B2B Marketplaces Part 2 – What is a good B2B Marketplace?
28 MINS watch

6th May, 2022

On today’s episode we dive deep into the makings of an ideal B2B marketplace.


Hi and welcome to Matrix Moments. This is Salonie and on today’s episode we have Sudipto & Nitisha from the Matrix team talking about B2B marketplaces – this episode is part of multi part series where we cover all things marketplaces. On today’s episode we dive deep into the making of an ideal B2B marketplace. Tune in.


But so, Sudipto, I agree that the timing is right and the market is super big, right, but we also know that there are so many permutation and combination of models that are possible in this space. 




Some are starting supply, some is demand, some part of it is fragmented, consolidated, should we play with working capital or not, should we build in a commoditized play or should it be a different shaded. Should it be distribution for, should it be vertical, horizontal, there are just so many things that a founder thinks of or an investor thinks of or if any person looking at these value chains. 

So I know like we’ve had multiple discussions over as to how do we look the companies and I know that as Matrix and across our valuations and portfolio learnings we have had like very strong points on what kind of models do we prefer over the other. So just to probably like discuss on couple of them and share insights with the viewers. So first of all I think the first most strongest buyers that I always hear from you and we’ve seen it working for our portfolios is that you’ve told me time in time out always vertical marketplaces. You can just never go horizontal in B2B. So why is it so, right, what has brought you to this particular learning if you could just share.


Sure. And before we discuss more the only caveat is to our viewers this is our thesis and we might be right or wrong, finally its founders who essentially end up executing and a lot of times proving us wrong and we learn in the process so sort of please bear with us and if you think we’re wrong would love to hear views from viewers as well. But internally at least for a B2B there are two, three things that we definitely look. 

We look at whether the market is something we want to invest in. And the first thing for us is vertical marketplaces. Now, why vertical, right. In B2C for example horizontal marketplaces become really, really big and all the large companies globally across geographies have been horizontal marketplaces. And in B2C why horizontal and B2B why vertical? So if you look at B2C, right, what does a marketplace do? 

They essentially acquire a customer by probably selling electronics at a very competitive price and then over a period of time make money by selling clothes, private labels, by selling books, by selling a lot of other products which have higher gross margin and you can make money from them. 

So B2C is essentially how do you acquire a customer and then amortize that cap by selling a lot of other products where you can make money and it’s a long LTV/CAC gain where once you established brand and trust and repeat the customer keeps on repeating and buying multiple different products from him. 

Now let’s take B2B. You sell electronics to a customer, will that customer ever buy fashion from you?


No, its very sticky to like one vertical. 


So the guy who sells electronics, the retailer who sells electronics does not sell fashion. So you cannot essentially acquire a customer and sell multiple different products to them. So the customer set across verticals is different. Then let’s see who we’re supplying. In B2C commerce there’s a wholesaler, there are multiple wholesalers who aggregate different products and then sell on Flipkart or Amazon for example. 

In B2B the fisherman is selling fish, the farmer is selling agri products, the shoe factory in Agra is selling shoes, the cloth factory in Tirupur is selling clothes, the chemical factory in Gujarat is selling chemicals. So the kind of factory and the form factor of factory and the geographical disposition of the factory is very different. So customers are different, the sellers are different. On top of that your logistics and supply chain is completely different. In B2C you have this uniform box under which everything fits. In B2B fish obviously is sold differently, agri products will be sold in a truck, shoes will be sold from size say 6-12 with different combinations of pairs. Clothes will be sold from XS to say XXXL.

Everything that you’re selling, the box, the packaging, the signs, the truck that you need, the cold storage, the non cold storage, first mile, last mile is completely different. On top of that credit, payment, underwriting, that is again very different in each supply chain. So supply chain to supply chain it is almost no synergy. Customer different, supply different, logistics and supply chain different, credit underwriting and payment different. Which means if you want to do horizontal you’re not building one company you’re building multiple companies and we generally believe that a strong founder who is trying to solve one problem maybe well generally will always do better than somebody who is trying to solve 4-5 different things together. 

Which is why we believe that vertical market this is a great place to start with and till you get to a certain amount of scale say a few hundred million dollars of GMV stick to one vertical, do that really well, get PMF, get to profitability, get to very good ROC characteristics. And then it is okay to expand horizontally into sort of adjacent sectors. But to begin with if you want to do multiple different verticals it becomes very tricky because the nuances, learning, org building and everything which you need to do differently for vertical to vertical. Which is why focus on vertical marketplaces and all our investments have been vertical market cases. 


