Why is Now the Time for B2B Marketplaces in Latin America?
The “why now?” question when analyzing an industry or business idea is a frequent one in the venture capital world. The answer to the question usually requires some brainstorming to justify why something didn’t exist before and should it exist now — did something change? Did someone try it before and fail? Why did it fail?
As VCs, we are often faced with ideas that seem to be ahead of their time, be it because they lack some core infrastructure being in place as it is still super incipient, or the idea depends on regulatory changes that are still far off, or maybe they need to rely on network effects that do not exist at this point in time. While on the other side of the spectrum sit the ideas that look like they are just too late, either because there are already one or more players doing it (and doing it well) or because some have tried and failed (and, in that case, you have to go back to the “did-something-change-and-what-is-different-this-time” question).
VCs will very often be wrong in both directions (although saying no to something that should be a yes is a lot more painful than the other way round!), but it is undoubtedly fulfilling to find good positive answers to that question, just like we recently did at ONEVC for the emergence of B2B Marketplaces in Latin America.
“No force on earth can stop an idea whose time has come” — Victor Hugo
Setting the ground
The Latin American market for B2B sales is currently extremely inefficient and highly fragmented. In the FMCG industry for example, there is a USD 100bn wholesale industry in Brazil, in which over 53% of the sales volume is made indirectly, through distributors. Yet having multiple intermediaries between the source and the final destination adds cost, complexity and, in most cases, a poor experience to all stakeholders in the ecosystem.
We believe these inefficiencies are paving the way for the growth of marketplaces.
Marketplaces are platforms that connect buyers and sellers of goods and services. Despite the many different models and features that can be offered (logistics, software, payments, credit, etc), the one thing that we can all agree on is that marketplaces exist because they are good for the market participants.
On the demand side, buyers find themselves in a more transparent environment, where they have access to multiple suppliers and benefit from an increased breadth and depth of goods, typically at better prices compared to what they would otherwise have. On top of that, they can do it all (or at least most of it) through the convenience of interacting with just one platform and can pick and choose goods based on the lowest price, fastest delivery, or best payment terms, depending on their priorities.
On the supply side, there are discussions ongoing about how to preserve direct channels and clients and how to maintain profitability while also being part of the marketplaces. There are also discussions on whether one should be a market-maker (and be the central enabler for a marketplace) or a market-taker (and be a part of other’s marketplaces). Those are valid discussions and should be carefully considered, but it’s also clear that marketplaces are a great alternative to (i) increase reach, (ii) provide access to new consumers, and (iii) access to tech-enabled tools that can provide data insights, information on pricing capabilities, and other management tools that can also result in an increase in sales.
Different from B2B marketplaces, B2C marketplaces have been around for quite some time now in Latin America, and this is an already saturated industry to some extent, with large players dominating the most relevant categories. Additionally, in our experience, B2B marketplaces have better unit economics, larger addressable markets, and a lot more friction that has not been removed in the past years. But why is now the time for B2B marketplaces to shine? Why are players such as Inventa, Clubbi, Tul, Floki, Frubana, Udaan (from India), Mecanizou, and others emerging and thriving?
Did something change?
In our opinion, yes. And, believe it or not, the answer is not only COVID-19, as seems to be for all of the questions about the rise and fall of startups over the last 18 months.
The COVID-19 pandemic did, however, accelerate many of the secular trends that were already set to pick-up at some point, including the transition of SMEs to the digital world. Not necessarily online ordering directly, but it’s hard to find someone during the pandemic who was not exposed to digital experimentation that was to some extent new to them. Especially in a category that, despite its huge relevance in terms of volume and market size, is known for its prevalence of analogical processes.
