If you liked “Investing in B2B Marketplaces: Varun Purandare (Accel)” 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 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, Varun Purandare, vice president at Accel, answers some of our questions. You can read all of the posts in our series by going here.
Varun Purandare is a vice president at Accel where he focuses on investments in enterprise software, consumer fintech, and marketplace businesses. Varun invests out of Accel’s London office and he joins us today to share some of his marketplace investing insights.
What side of the market (supply vs. demand) do you encourage B2B marketplace founders to focus on when they are looking to build traction and why?
This varies by marketplace but typically, supply is where the focus should be in the early days. If you don’t have restaurants onboarded on Deliveroo, customers will not use your app. Similarly, on marketplaces like Etsy, cracking supply is important as suppliers often bring the buyers with them to the marketplace – Lenny Rachitsky does a great job explaining this here. It is also important to remember what Bill Gurley said – “it’s not enough to control the supply, you must corner the demand – otherwise, you’re just a lead gen engine.”
Successful B2B marketplaces can quickly find themselves supply-constrained – what’s your advice for founders trying to drive suppliers onto their platform? Are there any methods you would advise founders to avoid?
Build software in addition to core workflow tools to ensure the supply-side “buys-in” – a classic example of this is what OpenTable did on the B2C side. Direct Sales is also very crucial in B2B markets – this often requires local teams on the ground going from supplier to supplier to onboard them. I would also say referrals and word of mouth can be important to ensure existing supply onboards new supply. Founders should not overvalue GMV growth – it is important to track net revenue & unit economics (not to scale too quickly).
What is your advice for keeping transactions within a marketplace? How do you avoid market participants using a platform to find each other and then taking their business offline?
Software is a key component to ensure transactions remain within a marketplace – they can be used in a variety of ways and can serve many purposes. Some good examples: i) Workflow tools – improve collaboration and remove manual work; ii) Matching tools – standardize transactions and make them self-service; iii) Fintech tools – working capital requirements, processing refunds, fund disbursement, and escrow can ensure participants use platform vs. go off it; iv) KYC tools – used to build trust in transacting on the marketplace. But it is not all about software – services/consulting can also be used in the early days to gain the customers’ trust and build liquidity
Once a B2B marketplace is getting traction and has product-market fit, what are the key growth levers you would encourage founders to pull on? Any you would advise them to avoid?
Geo expansion tends to be the most natural lever to pull once founders feel like they have cracked their first market – repeating what’s worked and adjusting for local behavior will help the marketplace scale. Expanding product range is another commonly used growth lever. Direct Sales / Referrals / WoM will also continue to be important in B2B marketplaces. The value of PR should not be underestimated in these markets – advertising in a reputed news outlet can build trust in supply/demand that is yet to join the marketplace. While M&A is not a common path for companies at such an early stage, inorganic growth can be a very useful lever to use as our portfolio company, Sennder, has shown in the last 12-18 months. Liquidity is crucial & important to track how the marketplace is creating more value for the incremental user
B2B marketplaces are increasingly highly specialized – what is your thinking around how much domain expertise a founding team needs to be successful?
Domain-focused teams are crucial – teams that are able to diagnose buyer psychology can win the mindshare of customers – this is important to help build a product that truly solves the customer problem. Teams must keep engaging with participants to build relationships – often doing this offline to get the flywheel going. Not all teams need to have spent years in that sector (see Sennder) but it definitely helps!
Accel is a prolific investor in B2B marketplaces – what are the guiding principles you use when assessing whether a marketplace is investable?
Founders with deep domain knowledge and the ability to build trust with partners. A focus on a large market which would benefit from digitization and access. User experience has to be 10x better than the status quo and there must be demonstrable liquidity on the platform.
Accel invests globally in B2B marketplaces – how does the way you think about investing in B2B marketplaces differ when comparing the U.S. with other parts of the world?
At Accel, I am part of the European team and we focus on opportunities with European roots – we find it exciting for several reasons: i) absence of a pan-European dominant player of similar size to Amazon (US) / Alibaba (China) / Udaan (India); ii) a move towards going “local” because of geopolitical dynamics and accelerated by the COVID-19 pandemic; iii) EU marketplaces solve the tough problems on Day 1 by mitigating traditional trade & cultural barriers for exporting within Europe (e.g. payments, language barriers, etc.); iv) the industrial heritage of Europe means it is the heart of several global manufacturing & logistics companies.
How are you thinking about the increasing verticalization in the B2B marketplace space? Do you see this trend continuing or beginning to reverse over the next 3-5 years?
We believe that verticalization is here to stay – B2B markets are huge and while verticalization could indicate shrinking market sizes in some consumer markets, this is typically not the case in B2B. We expect to see this trend continuing and building momentum in the next 3-5 years – in Europe, there are several opportunities in raw materials, warehousing, auto parts, and chemicals to name a few industries and we expect to see large companies being built in these verticals. Horizontals are not going to disappear, but the highest-value categories where great experiences can be created will be verticalized