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10 Theories on Procurement Technology Venture Stage Investment (Thesis 2: Marketplaces)

07/22/2020 By

I love B2B marketplaces. At least intellectually. That’s why the topic of marketplaces is part of this series on early stage procurement technology investing. Thesis 1 looked at automation and vendors in that space, and today we’ll look at providers of marketplace solutions.

On its most basic level, a marketplace brings together buyers and sellers in a manner that overcomes friction that would have made a transaction (or relationship) between the two trading parties less than optimal in the past — or not possible at all.

But even more fundamentally, a marketplace is an intermediary that, in one capacity or another, arbitrages previously high-friction information between buyers, suppliers or both. The irony, of course, is that a marketplace creates greater information transparency, at least in theory, than previously existing models. Otherwise, it will serve an inefficient purpose (and we know what happens in those situations, unless the marketplace has another advantage beneath the surface — e.g., government support in a regulated country/environment).

Successful marketplaces often do not describe themselves as marketplaces. I would argue that Grainger (and other brick-and-mortar distributors, including those in the metals industry) and Amazon Business are both examples of marketplaces that trade “goods,” even if title is taken by them during a process and other value-added steps are performed — making them a true “the supplier” more than just a broker or trader compared with a financial exchange such as the LME.

I should note that marketplaces do not just trade in goods. Some providers trade in information. EcoVadis is an example of an “information” type of network (or marketplace) that trades not the physical exchange of goods (or services) but an exchange based originating knowledge, in this particular case focused on supplier corporate social responsibility (CSR) and environmental considerations. Avetta and more than a dozen other providers we track are also “information marketplaces” of various sorts.

Marketplaces exist for capital as well (including, of course, securities and commodities exchanges).

Marketplaces don’t always work. In fact, they usually fail. The road to positive B2B marketplace intention (business-model wise) is paved with the corpses of dozens of failed attempts. And many failed in spectacular fashion! Here’s a slide I wrote with a colleague at FreeMarkets nearly 20 years ago, burying the dead at the time.

But occasionally, a marketplace succeeds. And when it succeeds, it can become a winner-take-all value proposition given the network effects of a many-to-many — as opposed to a one-to-one or even a one-to-many — business model.

I’m intrigued by marketplaces as a venture investment thesis. Granted, they are higher risk than traditional SaaS/cloud investments. But those that succeed have the potential to benefit their investors in proportion to the risk taken.

I asked some of my colleagues at Spend Matters and my own external network/marketplace guru, Bob Solomon) to share examples of early stage start-up and venture stage marketplaces that impact procurement. Here are six — of many possible — examples!

Bryzos — A new generation of steel marketplace — remember e-steel anyone? — focused on bringing together buyers and suppliers (and traders) of steel and related finished/semi-finished products. Working capital / payment terms are also a value proposition of this early stage marketplace.

Ecomedes — a marketplace that provides environmental/CSR specific information as an extension to existing product catalog data.

Fulcrum — an on-demand, cloud-based platform that connects enterprise companies with online gig and freelance online marketplaces. Enterprises access online marketplaces from a single, fully-compliant online point of entry with transparent pricing models.

GovShop (Public Spend Forum) — GovShop is a supplier intelligence marketplace for government procurement. It uses AI/machine learning to structure fragmented supplier data to help buyers find the right suppliers to fill critical priorities and needs (e.g., PPE, drones, etc.). Disclosure: I am a co-founder, investor and advisor to GovShop.

Qmerit — Qmerit focuses on delivering value as a new intermediary for MRO and related spend for the building products/construction industries.

Spoiler Alert — Procurement and asset recovery/scrap have always had a challenging relationship to explain. It’s as nuanced as the complexity of lichens (for you biologists in the audience!). But there is a relationship between the two here, so I list Spoiler Alert not just because it’s a clever name, but because it is a category and verticalized specific take on scrap/asset recovery that makes logical sense. Specifically Spoiler Alert targets distressed food inventories, working with sellers and buyers in the food business to, literally, avoid spoilage and the “call option” of a calorie — for profit or nonprofit buyers — becoming worthless!