That’s completely fair, Sudipto, and even like from the learning of -- 


So which is why all companies in our portfolio are vertical marketplaces and we’re big believers of vertical marketplaces. 


Yeah. I mean I agree it’s completely reflecting in our portfolio’s performance also so hopefully it continues to grow that way, fingers crossed on that. But on that point, right, when you were talking about that the supply base is different the demand base is different. I know we have had a very strong thesis that the supply has to be fragmented. It is the demand side if it’s fragmented it’s very good. Even if there’s a little bit of consolidation through some of our portfolio companies we’ve seen that that also works. Right, so on demand side maybe it could be like fragmented and even if there’s some sort of consolidation they’re okay with it. 

But supply side has to be fragmented, right, this has been a very -- like you have been internally a very strong advocate of that point and would love to understand your views around it. 


So, see, we’re trying to invest in great businesses. Obviously great founders, we’re founders first, but great founders building very good businesses. What is a great business and we’ll cover a  little bit later as well. A great business is where you can build a very large outcome with very little amount of capital. How do you build a very large outcome, it is essentially TAM, size of the market into percentage share that this company can get into the margins you can create out of the pool which gives you the net earnings that you have and then you have a multiple and that sort of gives you the valuation. The amount of money required is generally money that goes into CAC working capital and Capex, these are the major variables, salaries and everything you can take aside but these are the major variables. 

So essentially looking for businesses that in the end state can one, be large with a lot of GMV pull, two, you can have very high net margins and three have limited working capital Capex or CAC. Now in B2B generally CAC is not an issue so you can take out that from the equation. We’re looking at large markets with large marketshare, high contribution margin with low working capital and low Capex. If you can do that we’re building a very good fundamentally strong business, so that’s the overarching archetype. 

Now there are so many vertical B2B marketplaces, right, TAM is very easy. If you are not above a certain TAM say $5-10 billion don’t build in that space. But even if you do that cut as you said there are so many different verticals like milk and sea food and fashion and the different parts of the supply chain, finished goods, raw materials etcetra you’ve n cross and n combinations and we can end up investing in hundred marketplaces.

How do we decide out of this which marketplace will have good business characteristics. And for that going back we want to be in supply chains with end state you can create good amount of contribution margin with a low working capital. How do you do that? And from there we can come to the fragmentation question. See, if the marketplace is not adding value and is just a trading platform that is taking one packet from the supplier and then delivering that packet to the buyer you cannot make a lot of margin because you’re not adding value.

So whenever your supply -- so finally we’re in the business of investing in great businesses  and the quality of a business comes back to essentially what we just discussed, right, that can we make a lot of margin and can we do it with low amount of working capital. And if the business is not adding value it’s just a trading business which is essentially moving boxes say from point A to point B you cannot make that much amount of money.

So now when can a marketplace add value and can make margins. If the end customer or the buyer trusts the supply brand and not the marketplace then the marketplace cannot make a lot of margin. For example in FMCG if I’m buying something from ITC I care about ITC not the marketplace a platform that I’m buying from. In electronics if I’m buying a Xiaomi phone then I care about the brand Xiaomi not about marketplace. So if your supply is consolidated and branded then the end customer has complete trust on the supplier and they don’t care about the marketplace. The marketplace essentially is moving boxes and adding working capital. 

In a business of moving boxes and adding working capital you cannot make more than 1-2 percent of net margin because there are already stakeholders present in the supply chain that supply chain has been well oiled and people who make money are essentially making their money because of the labor that they’re putting in and to make a lot of margin out of that was very difficult. However if the supply is unbranded and completely flat vented, right, I as a customer don’t know which factory from Surat the clothes are coming or which factory from Agra the shoes are coming and which fisherman is selling. 

In all these situations the market just becomes important. So if supply is consolidated and branded the end buyer trusts the supplier or the manufacturer, the marketplace cannot make a lot of margin. If the supply is fragmented and unbranded the end buyer will always trust the marketplace that they will enable me to discover the right products, do the QC, have trust on the marketplace, they will deliver the things on time which is where the marketplace becomes powerful. 

