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Investing in B2B Marketplaces: Merritt Hummer & Allison Xu (Bain Capital Ventures)

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Michael Brown

January 29, 2021
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The Bowery Capital team is embarking on a blog series covering 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. This week, Merritt Hummer (Partner) and Allison Xu (Investor) from Bain Capital Ventures join us to answer some of our questions. You can read all of the posts in our series by going here.

What stage do you tend to focus your marketplace investing on, and what are some of the key factors you look for when evaluating a B2B marketplace investment?

BCV is stage agnostic, so our team looks at marketplaces that range from seed stage to late-stage growth. We focus on growth stage opportunities (Series B or later). When evaluating B2B marketplaces, we’re looking for companies that deliver a clear value proposition to suppliers and buyers, both from an experience and economic point of view. Some of the key factors we look at include supply dynamics (e.g., fragmentation, existing distribution methods), purchase frequency and behavior, monetization methods, and the opportunity to embed financial services.

What is your thinking on marketplaces monetizing through take rates vs. more non-transactional methods (e.g., SaaS subscription fee, financing, etc.)?

There are many monetization models for a marketplace; the right one depends on the idiosyncrasies of the vertical. While charging a take rate is perhaps the simplest method, it can also hamper adoption if suppliers perceive the take rate to be an unfair tax. We tend to favor non-transactional monetization models that sellers can justify if they are merely substituting costs they would have incurred without the marketplace. For example, Material Bank (one of our portfolio companies) is a B2B marketplace for construction and interior design materials that warehouses samples (e.g., fabric swatches, paint chips, flooring materials, etc.) from hundreds of brands. Architects and interior designers order free samples from Material Bank, and Material Bank charges the manufacturers a fee every time one of their samples is shipped out. By taking on sample fulfillment, Material Bank has embedded itself as the core discovery tool for buyers while monetizing on the backend by sending leads to manufacturers. Material Bank is a marketing and fulfillment engine, not a middleman adding new costs to the manufacturers.

Where do you see the cut off when AOV becomes so large you can’t charge a take rate (and instead need to do a sampling fee or just abandon commission as a monetization route)?

It depends on who’s paying the take rate. When a buyer incurs the cost, the cut off is less about a dollar threshold and more about the significance of that purchase relative to a business’s other costs. It also depends on how much cost they would have incurred to source and order that good through traditional methods, pre-marketplace. Companies tend to be more receptive to a take rate for ancillary spend, but more sensitive when the item is core to their business model or offering. When the supplier incurs the cost, the willingness to pay a take rate is related to the marketplace’s ability to bring them new demand vs. shifting existing demand, so in that sense there’s no real threshold; it comes down to the marketplace’s ability to drive demand.

What tactics have you seen marketplaces use that were successful in avoiding disintermediation with regards to follow-on transactions?

It’s worth noting that some industries are at greater risk of disintermediation than others. For example, industries like medical instruments, where products are highly specialized and buyers prefer to stick with the same supplier, are prone to moving follow-on transactions offline. One of the most successful tactics we’ve seen to combat this is to embed financial services. By offering personalized banking products, early payment discounts, pre-approved financing, or insurance policies with better underwriting, marketplaces can become both a platform to transact and obtain financial services. This increases user demand, user engagement, and user retention. Another way to avoid disintermediation is to become the workflow tool that suppliers and/or buyers use to manage their transactions.

What’s the biggest operational challenge you’ve seen marketplaces face trying to go from seed stage to an A round?

We tend to focus on the growth stage, which tends to be the jump from Series A to B or later. Typically, the biggest operational challenge to scaling is maintaining the right balance of supply and demand on the marketplace such that both sides have a good experience. At the same time, they need to be thinking carefully about which monetization model makes most sense for their customer base – we’ve seen plenty of companies raise early stage rounds without a single dollar of revenue, but as growth investors, we’re looking for a path to profitability.

Do you typically encourage marketplaces to prioritize supply or demand when they are first getting off the ground?

Generally, we encourage marketplaces to focus on building supply before acquiring demand. While initial supplier acquisition can be highly bespoke and expensive, once a marketplace onboards a strong set of initial suppliers (even if in low quantity), the demand will organically follow. On the other hand, we’ve also heard the argument that “sellers want to sell where buyers want to buy,” suggesting that it’s more important to aggregate demand first. It depends on the dynamics of the vertical the marketplace serves. The best emerging marketplaces usually have a secret sauce for aggregating either demand or supply very efficiently.

Can you tell us a little bit more about Material Bank and what drew you to it as an investment?

Material Bank is a B2B marketplace for construction and interior design materials that connects architects or interior designers to material manufacturing brands. Material Bank warehouses and fulfills material samples (e.g., fabric swatches, paint chips, flooring materials, etc.) from hundreds of brands, allowing designers to order samples from multiple brands and receive those samples by 10am the next morning. Manufacturers receive new customer leads that require no effort to generate and are happy to outsource sample fulfillment, which was historically a cost center and not a core competency. We were drawn to this investment for a few key reasons. First, the fee-per-sample model is a unique wedge in the aggregation of a highly fragmented supplier universe that provides a strong value proposition to both suppliers and buyers. Second, with its strong footing into the industry, there are numerous growth levers that Material Bank can pursue including more designer-facing applications or value-added services for brands. And third, we were really impressed by the CEO Adam Sandow, who is a long-time player in the architecture and interior design world. We were compelled by his deep expertise, industry relationships, and long-term vision for the company.

BCV is also an investor in Mirakl - can you tell us about how they are working to grow the marketplace ecosystem?

Mirakl is a platform that enables B2B and B2C sellers to launch third party marketplaces. As marketplaces play an increasingly important role in both B2B and B2C companies’ digital strategies, Mirakl empowers businesses to operate their own online marketplaces. This includes vendor onboarding, product catalog integration, order routing, order status updates, and vendor compliance. In addition to powering the marketplaces themselves, Mirakl also recently launched Mirakl Connect, which serves as a “marketplace of marketplaces” where sellers, partners, and Mirakl-powered marketplaces can promote their businesses and partner with other marketplaces to accelerate their business.

How do you see the next generation of B2B marketplaces exiting (e.g., IPO, PE, acquired by strategics)?

We’ll likely see a mix of exit strategies depending on the industry that the marketplace serves. B2B spend is much larger than B2C spend, but unlike B2C where one consumer might purchase goods from a variety of product categories, the B2B buying decisions are highly specialized with limited overlap across categories. For that reason, it’s unlikely we’ll see an Amazon-like behemoth that can cater to all B2B verticals effectively. Instead, we expect to see a series of vertical-specific B2B marketplaces. There will be a very diverse universe of B2B marketplaces a decade from now and the most successful ones will have a variety of exit options.

If you liked “Investing in B2B Marketplaces: Merritt Hummer & Allison Xu (Bain Capital Ventures)” 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.