During the waning days of the first dot-com boom, some of the biggest names in venture capital invested in marketplaces and directories whose sole function was to consolidate information and foster transparency in industries that had remained opaque for decades.
The thesis was that thousands of small businesses were making specialized products consumed by larger businesses in huge industries, but the reach of smaller players was limited by their dependence on a sales structure built on conferences and personal interactions.
Companies making pharmaceuticals, chemicals, construction materials and medical supplies represented trillions in sales, but those huge aggregate numbers hide how fragmented these supply chains are — and how difficult it is for buyers to see the breadth of sellers available.
Now, similar to the way business models popularized by Kozmo.com and Webvan in decades past have since been reincarnated as Postmates and DoorDash, the B2B directory and marketplace rises from the investment graveyard.
The first sign of life for the directory model came with the success of GoodRX back in 2011. The company proved that when information about pricing in a previously opaque industry becomes available, it can unleash a torrent of new demand.
“GoodRX did this to huge success,” said Shaun Maguire, a partner at Sequoia Capital, who invested in Knowde, a marketplace that follows a similar model. “The idea of crawling the public internet and creating structured data and winning SEO or doing SEO for the first time for something so you get a lot of traffic from buyers so you have something to offer sellers so you can get the sellers to cooperate with you… that playbook can be taken to many different industries.”
Indeed, these kinds of SEO-driven market makers are cropping up across the board.
Andreessen Horowitz invested in Tomorrow Health, which offers a twist on the model for home medical equipment purchasers.
“[The founders] mapped out all the components of the end-to-end home health service delivery model and identified the key areas where a grounds-up rebuild was both needed and possible: namely, the logistics side of home healthcare, which is a combination of real-time supply-demand matching and end-to-end supply chain management; the reimbursement side, which means aggregating and streamlining complex medical policies and reimbursement rules across hundreds of health plans nationwide; and last but not least, the customer experience side, for both providers and patients,” wrote Julie Yoo in a blog post explaining the firm’s investment.
A16Z-backed Tomorrow Health launches with $7.5M seed round to improve in-home healthcare
For Andreessen Horowitz, an opportunity presented itself in durable home medical equipment, a $60 billion market, according to the Centers for Medicare and Medicaid Services. “Not only does this category keep rising in spend, it also has significant downstream cost and outcome implications when its processes are poorly managed,” wrote Yoo. “For example, discharges from hospitals are often delayed because of the inability to reliably order DME for the patients who need it in their homes.”
Bain Capital Ventures is also trying its hand in the marketplace world with an investment in Material Bank. Announced earlier this week, the Material Bank deal — a $28 million investment that the firm led — shows the breadth of opportunities in the B2B marketplace.
As Bain Capital Ventures’ growth investor, Merritt Hummer, noted in her Medium post describing the investment, the business-to-business world is only just waking up to digital sales. She points to the comparative size of Amazon’s business and consumer marketplaces as an indicator. Amazon Business, Hummer noted, saw $10 billion in sales in 2019, up from $1 billion in 2015. Meanwhile, Amazon’s consumers sales platform reached $300 billion in gross merchandise volume in 2019.
The difficulty cracking business-to-business sales stems in part from the scale of the transactions and the different requirements businesses have from a one-off consumer purchase.
“B2B transactions may involve price negotiations, special payment terms, a variety of payment methods, detailed product specifications, complicated SKU proliferation, consultation with a sales rep, unique shipping requirements, and the list goes on,” wrote Hummer. “A retailer buying 10,000 TVs from a wholesaler is a fundamentally different transaction than a consumer buying 1 TV from a retailer.”
That specialization can go a long way to explain why there’s such a demand — and so many opportunities to scale — for vertical marketplaces.
“Take, for example, the highly specialized procurement processes in medical supplies, pharmaceuticals, and construction equipment. Whereas consumers in their everyday lives purchase across numerous verticals, business buyers operate in silos according to the idiosyncrasies of their individual verticals,” Merritt wrote. “This makes it more difficult for a B2B marketplace to achieve category expansion. Every time a B2B marketplace enters a new vertical, it faces the challenge of onboarding a new set of vertical-specific buyers and sellers.”
Hummer’s assessment means there’s likely not going to be a single marketplace that wins in every vertical. The specialization requirements mean that for each of these billion-dollar-plus industries, at least one or two startups may find a foothold and a way to succeed.
Material Bank, a logistics platform for sourcing architectural and design samples, raises $28M
Savvy investors can find these kinds of marketplace mechanics nearly anywhere.
H1, a recent Y Combinator graduate, is bringing this transparency to pharmaceutical companies that need to find information on doctors who specialize in areas where drug makers need expertise (or potential sales channels). That company managed to snag $12.9 million in funding mere months after leaving the accelerator program; Menlo Ventures led that investment.
Meanwhile, Maguire and Sequoia Capital placed their bet on Knowde and its attempt to bring transparency to the $5 trillion chemicals market.
Just the breadth of industries covered above point to a vast potential opportunity set. What’s needed is an old industry that’s going through the demographic shift of a professional managerial class coming online that’s comfortable with online buying and selling.
“We believe the next ten years will be characterized by the rise of B2B commerce and platforms that support it,” wrote Hummer. “It will look different this time: verticalized online marketplaces will emerge, and the landscape is unlikely to be dominated by one behemoth like Amazon.”
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