B2B Marketplaces 101

Since the late 1990s, B2C marketplaces (eBay, StubHub, Uber, Airbnb) have exploded in popularity. B2B marketplaces have trailed behind despite B2B eCommerce being valued at $15 trillion - more than five times that of the B2C market. At Asymmetric, we’ve witnessed a substantial proliferation of B2B businesses using a marketplace platform to disrupt antiquated industries. While we are big fans of the business model, it may not be the best fit for every sector. There are certainly nuances depending on product type (goods vs. services) and transaction complexity (high friction vs. turnkey), but we’ve laid our take on 4 characteristics common amongst industries well-suited for marketplace disruption below: 

1. Burning Reason to Adopt

Relative to B2C, B2B marketplaces tend to manage more complicated buying processes that involve a greater number of steps and parties. As a result, new players frequently face resistance from multiple internal angles. Certain market participants, notably suppliers, may be perfectly happy with a status quo that fosters pricing opacity and relationship-based differentiation. Intermediaries may exist in the form of brokers and/or consultants who make a living off navigating the murky waters. Shining a bright, pareto-efficient light means facing increased competition and diminished pricing power. As such, new marketplaces need a highly compelling onboarding wedge - something that solves for an urgent enough pain point that a segment of participants get pushed over the inertia tipping point.

• Take for example, OneScreen AI (out-of-home advertising marketplace), which has created not one, but multiple adoption wedges. The company consciously decided to first onboard the long tail of inventory suppliers because these SMB operators would most value newly provided demand. OneScreen then built out free SaaS tooling and faster invoice payouts to further incentivize adoption. Very quickly, suppliers start to see more to gain than lose by partnering.

• Knowde (chemical ingredients and polymers marketplace) also began by aggregating smaller suppliers with greater reason to adopt vs. the Dow Chemical’s of the world. The team recognized early on a major impediment for existing sellers and buyers alike - product discoverability was limited to physical product catalogs and PDFs. By putting all product information online along with search filters and online payments capabilities, Knowde significantly reduces the sales cycle and search costs for both sides. 

2. Fragmented Supply

Marketplaces cut out much of the yield loss within buyer/seller discovery by aggregating supply and demand on one platform. These platforms are especially powerful when they layer on a highly fragmented supply base and/or enable the growth/optimization of an otherwise scarce supply base. This is because fragmented supply usually means intense competition amongst sellers, leading to quick adoption of best practices to stay competitive. If sellers see an increase in demand after joining a marketplace, their competitors will quickly follow suit, leading to virality and efficient scaling. At a certain point, not being on the marketplace will be a structural disadvantage, essentially forcing late adopters to join or go out of business. 

• UpSmith (skilled worker marketplace) is an instance of a marketplace that grows fragmented supply. There are over 1.3 million open US positions in manufacturing and construction. UpSmith matches candidates interested in making a career switch (beginning with HVAC technicians and electricians) with employers, who then sponsor the candidate’s training. UpSmith simultaneously increases a scarce supply base while bringing transparency and convenience to employers. 

• Torc (freelancing R&D talent marketplace) optimizes fragmented supply. Torc helps make the most of the scarce supply of software engineers by leveraging AI skills matching, productivity-driven metrics and project-based, flex work to ensure engineers are optimally matched across multiple projects and companies. By artificially increasing the supply base by allowing for a shared resource, Torc opens talent up to more jobs and employers to more talent. 

3. Recurring and Diversified Demand

A marketplace’s end goal should be to maximize utility provided to sellers and buyers. While there are many ways to build for this, certain sectors are structurally set up for faster, larger value realization. A marketplace model will often save the most time and money in verticals where a business not only repurchases frequently, but also purchases from different suppliers every time. Value is reinforced each and every time a transaction with a new supplier is completed. On the supply side, these marketplaces also drive greater value as suppliers reach parts of the market that were previously unaddressable due to relationship and/or resource constraints. A diversity of engagements means that the marketplace continuously provides incremental value, which in turn mitigates disintermediation risk. 

• Reibus (industrial metals marketplace) is an example of this. The company benefits from a unique dynamic where a large portion of buyers are also sellers, thereby driving up the recurring frequency of platform usage. In addition, customers access the platform to fulfill RFPs with very specific requirements around material strength and dimensions - this often means working with a different supplier every time.

