How B2B Marketplaces Are Changing Procurement

The unexpected nature of Covid-19 has unveiled that many companies are not well prepared for disruptions among their supply chain and are re-evaluating how to procure materials going forward. In this post, I want to talk about the reassessment of supply chains triggered by Covid-19, the shift to verticalized procurement solutions, and why now is an excellent time for building B2B Marketplaces.

Covid-19 as one more trigger event for companies to re-evaluate their supply chains

When E&Y surveyed more than 2,900 executives in 46 countries across different industries in March this year, they asked how the Covid-19 event would affect their decision on their global supply chain. 52% mentioned they were taking steps to change, 40% said they would re-evaluate their supply chain, and only 8% said there was no change so far:

Examples of these changes are that companies look for alternative ports, source alternative components, develop dual sourcing strategies, and do critical reviews of trade routes and their existing suppliers. While in the past, many companies focused on optimizing their supply chain for efficiency, we might see a shift of that focus to more resilient and faster adjustments. Similarly, as a response to Covid-19, Porsche Consulting suggests to develop a strategic master plan for the reactivation of the supply chain and to invest in resilience “to lift the supply chain up to a new maturity level.”

Put differently, Covid-19 is one more trigger event for companies to re-evaluate their supply chain and, therefore, an excellent opportunity for new tools that can help companies in sourcing and managing their suppliers. The founder of Knowde, a B2B marketplace for chemicals where Sequoia recently invested $14M, confirmed this pressure to find new ways to procure and sell due to Covid-19:

“It’s going to be one more trigger event for these chemical companies that they have to go online,” he said. The personal relationships that drove much of the sales for the chemicals business before have dried up. No more conferences and events means no more opportunities to glad-hand, backslap, and chat over drinks at the hotel bar. So these companies need to find a new way to sell.

Horizontal procurement solutions won the heart of enterprise companies in the past.

In the past, most successful procurement platforms have been horizontal (i.e., focused on a wide range of industries) and have mostly focused on selling to enterprise companies. Two examples (you will find many more examples in the Gartner Procure-to-pay Quadrant):

• Ariba was founded in 1996 and was built on the idea to replace the paper-based and labor-intensive procurement processes with software. The company scaled from $800k to $274M in revenue within only four years and went public three years after founding. Tomasz Tunguz from Redpoint summarized the whole Ariba journey as a great case study already. The company was eventually acquired by SAP for €4.3bn in 2012.
• In a more recent example, Berlin-based Scoutbee generated a lot of buzz among investors when it raised a pretty big Series B of $60M last year. It offers a supply discovery suite with two main functions: a) Streamline to find and evaluate global suppliers and b) DeepSee to enrich supplier profiles.

While most of the procurement solutions you find on Gartner are very mature, they often need significant time to onboard employees and suppliers and to integrate into other enterprise products. This is also visible if you look at Ariba’s gross margin, which decreased from 83% to 46% within seven years due to services and heavy customization of its procurement software. The decrease of Ariba’s gross margin demonstrates how unique companies’ procurement flows can be (across industries) and why building customized solutions are so important when selling into large enterprises.

Also, the required onboarding effort, complexity, and cost of customization show that these procurement solutions are often unaffordable and out of reach for most SMBs. These companies could benefit from such solutions but not at very high cost or if the product cannot be adapted to their specific workflows. In response to this, we see a trend from horizontal platforms to more vertical procurement solutions and hence B2B Marketplaces.

Entering vertical procurement solutions — for all kinds of businesses

At Point Nine, we’ve been very interested in B2B Marketplaces in recent years (see our blog and investments). I think many B2B Marketplaces for materials are, in fact, verticalized procurement solutions.

What is very interesting is that these B2B Marketplaces are often building very tailored workflow software for a specific buying persona in a particular industry, which decreases the need for customization.

There is enormous potential for streamlining these procurement processes and automating parts of it. This can free up time from repetitive work that fails to leverage the capabilities of the procurement department for more strategic purchasing, innovation, and researching new and better materials.

A few examples of these tailored workflows:

• Laserhub: if you want to buy sheet metal parts, it will take you less than 3min from uploading your CAD file to an offer with Laserhub — what previously has taken days and lots of back and forth with different suppliers to procure these parts. Laserhub also offers a CAD guide so that its customers can manufacture the best possible sheet metal part.
• Faire: if small makers want to sell to retailers, they usually need to take care of the logistics, need to accept the standard payment terms of the industry (45–60 days), and often don’t have access to trade credit given their small size. Faire completely changes this “industry standard,” i.e., it enables these small makers free shipping while also paying them upfront, handling the returns on their end, and offering trade credit.
• Zageno: is building a marketplace for lab supplies. It helps researchers to find the right equipment for their laboratory experiments. In the past, it was tough and time-consuming for researchers to compare different offerings, and they now see everything in one place. Zageno also offers a product rating system to get unbiased, peer-reviewed ratings, which are very important in that industry and which researchers otherwise would not get. At the same time, it helps suppliers to get access to researchers across academia, pharmaceuticals, and biotech all at once.

Time to build

For large and very fragmented industries, we see exciting opportunities to change procurement with such B2B Marketplaces, and I think timing has never been better. Looking at how the eCommerce penetration has evolved in the US in the last few weeks due to Covid-19 is mind-blowing if you believe this chart:

While it’s hard to say how much of this holds true for B2B and how sustainable the adoption will be, I think it’s fair to assume that Covid-19 triggers changes in buying behavior that can be long-lasting and also leads to shifts that might make companies more open to trying new things.