Also in these categories there’s no MRP which means you can actually create margin out of it, right, and end state if you have to build a 7-8 percent EBITDA business which means you need a 20 percent gross margin you will need all of these characteristics in the marketplace which will ties up to our original point that what will separate business. without that end state you can’t make a 7-8 percent EBITDA business. 


Sudipto, to the same point and I completely agree and we have discussed this that the marketplace needs to add value across the quality, the branding part of it and then the supply chain logistics and the working capital can all pursue, right, and it also gets the pricing part and the margin part. 

But in the beginning and we’re faced this question from a lot of early stage founders that it’s a chicken and egg problem. You have to get the consolidated suppliers, the big brands because the demand side is asking for it. They’re saying they only come to the platform if we can get goods from these particular brands. So you start with the consolidated suppliers and then when investors evaluate their like your supply is consolidated, right, and then like the founders say that ultimately it’s going to be the long tail of it that we will eventually build. So what about the timing of all of this? Like does the B2B marketplace start with fragmented suppliers or does that eventually build over time. Like how should the founders think about it?


So it’s a choice of category. See, if I look at the trillion dollar stack, right, if you look at lifestyle categories there’s hardly anything branded especially when you’re selling the retailer segment. If you look at most of agri commodities, right, there’s hardly anything that is branded. If you look at the raw material supply chain in terms of commodities in steel, in chemicals, in construction materials there’s hardly anything that’s truly branded and branded will be a very small portion. So choosing the category itself gives you an answer. 

If the end customer is looking for branded products it becomes very difficult to build the marketplace. But if you’re building a marketplace for fashion the end retailer is not looking for branded products they’re looking for variety, they’re looking for new designs, they’re looking for quality. In sea food nobody is looking for a branded shrimp, they’re looking for good quality shrimp. So it’s a choice of marketplace. Although agree on your point of starting with something should be consolidated both sides cannot be fragmented which is why consolidated demand makes sense. That you take fragmented supply but start selling to large retailers or large brands to begin with so that you can at least have one side of the marketplace which gives you volume. 

For example when Captain Fresh started they focused a lot on the modern trade and the online retailers like the Licious, Fresh to Homes of the world. That enabled them to scale so really fast and which ensured that their supply chain and sort of the procurement function which is key to success scales up super fast because you were having demand. Now once you started doing that and your pieces of supply chain and logistics fell into place then you sort of diversified demand and went into retailers, went into exports, and started in B2B, B2C so on the demand side starting with consolidated demand and then going into more fragmented demand makes sense.

But supply I would still say it’s better to look at sort of segments where supply is fragmented, you will have to take that effort say of 6 months to 12 months to actually go on the ground, catalogue the supply, aggregate that supply, build QC and trust and get that supply on to your platform. But once you do that you’ve a clear reason to exist because nobody out there has that supply of products. And if you have a very good high quality supply of products at the right price and you will have the right price because you will have economics of scale compared to the unorganized segment. You will always win when you go to demand because see, unlike B2C, in B2C the actual job in life of end customer is not procuring products for their household. Unka ek job hain on top of that they’re purchasing for fun. 

So whenever they like a brand they stick to the brand, they will not always figure out what are all the other brands out there and do a price quality comparison. In B2B the purchase managers entire job in the entire year is to get better quality products at a lower price, that is his job, he’s doing that, it’s a purchase function. So there they will evaluate all possible outcomes and take the best combination of price and quality. Which is why if you can get supply at scale do the deal, that’s not the case for a B2C which is why B2B is supply first, if you’re doing supply first fragmented supply and if you’re doing fragmented supply, supply first do vertical which is sort of the foundation of our thesis when we look at markets. 


Yeah, and I mean as you always say, right, the more fragmented your supply base is the harder you are to replace. So I mean if it’s consolidated anyone can take those suppliers and create a separate company and then you can’t do anything about it. 


Yeah. A small anecdote and this one is for demand side, right, but say for example if somebody wants to build a Flipkart, Ola or Swiggy, a B2C company with say 30-40 million customers. Even if you spend $10 in acquiring that customer you will spend $300-400 million and by the way $10 in today’s market you can’t acquire customers but still you have to spend $300-400 million. If you take a B2R business or a reseller business wherein most of the business probably is powered by 50,000 people, right, there even if you spend $1000 that’s a lot of money in India and say please try my product. You will spend $50 million to acquire that set of customers.

