The Case For B2B Marketplaces — The 4 Kinds of B2B Marketplaces

At Point Nine, we’ve been very enthusiastic about B2B marketplaces for quite some time now — to the point that we organized a conference exclusively focused on this topic and published a “map” that showcases all major European B2B marketplaces that we could find. Also, we have been lucky enough to invest in a few B2B marketplaces already and want to continue doing so.

However, the industry as a whole is still at a very early stage when it comes to B2B marketplaces and we see new opportunities here on a weekly basis. A common mistake I observe is to think that just because there are transactions between two parties in a specific industry, there is a great marketplace opportunity. If you are thinking about starting a B2B marketplace and what’s the best way to approach this, I can highly recommend this classic by Bill Gurley to understand which criteria make a great marketplace. When we’re analyzing B2B marketplaces, Bill Gurley’s framework is one of the tools that we like to use to assess the market. In addition, I also try to sketch the market structure and the value chain of the market and want to outline my thinking here in case it can be helpful for early-stage founders.

In B2B, the value chain always consists of the supply and demand side and in many cases, you will find some sort of middleman in between. Over time I realized that these sketches usually end up in one of four different structures — two that are more in favor for a marketplace (A1, A2) and two which are less (B1, B2). As an overview, it looks like this:

Let me explain these different structures in more detail.

The middleman structure (Market Structure A1)

In these cases, both the supply and the demand side are highly fragmented and connected through a lot of middlemen, e.g. traders or agencies. Besides connecting supply and demand, these middlemen often provide additional services such as logistics, insurance or trade financing.

If you are building a marketplace, there is a good chance that by offering similar services you can replace a lot of the middlemen and BECOME the middleman between the supply and demand side. I have also seen that there can be strong resistance from the existing middlemen because they are obviously afraid to lose their business.

A good example here is our portfolio company Metalshub, which is a marketplace for ferroalloys and specialty metals.

Direct relationships — high fragmentation (Market Structure A2)

This is probably the classical market structure in favor of a marketplace — a market with very fragmented supply and demand that do business together. The aggregation by the marketplace helps the demand side in discovering new suppliers with potentially better prices or products. In addition to addressing the “discovery” problem, many of these marketplaces offer additional services which can ensure a much more efficient process. For the supply side, a marketplace can help them to acquire new customers and also ensure a more efficient process.

A good example here is #p9family member Laserhub, which is a marketplace for industrial sheet metal processing.

For the B2C side, Bill Gurley has (again) an interesting framework where he distinguishes between ‘monogamous’ and ‘promiscuous’ businesses regarding direct relationships and I think this can be also applied for B2B. Monogamous businesses are your barber or doctor who you probably don’t switch often whereas promiscuous businesses are restaurants or clothing shops where you want to frequently try new ones. Due to the existing relationship, ‘monogamous’ businesses are harder to build a marketplace out of.

Direct relationships — low fragmentation (Market Structure B1)

Compared to A2, in that setup, at least one side is less fragmented which means that there are fewer but usually stronger direct relationships between the supply and demand side. In B2B not only the companies but also the people working there can have very long-lasting relationships with their customers of up to 20 years. It is incredibly hard to break into these existing relationships if the degree of fragmentation is low and if people are not used to switching providers frequently. Also, it is very hard to monetize existing relationships — you would basically extract value at the expense of the demand or supply side.

Since there is less value for a marketplace in providing discovery and it’s harder to monetize these strong relationships, it can make sense to build a workflow tool that makes the buying process more efficient. The goal should be to get at least one side addicted to such kind of product which is easier if the frequency of purchase is high. That can allow you to get to a very high share of wallet fast. If the usage is high and you ensure a much more efficient process, you will most likely be able to monetize it as a workflow tool.

The pyramid structure (Market Structure B2)

This structure is a bit more complex. As you can see in the picture, the structure looks a bit like a pyramid. At the bottom, you have a very fragmented long tail of small suppliers. In the middle, you have a small and big wholesaler that aggregate the fragmented supply side. There are also a few small buyers but the majority of the volume gets bought by a few big buyers who only work with a few big wholesalers.

While I think this structure is rare, it does exist, especially in oligopoly-style markets.

Two additional criteria that make B2B marketplaces special

In my eyes, there are some additional criteria to consider for B2B marketplaces which can have a big impact on the feasibility of a marketplace. Here are two of the most important aspects that can have a big impact on the success of the business and which you should consider evaluating as well:

Commodity vs. specialty goods

If you build a marketplace around commodities, price is the most important decision criteria for your customers. It’s going to be very hard to monetize trades on low-margin products since every small cut you take can have a big impact on the unit economics of buyers and sellers. Therefore, it’s important to consider other ways of monetization early on such as selling pricing data or additional services such as financing or insurance.

If it’s about specialty goods, there is a good chance that you can take a healthy take rate of around 10–20%.

Local vs. global

In B2B a good amount of the business happens globally which can be awesome for a marketplace if you are successful with it because global network effects can be very defensible. However, initially, it often makes sense to narrow the scope to build up early liquidity, e.g. in a certain region or for a certain product.

Interestingly, marketplaces which are global from day 1 usually have very diverse teams because they need people who can sell to all kinds of different markets in different languages. As an example, our portfolio company xChange is a marketplace for shipping containers and has its HQ in Germany but since they sell to countries such as Pakistan, China or India they need native speakers for these countries for sales and customer support. Today, they are 40 people from 22 different countries.

I’m sure I will iterate on this framework going forward and it’s far from being perfect but I hope it helps you in your market analysis. If you have any questions or I can help you in diving deeper into the structure of the market you are tackling, please reach out anytime.