B2B Fintech in Offline Industries
By: Dan Borok and Kiswana Browne
The 30th President of the United States, Calvin Coolidge, once said that “the business of the American people is business”. If so, then the movement of money is America’s lifeblood. At Newark Venture Partners we invest across core industries, including Chemicals, Logistics, Healthcare and Construction, among others, and we have found this to be true - whatever the industry or company product, buying and selling and the corresponding workflow is key.
As we have dug in further around the centrality of capital flows in business growth – we refined our vertical B2B fintech investment thesis to ‘follow the money’. And we have been making investments behind our vertical fintech roadmap over the past year in companies like Walnut (healthcare payments and lending), Agilis (Digital commerce for the chemical industry), and Quiltt – which is the connective tissue that helps spin up fintech offerings more quickly and easily. We’ve also seen our heavy industry marketplace investments like Ocean Freight Exchange and Gearflow work through the challenges of incorporating payments, billing, and lending into their platforms. We have found that our model of engaged, strategic LPs and thesis-driven investing provides a network effect of information that gets more useful over time. Our strategic LPs include a number of large financial institutions as well as some of the leading industrial players, creating a broad, unique perspective.
Don’t get us wrong, productivity solutions are great, and we’ve invested in a number of exciting companies making life easier for businesses. That said, we’re convinced that the most meaningful business productivity solutions of the next 10 years will involve workflow software focused on the movement of money for core functions including billing, payments, and lending. These are financial functions that help businesses grow more quickly as well as add and retain customers – critical to long-term value creation.
We believe this is a particularly good time to focus on B2B fintech in offline industries for the following reasons:
Consumer fintech innovation has shifted B2B customer expectations
Some of the biggest and earliest unicorns in fintech to date, such as PayPal and Square, have created value by transforming consumer finance across payments and lending. They fundamentally changed consumer behavior and preferences. This impact of fintech innovation on the consumer landscape has shifted how businesses expect to transact with their suppliers and partners and the level of convenience businesses are expected to provide to their consumers.
Vertical SaaS is on the rise
Enterprise solutions such as Microsoft and AWS dominated the cloud infrastructure space by deploying what’s now a long-held strategy of enterprise software - offering high-level solutions that capture the core needs of a variety of businesses. These major players are now heightening their focus on specific industries to attract more customers and capture more value. This trend was driven by vertical SaaS such as ServiceTitan and Procure, which have proven that considerable growth and success can be achieved within niche industries. For vertical SaaS to continue down the path of high growth, fintech is advantageous because it can increase revenue per customer and open new customer segments. This creates an opportunity for verticalized fintech solutions to dominate, particularly those that solve for pain points not only in transactions and invoicing but also in workflow.
The pandemic has accelerated digital transformation efforts, particularly at customer touchpoints.
The pandemic forced many legacy industries to modernize their technology stack and update business processes to reduce costs and improve efficiency in the new virtual world. According to Goldman Sach, S&P 500 companies will increase their capital expenditures and research and development investment by 18% this year from 2019 levels. The pandemic also highlighted the importance of prioritizing customer experience in operational growth strategies. This is because customer-centric solutions enhance customer satisfaction, engagement, and retention. Accordingly, as businesses become more digital and customer-focused, the demand for vertical-specific fintech will increase because it is tailored to the intricacies of traditionally offline industries and it is positioned at a critical point of the customer journey - enabling customers to pay how and when they want.
Verticals with the Greatest Opportunity:
We identified a number of core industries that have been historically under-digitized but drive a significant volume of payments and value transfer in the modern economy. As we see more digital platforms bring these legacy industries online, there will be an accelerated push to digitize payments and lending capabilities to facilitate growth. Verticals that are within this scope include B2B commerce, healthcare, supply chain/logistics, and in-person/blue collar industries.
Now that businesses are recognizing that transacting with suppliers and partners through phone calls and emails is inefficient, they are increasingly adopting technology to develop a competitive advantage. Accordingly, we are seeing more B2B platforms such as marketplaces quickly gain traction as they tackle the complexities of the B2B space. Similar to the verticalization of SaaS, B2B commerce solutions are targeting specific industries and expanding value through fintech. Fintechs like Balance have seen success by tailoring their product to B2B e-commerce, enabling B2B payments and financing for marketplaces, and we believe there are more of these opportunities to come. And while the B2C e-commerce market is very large, the B2B transactions are even larger, making the offline to digital commerce shift exciting and incredibly lucrative. The next generation of e-commerce platforms will deliver more value to businesses and offer enhanced customer experiences.
Digitization of the consumer healthcare experience has run parallel to that of the consumer finance experience. Traditional providers are not offering the same ease to patients when it comes to understanding/optimizing insurance coverage, out-of-pocket expenses, or financing options. Traditional providers/payers are seeing increasing competition from innovative digital players who are reaching meaningful scale. They need to adopt new whitelabel solutions and be creative with financing options in order to compete. Healthcare expenses represent a $4T opportunity. Companies like Walnut and Cedar are transforming payment workflows to make healthcare services more accessible, personalized, and affordable.
Supply Chain & Logistics
The supply chain and logistics industry is another where business primarily occurs offline. Workflows in this industry tend to be complex and involve multiple parties so digitization would need to be tailored to the specific needs of this sector to maximize efficiency. For example, the process of transporting goods to a warehouse includes the shipper, broker/carrier, truck driver, and warehouse. In this example, digital payment solutions such as RoadSync can significantly enhance efficiency by improving transparency and streamlining the payments process. Additionally, lending solutions can offer new business models for suppliers and infrastructure providers. As digital channels become more of an expectation for conducting business, manufacturers, wholesalers, and distributors are increasingly leveraging technology. Vertical fintech improves the customer experience for buyers and suppliers, leading to more transactions and higher retention.
For in-store transactions, customers expect to have the option to pay digitally or by credit card leveraging, at minimum, a POS terminal. For in-person services/manual services such as construction, the options for customers to pay or request a loan are limited to peer-to-peer solutions, such as Venmo and CashApp. As an independent contractor providing a service, a P2P payment platform would provide the ability to pay but neglects such needs as invoicing and tax filing. If a customer requires funding, they would delay or completely cancel the service. Companies like Square became a go-to in this market because of their portable hardware, then they expanded to accepting digital payments. However, there is a huge market opportunity to innovate in this space by catering to the sub-verticals of the in-person/manual services industry. For example, Squire found success by offering a payment solution for barbershops. We believe that fintech solutions entering this space as the middle layer between a payment processor and the customer can offset the cost of payments by expanding the business model to deliver operational value as well.
Our team at NVP wants to connect with founders innovating verticalized solutions in B2B fintech. Please reach out to Dan (Dan@newark.vc) or Kiswana (Kiswana@newark.vc) to share more about what you’re building. We look forward to trading insights and exploring all of the opportunities that lie ahead.