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, James Currier, managing partner of NFX Guild, answers some of our questions. You can read all of the posts in our series by going here.
James Currier is the managing partner of NFX Guild, a five-year-old venture firm focused on Seed & Series A investing. In 2019, NFX announced it had raised $275m for a second fund which will invest in companies that are poised to benefit from network effects. In addition to being a respected early-stage investor, James is also an accomplished entrepreneur having successfully built and exited four businesses prior to launching NFX.
James – with your investor hat on, how do you think differently or similarly about B2C vs. B2B marketplaces?
At NFX, we think of them very differently because the psychology of the people involved are different. Some characteristics that make a B2C marketplace successful will not work for B2B marketplaces. For instance, buyers on B2C marketplaces typically buy for convenience, price, speed, and they have no goal for their relationship with the seller. Buyers in B2B marketplaces typically buy for quality, certainty, price, and are hoping the purchase will give them an advantage against their competition now and in the future. Further, B2C buyers are focused on the thing they are buying, while B2B buyers are focused on the profit margin the thing will help them achieve. The seller psychology is similarly different for B2C versus B2B. What that means as an investor is we have different elements we look for in how the product works, the pricing, the transparency, how the initial liquidity is created, etc. depending on whether it’s B2B or B2C. The biggest impediment to B2B marketplaces is that, fundamentally, efficient markets mean low profits, so the existing players have profits to lose when a B2B marketplace comes to their market. Many B2B markets are trying to digitize transactions that are already happening. B2B founders shouldn’t make that mistake this time. They should find transactions that are NOT happening today and make them possible. That’s how B2C markets have started and then succeeded.
What are some of your key themes and ideas around B2B? For instance, you’ve invested across the spectrum from healthcare marketplaces (Medinas) to operating systems that cater to the interior design industry (Ivy). How do you think about the key themes at NFX that led you to these investments? Going forward are the focus themes going to differ from those historically?
B2B marketplaces need to have many elements to succeed, and it’s rare to find all those elements, so I just look for companies with the right elements. The first element you need is a CEO and a team that can constantly re-evaluate and iterate the elements of a marketplace. These are “hard planes to fly” and they take 5-8 years to get going. So the pilots need to be data-driven, humble, and tireless to keep changing it up. Your B2B marketplace will go through many seasons, and the product needs to do different things in each of the different seasons. There are many, many more elements to look for, but they tend to stay somewhat static: average order value, frequency, fragmentation of each side, drive to disintermediate, etc. What changes is the target markets, and for instance, how much fintech we can apply to that market given changes to the fintech infrastructure around us.
In this current economic downturn, what are a few modifications you are making to your investing guidelines at NFX? Which B2B companies will navigate this downturn to emerge as winners?
We’re making no modifications to our investing guidelines. These are very long term businesses. When the companies we invest in at NFX are mature, Covid-19 will be part of history. One simple thing is we want to make sure we fund companies for 24 months minimum. The B2B companies that navigate this downturn are the ones with the best pilots to find revenue where there was none, to cost cut where needed, and to support their buyers and sellers during this time to build goodwill for the long term.
How does consolidation play into your assessments? What are the early telling signs of the platforms that will become the dominant acquirer? What characteristics or actions built the momentum that carried successful exits?
It’s not typically worth all the work to invest in a marketplace that doesn’t become #1 in its space, so we don’t typically think about how a company will exit other than at IPO. The early signs that we have the dominant marketplace are liquidity, having the highest transaction volume, embedded SaaS software on one or both sides, and repeat usage on both sides without multi-tenanting. The actions that build these dominant positions are picking the right segment of buyers and the right segment of sellers to start with, capturing 85+% of your best nodes’ volume, and writing great software iteratively.