Now if your sales actually is happening with only 100 customers you can go and give them $100,000 and that $100,000 does not need to essentially be in terms of direct payment it could also be discounting and stuff like that. Within $10 million somebody can come and snatch your customers. So any fragmentation is always a moat, consolidation is always risk, fragmentation is always moat. 


Which is completely like something that you know, we all agree with.

. So continuing our discussion on B2B I think we have talked a lot about what does a good market or a good founder look like. But what does a good business look like, so what about their business fundamentals, what do you think around that?


Fair. So in B2C it is very important for businesses to ensure the customer tries a product and then you create a habit of stickiness around it and then over a period of time you make money. Those that are lot of great B2C companies are habit forming or habit changing companies, you were never used to a cab coming in 5 minutes or food coming in 10 minutes and they make it possible for you. B2B is not habit changing or habit forming or a new customer behavior. Customers are procuring, now you’re giving fundamentally more quality, more assortment or better price and better tap of credit. So for a good B2B business you cannot start building a contribution margin negative business and hope to become contribution margin positive overnight. 

Because if you’re CM negative especially CM1 negative and people are buying from you they’re buying from you because you’re CM1 negative not because you’re changing habit. And the moment you want to increase price you will not be able to essentially attract that customer. So in B2B businesses being margin focused is very important and always build a CM1 positive business on day 1 which means that that transaction at least is making money and people are buying from you because of the quality of service and not because you’re cheaper than market price. So CM1 is very important. 

We also prefer CM2 positive but we’re cognizant of the fact that sometimes you will have excess capacity built in, sometimes you will be burning a little bit of branding and marketing to acquire customers, your sales funnel may not be the most optimized to begin with so probably you’re CM2 negative to start with but over a period of time there should also be a path to CM2 breakeven. So one thing is around your margins in unit economics very important for B2B and CM1 positive is a must to begin with. 

Second is the question of working capital because in the end what is a good business, it is all about your margins and how much margins you can make with limited about of capital. And the place where capital truly grows in B2B is in working capital. The second thing is can you build a business with best is if you can start with cash. If people are buying you from cash it is very clear it is because the quality of the product that you’re giving to the customer. If that’s not possible start with 10-15 days of working capital. The less the number of working capital if you’re essentially giving 100-120 days working capital to someone and they’re buying because of working capital then they’re buying PMF, this not true PMF. And the more the number of days of working capital becomes -- 


The more demand you can get. 


So for example if you have a three months working capital versus say 15 days working capital. If you have to build a billion dollars GMV company which means broadly say 100 million a month if it’s a three month working capital cycle you’ll need $300 million, if it’s 15 days you will need $50 million. And that is where your dilution, your ROC and the quality of the business is truly impacted.

For certain segments say for construction you will need to have higher working capital days. But then you need to be extremely commercial, you need to figure out the right processes for collection, underwriting so that NPAs don’t happen. But in general having working capital in check or if working capital cycles are huge having a very strong finance and collections department is extremely critical. So when we generally look at a B2B business there is a lot of focus on four things, margins, working capital, third is growth. Obviously growth is great but in a B2B business if you’re growing 3.5-4x year on year that’s great growth in the initial stages and 2-2.5x at a late stages is actually great growth. The fourth is cohorts, and especially supply side cohorts. 

So if you have to look at PMF in an early stage business most of the PMF comes from cohorts. People who are selling on you are they selling more and more and more which means because of you are they actually getting more money, are they satisfied with your service. Similarly your demand, are demand cohorts going to get time. So good B2B business looks like growing 3.5-4x year and year, contribution margin 1 profitable, clear path to CM2 profitable and end state EBITDA of at least 5 percentage plus. Working capital less the better, if it’s less than 30 days great because then that gives you great ROC characteristics and very strong supply cohorts and reasonably good demand cohorts. That’s what an ideal B2B business looks like, whenever you see a business like that please invest.


That’s amazing, Sudipto, thank you actually so much for sharing and especially the point around CM, right, that really hits me because even when we meet the founders it seems like it’s not pinching them at all that the CM1 is negative. And it’s probably because they’ve seen -- 


No but all great founders it pinches them.


So for the early founders, right, for the young founders they say businesses even with CM2 and they do not say like a sector specific answer. They’ll quote some consumer company, they were also CM1, CM2 negative in the way. 


