One of the investment themes that nvp capital is actively pursuing is B2B Marketplaces.   As we have looked at 100s of opportunities and invested in a handful, we have noticed an interesting trend:  Marketplaces are getting into the SaaS business.  They are creating SaaS software for their customers (e.g buyers and sellers) that is “outside” of core marketplace functionality. To say it another way, this SaaS functionality is not about buying and selling, it is focused on solving some other business problem for the buyer/seller.    (Queue the alarm bells…Investor ALERT, red FLAG!!… founder doesn’t know what business they are in! lacks focus, trying to do too many things! Fail or big pivot inevitable!). Counterintuitively, however, many of the successful marketplaces are the ones that have added SaaS.   So, what’s going on?

The VC world really does look at SaaS and marketplaces as very different business models that stand separately.  SaaS is clearly focused on solving a problem for its (one) customer. Marketplaces are complicated by the fact that they need to serve two customers (e.g buyers and sellers).   SaaS products sit “within” the enterprise, they act like 1st party software “owned/ used” by the client.   A marketplace by its nature is largely “outside” the walls of its customers; an external platform shared by buyers and sellers, and run by a 3rd Party.  SaaS usually makes money with ARR-priced contracts that are sticky and high margin.  B2B Marketplaces are transactional, with a focus on driving GMV growth and a reliance on a (relatively small %) transaction fee for revenue.   This is just a short list of the meaningful differences.   Mixing SaaS and marketplace models seems like oil and water.   So why is it happening and where is it working?

Let’s look at some examples of early-stage startups doing both and succeeding:

1. GearFlow is a marketplace for heavy equipment parts that has created and launched a SaaS program that does fleet management for its buyers.
2. Agilis, a marketplace for chemicals, has launched a PIM (Product Information Management) product for its suppliers.
3. An aspiring B2B marketplace for lumber has put its marketplace platform on hold while it aims to be the new ERP for its suppliers, the Sawmills.
4. A marketplace for heavy construction equipment is developing asset tracking functionality for the large owners of the equipment eg the sellers.
5. A marketplace for steel commodities has decided to build out a sophisticated planning and procurement platform to get its first major buyer on board.

In each case, this dual functionality organically happened as the founders were trying to get buyers/sellers to give up their ingrained, legacy process and bring their buying/selling onto the new marketplace platform.  

When I am explaining the massive opportunity in B2B marketplaces, I often use the success and transformation driven by consumer marketplaces (eg Amazon), compared to the stone-age email/ spreadsheet/ paper/ telephone-based process in the business world, as the core argument that online marketplaces in the B2B world are inevitable.  Buying and selling….is buying and selling. Software will eat this world in the name of making it more efficient and effective, and dozens of B2B Marketplace Unicorns will be born. Not an “if”, but a “where, when, who, and how”?

While I still believe this is true, it fails to anticipate two major challenges in launching a new marketplace in B2B:

• Firstly, in business buying/selling the stakes are higher, and it is far more complex than consumer buying/selling. In businesses, there is more money behind each purchase and more impact if there is a mistake.  Further, business purchasing is part of an interconnected web of other business functions,  whereas a single stand-alone consumer is empowered to buy stuff (eg a shirt, etc.) all on their own.  The same complexity and interconnections apply to the “selling” function and sell-side businesses.  Additionally, the products can be a lot more complicated than consumer goods (e.g. they have 100s of critical specifications, vs a handful that are less critical). The necessary logistics for delivery are different and more complex (e.g. FedX just doesn’t work) and buying and payment processes often involve the coordination and approvals of multiple people.   
• Secondly, the current legacy state of email/ spreadsheet/ paper/ telephone in business commerce is both catalyzing the opportunity for modernization and slow-rolling the adoption process.  It is not an exaggeration to say that much of business commerce is basically “manual” with limited help from “high-tech” solutions like email, spreadsheets, paper, and telephones. Perhaps worse, a business might have a tech solution, but it’s in the form of an expensive inflexible legacy ERP.  Either way, any data collected about right and wrong products, or better and worse outcomes is likely to be inaccurate or inconsistent if it’s captured at all. So, the current commerce process works, but it’s complicated, slow, and inefficient compared to consumer e-commerce.   In one sense this is awesome for start-ups: the bar is low, there is huge room for improvement, and marketplaces exist (this is not “new” tech).  However, this legacy state means that companies and individual employees lack experience using modern software for these processes.  Much of the institutional knowledge of how the company buys and sells is in people, paper and disconnected, stand-alone systems. 

The unfortunate truth for most marketplace founders is that both buyers and sellers are just unable to use an online marketplace initially.  Customers just don’t have their act together to use the marketplace effectively; key processes and systems on their end are just missing. If a chemical supplier doesn’t have an accurate database of its product specs, how is it going to list them? (Today that data is scattered around in PDFs that the salesmen use.)  If a buyer doesn’t have a system with the make/model/specs/repair history of each vehicle in their fleet, how can they effectively use the marketplace to get the right parts?  

Often, even the best, most functional new marketplace is like a shiny new bridge…. that has no on-ramps, just messy mud, and potholes on both sides.

So, how do you create the on-ramps, pave the potholes, and drop in safety rails? 

That’s where the SaaS comes in.  Provide the minimum level of functionality–in the form of a SaaS platform–that enables buyers and sellers to start using the marketplace and start experiencing the value.

The chemical marketplace mentioned above would sign contracts to on-board manufacturers only to realize that the supplier had no repository of product data and no way to know if any of it was up to date. Solution:  the founder created PIM (Product Information Management) functionality to solve the problem for the first few clients.  Then they made it into a stand-alone SaaS product.  The client used PIM across their enterprise and the startup got paid SaaS revenue to provide it, and now has an on-ramp to its marketplace.  Happy client, happy founder. 

The founder of the lumber marketplace realized that given the state of the systems/processes at the sawmills, it was impossible to launch a lumber marketplace (at least then). But they saw a huge opportunity to create the “modern ERP” SaaS platform that the sawmills needed.  This would ultimately position them to launch a marketplace from a position of strength. 

The founder of the steel marketplace realized his large buyers needed to have a full-fledged SaaS procurement product to handle their needs and complexities before the buyer could make use of the marketplace.  So they developed one with the help of the buyer. Last I heard, they were still working through whether they would charge a transaction fee (which the buyer market was very resistant to) or charge a “SaaS ARR” that flexed up and down with volume (and achieved the same revenue outcome).

The bottom line is that successful marketplaces need to solve for more than just buying and selling: they need to solve for many of the steps leading up to buying and selling as well. That’s one of the reasons why we believe the best founding teams of these businesses bridge the gap of industry experience (getting how their customers do it now) and high-tech start-up experience (building a new way to do it better).  Marketplaces that can do this within their B2B vertical will not only gain stronger traction and customer loyalty, they’ll also be able to tap into SaaS ARR, allowing them to build the marketplace and grow it faster. 

Perhaps SaaS and Marketplaces seem like an odd couple, but in reality, they are the perfect pair. 

If you are building at the intersection of SaaS and B2B marketplaces, send an email to sean@Newark.VC. We want to learn more!