When you think about outcomes, most of the v1.0 players were acquired by PE firms with many of the strategics feeling that if they acquired these companies their independence would be lost. GHX could not be bought by a drug distributor because then it would be less independent. Elemica could not be bought by a chemicals company like Dow because then it would lose independence. Caterpillar buying IronPlanet would be bad because then they’d just sell Caterpillar equipment. What are your views on the v2.0 successes and their outcomes? What do you think is different this time around?
I believe this trend will continue, with B2B marketplaces staying independent in their markets. Hopefully, this time, many B2B marketplaces will get to sufficient scale to go public, because software is now part of life, and the markets are so much bigger. Remember, there were only 300 million people on the Internet during the last wave of B2B marketplaces 20 years ago. Other B2B marketplaces will be taken out by PE. There may emerge a holding company like IAC did on the consumer side, but we can’t plan on that.
There obviously were some great successes as well as spectacular failures around the v1.0 marketplaces. What do you take away from the prior generation of companies as you apply your lens for investing in the next generation of B2B marketplaces?
The first generation of B2B marketplaces had too few people on the Internet, too few people accustomed to using software, and the people in charge of the companies had more to lose than to gain from using software. In this generation, the people in their 40’s who are taking over the businesses from their predecessors, grew up on software. That will make a big difference in adoption. Second, this generation should start on the outskirts of the markets and work their way in, rather than attack the center stronghold, where the winners still have more to lose than gain from efficient markets. Don’t replace existing transactions. Create new B2B markets. Create new opportunities for people to go from $0 revenues without your marketplace, to $X revenues with your marketplace. They will be your champions. They have nothing to lose and everything to gain. Adoption and retention will be swift if you can do that.
For entrepreneurs, do you encourage B2B marketplace founders to do things differently than B2C marketplaces?
Talk to customers more – Zoom calls, phone calls, emails, texts. With B2C, you can successfully spend 90% of the time looking at numbers from behaviors on your marketplace. With B2B, you should spend 50% of your time talking and asking questions of your customers.
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?
Early on, you have to figure out which side is harder to get, then focus on that side. In some B2B marketplaces, if you get supply, the demand will show up. In others, if you find demand, the supply will show up. The biggest mistake a founder makes is saying too soon, “You are in charge of supply and you are in charge of demand.” Then the org has to support both equally for human reasons. Both take up air time at company meetings. What you really want is to determine which side is harder and then put the whole company focused on that one side. At the early stages, the other side really doesn’t matter.
What have you seen to be the biggest impediment to driving utilization and participation? What do successful exchanges do to overcome these challenges?
Getting the market participants to stop doing it the old way. People get in ruts. They like what they know. You have to think through their psychology, their motivations, and how to make them feel higher status and cooler and more powerful to change their behavior from the old path. Second, the pricing is key, and the transparency and presentation of the pricing is key. You must become a student of clever ways to implement pricing. Others have tried. You can learn a lot from their attempts.
What are some of the things you see in B2B marketplace pitches that move you to a pass? What are some things that move NFX to fund a company in B2B marketplaces?
A pass often comes when I see too little fragmentation in the structure of a market. Or I see founders begging the first customers to use the marketplace because there’s no clear way to add enough value. To invest, I look for the opportunities to add fintech, the opportunities to create new types of transactions with new supply or new demand, the opportunity to create a new experience, and the opportunity to find economic gain for one or both sides.
What are the key characteristics you look for in a winning team for a B2B marketplace?
Relentless, data-driven, iterative, high EQ and high IQ.
How do you apply your prior experience having founded several marketplaces to the companies you work with?
I spend a lot of time with founders working on their psychology, their team, and their priorities. You wouldn’t immediately think that would be where the value add is, but that’s where we end up typically. That’s where you get the right decisions and save a lot of time. Flying these complex planes requires experienced advisors around the table. Also, after investing in 50 marketplaces, we have a library of KPI’s for founders to benchmark themselves against, which saves more time and provides clarity to the teams about what to do next.
If you liked Investing in B2B Marketplaces: James Currier (NFX) 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.