What you should quote are all the B2B unicorns. All the B2B unicorns are EBITDA profitable, forget CM2 profitability. They are unicorns for a reason because they’re proving profitable, scalable PMF and that should your aspiration be in all the companies we’re investing in our portfolio they’re all CM1 profitable and most are CM2 profitable as well as we speak. 

And finally as founders you’re not building it for investors, you’re building it for yourself and if your company is not CM1 profitable the moment you scale and you try to become CM1 profitable your customers will go away and you would not have built a business. So it’s end state good quality business that we’re talking about and on day 1 from day 1 being strict on being CM1 profitable helps you get there. 


Yeah. And either have the control on the levers, right, you know if this changes then I can go into profitability. Clear. So actually, Sudipto, just to close this conversation given we have shared all the insights and you have shared across different stages, across portfolios what happened our learnings like, right. So with all of this where does this go ahead, what is our outlook for the next 5-10 years. I mean as Matrix we know we have been very bullish on B2B but there are statements coming along or like the noise in the space that probably this was the time when now there’re going to be other sectors which take the weight in their head or something like that. 

And now there are going to be corrections in the valuations, couple of companies are under the scanner, you know, there are problems to this sector. So how do you put all of it together and what is your outlook on B2B future?


So there are two parts to it, right, first am I bullish on India, definitely. And part of being bullish on India is being bullish on Indian MSMEs, Indian farmers, Indian manufacturers, Indian retailers. There’s a huge amount of potential and for all the things we discussed combined with China plus 1 and global sort of supply chain realignment Indian MSMEs over that ten years will do really, really well. That’s the big core belief, right, so will B2B do well in India, definitely. Now the question is VC funded B2B startups will they do well in India or not. 

I believe most companies in B2B are truly adding value to the sector. Like it will never be all in any sector and I don’t know enough about all companies to also comment, I can only comment about our portfolio. I think most companies are doing it the right way and building the right set of companies. Now are valuations ahead of time, I think that was true for almost the entire industry last year. Some of the companies have to grow into valuations over the next 6-12 months definitely they will do. If you look at public markets most B2B companies are probably valued at anyway between 20-40x of sort of EBITDA. So will companies need to figure out a way to 5-10 percent EBITDA to justify their current valuations, definitely. 

Obviously B2B companies which have better growth and better ROCE can even command better multiples but there will be an overall correction in valuation multiples, yes, the boot companies will take 6-12 months to grow into the valuations, yes. The companies today was still undervalued and will continue to perform, yes. And there might be some companies which will need to sort of figure things out and figure PMF out. 

But the good thing about B2B is it’s not a very capital intensive sector, so if you’re building the company the right way and if you’re working capital is within check still enough and more amount of money to build a large enduring businesses. So we’re in the business of building great businesses which create a value, valuation is cyclical but if you ask me will great B2B businesses be built out of India I’m a very, very strong believer of that. In the near term will valuations go up and down, yes, but that’s okay. Because all the founders luckily that we’re working with are looking at building 10-20 year companies doing a IPO, building a legacy, you know we’re long term investors.

So the next 6-12 months of valuation really does not impact us, we have done a lot in B2B in the last two years which you’ve seen as you know we’re closing two deals in B2B and we definitely would love to double down and spend more time in B2B. Now if I look at in terms of sectors we’re heavily invested in the B2R sector which is factory or farmer to the retailer. And now you’re doing a bunch of companies in the export, import space which is exit. You know we’re bullish on input raw materials and there are multiple different raw material sectors that we’re sort of looking at that we would like to invest in the next 12-18 months.

Along with that companies have helped improve productivity of the SMEs, right, of the farmers, of the manufacturers, the retailers, I think that’s also core area of interest for us going forward. So overall super bullish on B2B, have been very privileged to work with some really, really amazing entrepreneurs in this space, big believer in B2B enabling digital growth and digital nation building and pushing GDP forward. And super committed to investing in B2B over the next few years.


Thanks, Sudipto, I’m more part of the B2B sector and hopefully it continues to do well and we continue to take our share from the founders and the ones who do well. But thank you so much for sharing your insights and hopefully this session was helpful for our viewers. If there’s anything that we talked about around which you wanted to discuss further please feel free to drop a line. And thank you for tuning in. Thanks.