Michael Brown of Bowery Capital and Kelli Fontaine of Cendana Capital discuss trends and themes using Cendana Capital manager data.
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, Fabrice Grinda, founding partner of FJ Labs, answers some of our questions. You can read all of the posts by going here.
Fabrice Grinda is among the world’s leading Internet entrepreneurs and investors. He has over 150 exits on 500 angel investments and has served as CEO for three multinational companies. Fabrice has an impressive track record as an early investor in Alibaba, Flexport, Delivery Hero, Betterment, and Brightroll. He is currently running the startup studio and venture fund FJ Labs, which he co-founded with business partner Jose Marin. In 2018, Fabrice was named the top angel investor in the world by Forbes.
Fabrice – you have a very thesis-driven approach to investing in marketplaces. Can you break down your thesis for us?
We have three parts to our investment thesis:
1) Verticalization of the Horizontals: We define horizontals as multi-category sites, like eBay or Angie’s List. There’s a great picture that breaks down each category of Craigslist into its own vertical. I think we’re still at the beginning of this, and by going category by category, there’s still a lot of opportunities.
2) Moving from Double-Commit to Marketplace-Pick: The first version of marketplaces was about double-commit between buyer and seller. There was a lot of friction in the transactions happening. The second version happening now is far more seamless. The marketplace does the work of picking the supplier, taking the work off the buyer and seller. One example is a B2B photography marketplace we’ve invested in, Meero. These marketplaces are the future of work, allowing workers to do the work they love and make more money doing it.
3) B2B Marketplaces: The B2B space is very large and everything is still yet to be done. For SMBs and enterprise, business has traditionally been done through relationships but this is changing. Now, businesses are looking at the success of consumer marketplaces and we’re starting to see a generational shift. Digitally native millennials are moving up in the workforce and older, less-tech savvy executives are retiring and being replaced by younger people. These changes are opening doors for B2B, and now the Covid-19 situation is accelerating a lot of this.
With the current economic downturn, what are a few modifications you are making to your investing guidelines? Which companies will navigate this downturn to emerge as winners?
Our investment criteria hasn’t changed much. We’re keeping the same metrics: net 3x CAC in 18 months, LTV of 10-1 or 20-1 CAC. What we’re changing now is the stage we’re looking at. We’re looking for companies raising for 24 months of cash, and we’re looking at early-stage rather than later-stage opportunities. We’ve actually made 10 investments in the last month.
My advice to founders during this time is to stay open to new business development opportunities. It’s an amazing time for early startups to be going for opportunities beyond their normal reach. Businesses are eager for solutions right now and willing to experiment with new tech and partners. There is a reason that so many great startups came out of the last economic downturn. There’s less direct competition, CAC is lower because of less competition, and the war for talent is easier. Right now is the best time to start a company, if you have the cash to last you 24 months.
For entrepreneurs, do you encourage focusing on the supply or the demand side during the early days? How do you think about the early motions and dynamics with B2B marketplaces?
Most industries are demand-constrained, so starting on the supply side is easier. Start with supply, then match supply with demand, then increase supply again – so that supply and demand always move in parallel. Go hyper-vertical and hyper-local when you first start scaling. Demand is more elastic in B2B than B2C/C2C, so the rate you can take is lower in B2B (1-10%) than in C2C (10-25%). For B2B startups, I recommend locking in your supply by offering businesses a free SaaS tool to incorporate into their workflows and manage their teams.
If you liked “Investing in B2B Marketplaces: Fabrice Grinda (FJ Labs)” 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.
The Bowery Capital Team discusses early stage go-to-market strategy with the Revenue Council
The Bowery Capital team is doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. This week, Tyler Ellison, Founder & CEO of ChemDirect, answers some of our questions.