• Halo (external R&D labor marketplace) is leveraged by enterprises to gain access to larger, more diverse pools of outside scientists, academics and startups. A single customer will leverage Halo to source experts for topics ranging from reducing sugar content in juice blends to building bio-based moisture barriers for packaging. Every single project requires newly-supplied expertise.

4. Aligned Incentives for All

Finally, it is important to have aligned incentives such that most (if not all) participants in the ecosystem benefit from the introduction of a marketplace. When evaluating marketplaces, we often ask ourselves: What does the current value chain look like? Who would be disadvantaged if this company were to succeed? Many markets have entrenched middlemen (mainly brokers, distributors, and consultants) who might feel threatened by, and push against, adoption. While this does not mean a marketplace can’t succeed, it does create additional scaling headwinds. In such industries, we often find that new entrants achieve success by creatively finding ways to enable intermediaries, rather than fully displace them, thereby turning key participants into marketplace accelerants vs. detractors. 

• Flyp is an example marketplace that saves $200B+ worth of goods from ending up in landfills by using AI to connect power-sellers with used-clothes suppliers. Flyp uniquely benefits all ecosystem players: (i) used-clothing suppliers (thrift stores, donation/liquidation companies, consumers) access net-new demand at higher prices, (ii) power sellers (professional clothing resellers) access a more convenient way to source clothes, and (iii) online marketplaces (PoshMark, Mercari, eBay, etc.) reap net-new supply passing through their sites. This dynamic drives rapid growth as there are only Flyp advocates. 

Now that we have identified some of the recurring traits seen in successful B2B markets, let’s walk through 3 foundational mindsets we have seen successful founders embody in order to crack the cold start problem: 

• Throw all your resources at the difficult side: There is always one side of the marketplace that is more difficult to convert. Spend 100% of energy on converting this “harder” side, and the “easier” side will follow. The best founders are seeking out and listening to these participants to understand exactly what to lean into and prioritize - whether it’s access to a new or particular segment, free software, data, faster payments, financing, etc. 

• Manaically focus on building reliability and trust: B2B purchases tend to be larger and more critical compared to, for example, buying clothes off Amazon. If a buyer’s expectations aren’t met the first time, chances are they will churn immediately. Most corporate buyers also run in tight-knit groups, where news (good and bad) spread rapidly. This “no second chances” environment amplifies the importance of building trust from day one via methods like: (i) “fake it till you make it” aka manually manage the marketplace until parts or all of it can be automated reliably, (ii) vet participants and embed KYC early on, (iii) enable buyer/seller review functionality, and (iv) backstop transactions by guaranteeing refunds and payouts.

• Be long-term greedy: Marketplaces benefit from network effects. So the initial focus should be on increasing users and not generating revenue. Take rate and disintermediation are always a zero sum game. We much prefer platforms that start off with a freemium model or low take rate. If teams are focused on driving the very best experience for participants, there will be plenty of opportunities to monetize down the road by implementing a higher take rate and/or adjacent offerings like ads, fintech, etc. 

At Asymmetric, we are both encouraged by and excited about the rise in B2B marketplaces. We hope these thoughts can serve as an introductory framework to those similarly compelled. We have linked below several other resources we have found helpful as we have iterated our thinking on the space. We feel fortunate to have met so many wildly talented founders building marketplaces of all stripes - should you or someone you know want to chat about B2B marketplaces, please don’t hesitate to reach out.

____________________

Additional Resources

• The 2.0 Playbook for B2B Marketplaces, Kent Bennett, Connor Watumull, Mike Droesch, Dhruv Jain @Bessemer Venture Partners 

• 24 Ways B2B Marketplaces Win, James Currier @NFX

• A Field Guide to B2B Marketplaces, Michael Brown and Loren Straub @Bowery Capital

• All Markets are Not Created Equal, Bill Gurley @Benchmark  

• The Hierarchy of Marketplaces, Sarah Tavel @Benchmark

• Jeff Jordan on Building & Investing in Marketplaces, Patrick O'Shaughnessy on Invest Like the Best

(Image Source: Shutterstock)