B2B vs. B2C vs. B2B2C

Last month, Justin Kan — former YC partner and co-founder of Twitch (B2C) and now Atrium (B2B) — published a piece titled “Why I love B2B over B2C.” My first instinct as a consumer investor was to send him an angry tweet (@justinkan you damn traitor! We’ve lost you to the dark side).

My second instinct, as I’m currently doing a deep dive on the future of retail, was to map out how Justin’s arguments apply to a third, often overlooked, category: B2B2C [a model in which business A sells to business B, but interacts directly with business B’s customers under their own brand].

First, I’ll sum up Justin’s points (worth a read regardless of whether you think Freshworks or Glossier is the hottest deal around). Second, I’ll map out how the arguments apply to three companies in the retail space — representing each of the three business models — and why I see huge opportunities in the third.

In short, billing an enterprise but interacting directly with consumers is a bit like having the cake and eating it too; you’re a little less dependent on luck and will have a more predictable growth trajectory than the average consumer startup, yet play in the category with the largest wins on the internet.

Justin argues that:

1) “B2C is a gamble while B2B is (more) within your control”: every B2C success story rode a massive wave the founders didn’t predict at the get-go (think: “Uber came out as the killer app for the mobile world — just as everyone was getting a mobile phone for the first time”). For B2C, the magnitude of success corresponds to the unknown magnitude of a wave, while B2B success is about asking businesses what they want and carefully crafting a solution that is better than any known alternative.

2) “B2B Customers know what they want, while B2C products are a shot in the dark”: B2C consumers are irrational and trend-driven, while B2B clients are more predictable.

3) “In B2C, it is hard to know if things are working, while B2B has a clear execution path”: selling B2C is an art while B2B sales processes more of a science. In addition, B2B customers don’t “quickly flip-flop from using one product to another.”

4) “Iterating in B2C is hard, while B2B has clear follow-up steps”: In B2B, “you can just ask customers for their feature requests, then you implement them and charge for it.”

5) “B2B Customers will actually pay for your products”: Consumers are price sensitive while “businesses make decisions based on cost-benefit analyses.”

Justin finishes off saying that “The biggest wins on the internet have been consumer companies, and that is likely to continue to be the case. However, having built and sold a consumer company, I just think it’s a lot more painful, prone to luck, and harder to grow compared with B2B.”

Source: Sapphire Ventures: “This trend of large, consumer outliers is clearly illustrated when zooming into the venture exit history of the past five years. Returns from large, consumer outcomes such as Facebook, Twitter and WhatsApp often account for more than the sum of a plethora of enterprise companies in any given year”

New Store (B2B) vs. ShopShops (B2C) vs. Hero (B2B2C)

The arguments are compelling on paper, but how do they apply in the wild? Let’s take a look at the (eat-or-be-eaten) retail jungle as a case study: New Store, ShopShops, and Hero are all omnichannel startups, operating in the same space but with different business models.

New Store — the B2B representative, founded by Stephan Schambach who sold his previous company to Salesforce for a humbling $2.8B — sells mobile-first omni-channel software solutions to large retailers with a product suite including omnichannel fulfillment, assisted selling, and clienteling. They’re solving some of the industry’s largest pain points: how to move from independent online and offline channels to “unified commerce,” and how to unlock a cohesive understanding of shoppers’ online and offline customer journeys. As Justin argues around B2B, their clients are deep pocketed retailers that have a predictive willingness to pay as long as New Store’s solutions generate a revenue uplift or cost reduction.

ShopShops — the B2C representative, backed by Union Square Ventures and Forerunner Ventures— is a live video shopping mobile app, predominantly for Chinese consumers buying US brands. They connect shoppers in the brick-and-mortar stores with shoppers at home, enabling transactions between consumers through live video streams. The social shopping app is in a good place to catch big waves on the horizon: cross-border e-commerce sales in China are growing ($100bn in 2017), Gen Z (the mobile first generation) is rapidly increasingly its spending power, and companies incorporating live elements rather than on-demand, are rising in popularity (Justin Kan’s Twitch being one example, HQ Trivia being another). In short, ShopShops is an interesting bet: depending on what happens with aforementioned trends they may well make a splash.

Hero — the B2B2C representative — is in every way a hybrid between previous two companies: a SaaS solution enabling store associates in the physical stores to connect with online shoppers via chat and live video, and then using insights from the conversations to better assist consumers during both online and offline store visits. Just like New Store, Hero sells to large retailers (including the LVMH group, Harvey Nichols, J.Crew, and others) willing to sign multi-year contracts worth hundreds of thousands as long as Hero helps them improve conversion rates, increase average order value, and decrease return rate. Unlike New Store, however, they own the relationship with the end consumer and the experience on their clients’ websites is Hero branded. In this case, that means that 350 million online shoppers are exposed to the Hero brand every day; a scale ShopsShops will struggle to reach, a personal connection New Store will never have.

I’ll backtrack for a second, to crystallise the difference between B2B and B2B2C and highlight why the above is crucial. Borrowing the words of Andreessen Horowitz’s Alex Rampell (a fellow b2b2c champion!): ‘A “white label” solution not showing its brand — instead just doing the backend software — is just normal B2B software. But a solution where each consumer knows he or she is creating an account with the first B would be B2B2C.’ Why is this important? Eventually, “customers becomes untethered from the middle B. . .they recognize that YOU (the first B!) are the product they use. Think Affirm in consumer lending, Instacart for grocery delivery, OpenTable for restaurant bookings. . .In each case, a well-structured set of business deals led to lots of downstream consumers with no per-customer acquisition cost.”

Bringing this back to Hero, the fact that consumers engage directly with Hero makes them able to leverage their brand to adopt new models as they learn what waves that are worth riding. In a few years, consumers may not only use Hero to connect to store associates, but to influencers, brand advocates, shoppers in other countries, or friends who want shopping advice — all in one place.

That being said, B2B2C is by no means some panacea. If it’s hard to build a product that enterprises or consumers love, building one that is loved by both is more than twice as difficult. However, if you do it right — and manage to keep the incentives of your B and the second B perfectly aligned — you’re onto something big. Or, as Alex puts it, “Done right*, B2B2C can be one of the most effective ways of acquiring customers and constructing a powerful moat.”

A false dichotomy

If you want a predictable growth trajectory and high odds to build a sizeable business, go for B2B. If you’re aiming for the groundswell, B2C is your ocean (but know statistics indicate a likely belly-flop!). If you’ve accomplished the incredibly hard task of building a product that is 10x better from both a business and end-consumer’s perspective, the reward is that B2B2C lets you have the best of both models.

*”Done right” means that the incentives of the first and second B must be aligned. B2B2C does not work if you become an antagonist of the business you sell to.