals and verticals to focus on. The ‘90s and early ‘00s were all about order visibility and order management. There was no central system of record for that then, and some of these companies would even trade with each other. So, these companies created marketplaces out of a need for order management. What was never built out the right way that we tried to help our portfolio companies with was how do you monetize the network better – so working capital factoring, trade payables, the payment business model, demand planning, and so on.

Today, these solutions are not just for procurement, they’re also for distribution and logistics. 20+ years ago, enterprise solutions were focused on orders so they could bill for finished goods. Now, founders are also looking at working capital, how they get paid, and how they get the orders out. They’re starting to build more end-to-end solutions; it’s an upstream network.

A majority of the original B2B marketplace companies that were venture-funded or self-sustaining ended up being acquired by PE firms, and there were very few that got bought by strategics (e.g., IronPlanet). What do you think about the next generation of these businesses? Coming out of a market top right now, is it going to be hard for these businesses given that pricing and multiples have been so high? How are strategics viewing this?

PE is loving these businesses, for example, ICONIQ Capital just bought PE is still the biggest buyer for most of these marketplaces, and it’s not necessarily because of multiples. These marketplaces thrive because they’re neutral, and the moment that there is a captive buyer in an industry, the neutrality element goes away. That’s the challenge for a lot of these buyers. So, I think these are PE specials. Over time, I think we’ll start to see a lot of these. They’ll be priced at almost a cap rate and will end up in the hands of permanent capital owners and sovereign wealth funds. For example, Temasek bought GHX from us.

Do you encourage entrepreneurs to focus on the supply or demand side during the early days? What’s the right early playbook?

From my experience, you get a lot more done when the demand side (OEMs) blesses you. If you’re an entrepreneur, you can certainly get a lot more pop with a lot less work if you start with the top 5-8 OEMs at the end of the supply chain. It’s a great way to use your capital and time efficiently.

What are the things that entrepreneurs should avoid doing based on the successes and failures you’ve observed?

Don’t build too many products too soon. You may spend too much time building them, only to find that nobody ends up buying them. Focus on one very specific problem where you can use thoughtful product management competency as the company grows. It’s easy to turn a widget on to try this or that once you have a marketplace, but that can lead to a Frankenstein of a product. A lot of the companies we bought had 30+ modules but only 3 of those modules were making all the money. It’s not that the rest weren’t good, it was just that they were more of pet projects and there was no dedicated focus for growing them into big businesses. So, we shut a lot of those down and didn’t see much loss in revenue. Over time, we realized that a couple of the ones we killed were actually pretty good, so we decided to rebuild those for the company’s growth. Just don’t get caught in that trap too early.

What was the critical path for GHX and what made it successful in the long-run?

GHX established its business in a smart way. It had all industry participants involved from an early start – hospital management companies, pharma, biotech and biomed suppliers, etc. – which led to a lot of volume early on. As a result, they had a ton of transactions and constant order volume. The more transaction volume you have on a platform and the supply/demand dynamic can create or prohibit certain products.

If you liked “Investing in B2B Marketplaces: A.J. Rohde (Thoma Bravo)” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Look out for more content on B2B Marketplaces from us in the coming weeks.