But there are other factors that, combined with the pandemic, conspired in the emergence of the B2B marketplaces just now:
1.Capital and technology availability. In order to overcome the chicken-and-egg quandary, players usually subsidize value early on for the supply-side, demand-side, or both. That subsidy is often in the form of lower take-rates, discounts, and payment terms but also in the form of technology, such as offering SaaS-like services, usually related to data insights, inventory management, ERP/POS, and connectivity. More capital and technology allows for faster rollout of the 2-sides of the marketplace;
2. Tech-enabled platforms that reduce friction and minimize the need for trust. In the past, it was harder for market participants to trust each other from the get-go; that’s why long-term relationships were highly valuable for both parties. It was previously tough, for example, for a supplier to provide credit to someone buying for the first time; same as it was tough for the buyer to trust that the supplier would deliver goods on time and as promised. Technology and capital now allows marketplaces to mitigate those inefficiencies by, for example, generating incremental sales for a supplier by extending credit to someone on their first order based on past behavior with other suppliers. Technology can also provide the buyer with reviews on the seller and a tracking tool, support service as well as a guaranteed return in case the product is not as expected. A trusted intermediary unlocks significant value;
3. Fragmentation is essential for marketplaces, and digitalization contributes to it. Marketplaces usually thrive in competitive and fragmented environments, where neither supply or demand can concentrate too much power. With more and more market participants going online, marketplaces are seeing a much more fragmented supply and demand base;
4. Adding a fintech layer to the marketplace. There’s been a lot of talk about how the fintech layer can unlock value for marketplaces. Pete Flint, a General Partner at NfX, wrote a great article that helps understand why this is the case. In the case of Brazil (and also all Latam countries), facilitating credit to marketplace participants is a very compelling value proposition and that alone can unlock 2-digit increases in sales. On top of that, there are other tailwinds strengthening that process:
- More friendly central bank regulations, incentivizing new entrants through lower bureaucracy;
- Investor appetite to fund debt facilities earlier in the startup life cycle, helping reduce capital costs and supporting growth;
- Open banking, leveling the playing field by allowing greater access to data for new entrants.
5. The rise of “infrastructure” startups to support marketplaces. The rise of marketplaces has led to a surge in startups that are enablers of higher efficiency and lower friction, and are unlocking the demand for the platforms. Companies such as Olist and Merama are great examples on the B2C side, but the same is happening for B2B too. ONEVC has proudly backed two companies that are taking advantage of that opportunity:
- TruePay, which allows marketplace participants to provide credit without running the usual risk of credit. By leveraging a recent regulatory change, TruePay is allowing merchants to use their credit card receivables as a payment method, thereby eliminating, at the same time, the need for anticipating receivables at a high cost for the merchant, and the credit risk for the supplier;
- Cross Commerce, which is making it easier for sellers outside of Brazil to sell in local marketplaces. Using one single API, CrossCommerce connects these sellers to the most relevant platforms and provides tools for better controls, such as pricing recommendations and inventory management.
As Nipun Mehra (the founder of Ula in Indonesia) well said, B2B marketplaces are not only bringing closer supply and demand for goods and services, they are also bringing closer the supply and demand for capital, data, and technology. In that ecosystem, the trade of goods is just a stepping stone to a much more efficient environment between B2B buyers and sellers, which includes fintech and software components enabled by the platform and other third-party participants.
At ONEVC, we are extremely proud of the founders we backed at Inventa (where we led the pre-seed round), Clubbi, Cross Commerce, and TruePay, and we are looking forward to backing other founders in the B2B marketplace ecosystem. We are confident that there is still a lot of disruption to take place in the way B2B sales currently work. If you’re building the next category-defining company in this space, reach out to us.
Below is an overview of some of the companies backed by ONEVC that are directly or indirectly involved in this space:
- Inventa: Founded by Marcos Salama, Laura Camargo, and Fernando Carrasco, Inventa is a B2B wholesale marketplace connecting SMBs (retailers) and suppliers or distributors in an easy-to-use online platform.
- Cross Commerce: CrossCommerce’s mission is to make cross-border selling easy and highly scalable. From the seller’s perspective, the platform allows them to integrate with major marketplaces, control their inventory, and integrate with logistics players. For local marketplaces, it represents an incremental assortment for its consumers.
- Clubbi: Clubbi was born with the ultimate goal of digitalizing mom-and-pop shops. By connecting the industry and distributors to small merchants through a B2B marketplace, the company enables merchants to have access to a broader assortment of businesses, with an easier, faster, and cheaper inventory replenishment experience.
- TruePay: TruePay is a B2B fintech company that is re-inventing the way merchants pay their suppliers. The company allows merchants to use their credit card receivable as a payment method to suppliers. By bringing that option, TruePay minimizes the cost of anticipating receivables for the merchants and, at the same time, virtually eliminates the credit risk for suppliers. TruePay recently raised a Series A led by Addition.
Rodrigo Parsequian Cartolano is a partner at ONEVC. Rodrigo spent over 6 years in investment banking at Moelis and G5 Evercore, where he focused on local and cross-border M&A and restructuring transactions. After that, Rodrigo joined Rappi, a multivertical last-mile delivery company headquartered in Colombia and present in 9 countries across LatAm, where he was most recently the Head of Strategy and led the efforts to raise over $800m in equity. Passionate about entrepreneurs and seeing early-stage companies grow and succeed, Rodrigo joined ONEVC as a partner in 2021.
