To deepen or broaden? A b2b story.
To deepen or broaden? A b2b story.
The best ideas come from anywhere and scale everywhere. We discuss it here.
To deepen or broaden? A b2b story.
Over the last few years, B2B marketplaces (often coupled with embedded fintech) have become a force to be reckoned with. There are all manner of examples, from gardening services to office lunches.
As these companies scale - particularly when trying to generate venture scale returns - a critical question is whether to horizontalize (add more products and services across other areas and to different customers).
Conventional wisdom is that vertical specialization is key.
Yet, I found this thoughtful analysis about the Indian landscape - where there are arguably more billion dollar b2b marketplaces than in any other emerging market - revelatory to say the least. It argues that horizontal product coverage is key.
“Multi-category platforms, especially those with an inventory-based model, have a distinct advantage of leveraging staples to drive low cost distribution penetration, increasing the frequency of service in any location, and then monetizing the distribution chain through other non-staples categories, thus creating the right gross margin to cost structure balance.“
The argument in essence is that a larger surface area solves for the combination of growth and profitability as their diagram below shows.
Critically, it also asserts that over time horizontal marketplaces - that get good at servicing multiple customers and use cases - keep scaling and displace more specialized ones with network effects.
B2B marketplaces are a key investment focus for me, and particularly models that are asset-light (ie are not having to carry inordinate amounts of inventory or manage deliveries), have broad possible product coverage (e.g. in FMCG, construction materials or industrials) and look to provide embedded financial services.
Interesting discussions
What’s better? Unbundling or rebunding? “Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.” Nearly 30 years later, this statement is widely seen as being axiomatically true. However, like any axiom, the truth behind this one is often oversimplified. I think when people read, “The only ways to make money are bundling and unbundling,” what they hear is, “Bundling and unbundling are equally good ways to make money.”
How should development finance institutions drive innovation? Fascinating piece arguing for deep shifts in how the DFC in the U.S. should operate.
Shifts in global equality - for the better and worse in different places - are having massive impacts. “The term “global inequality” refers to the income disparity between all citizens of the world at a given time, adjusted for the differences in prices between countries…From the advent of the Industrial Revolution in the early nineteenth century to about the middle of the twentieth century, global inequality rose as wealth became concentrated in Western industrialized countries…"The future direction of global inequality is hard to predict. Three external shocks make the current period unlike any that preceded it: the COVID-19 pandemic, which slashed countries’ growth rates (India’s, for instance, was negative eight percent in 2020); the deterioration of U.S.-Chinese relations, which, given that the United States and China account for over a third of global GDP, will invariably affect global inequality; and the Russian invasion of Ukraine, which has raised food and energy prices around the world and shaken the global economy.”
Fintech was supposed to free us from the branch. But financial services is not 100% transaction. Many things - be it figuring out how to save for a child’s education or get a mortgage - are complicated financial decisions with long-term ramifications. Trust, confidence and education are important. I was surprised to read about the rise in desire for in-person financial advice, even among younger cohorts. “Almost three-quarters of customers surveyed say they plan to visit a branch at the same rate this year. Interestingly, 21% of customers under age 40 say they expect their branch visits to increase compared to 12% of those over 40. Those results come against a perception that younger bank customers are more likely to embrace a fully digital experience.”
Apple launched a deposit account and attracted $1b in just 4 days. But not everyone is happy. Goldman Sachs, Apple’s financial services partner is reported to be looking for an exit from the deal. Banking as a service is not necessarily all it was cracked up to be as it seems for them.
When I was at McKinsey & Company, one of the partners I worked with told me "Strategy is less what you're going to do. It is much more about what you're not going to do." A decade into VC, for startups, this rings particularly true. When resources are limited - and I'm not just talking about capital, but time and emotional bandwidth as well - being able to say no is even more important. There will always be shiny objects. These can be distractions. But staying focused is the way to build an exceptional product. Great piece on how to make these trade-offs.
A word on Payment Innovations - coming globally and now to the U.S.
America pioneered digital payments. But because it was the first, it also has a lot more catching-up to do.
One of the most important advances in payments in the U.S. is about to take place: the launch of "FedNow". "Since [the launch of Fedwire at the turn of the 20th Century], the Diner’s Card ushered in Visa and Mastercard in the 1950s and 1960s, and a consortium of the largest U.S. banks came together to create The Clearing House (TCH) and its ACH payments network in the 1970s. Until TCH launched the RTP network in 2017, there had been no major payment innovation in U.S. rails for over 40 years."
What will it do? FedNow will disrupt a fragmented payments landscape (see chart from article below), both on cheaper/slower end (e.g. ACH which takes more time to settle) and faster/more expensive (e.g. credit cards).
I believe it will be a big deal long-term. But unlike PIX in Brazil and UPI which have scaled rapidly, context in the US is different. "Financial institutions in these countries are mandated to adopt the payment rail and are enablers, rather than gatekeepers. This is different from RTP and FedNow in the U.S., where banks have to opt in, and thus act as the gatekeepers to wallets, applications, and networks. This pain point is all the more acute in the U.S., which has one of the most fragmented banking systems with a long tail of over 4,000 commercial banks and nearly 5,000 credit unions."
The world is getting better
A perception today is that the world is getting worse. But this is a cognitive bug.
Here's why. "Overwhelmingly, people believe that humans are less kind, honest, ethical and moral today than they were in the past."
Except: people have thought that consistently since the question started being asked 70 years ago!
What's driving this is human bias: "Two well-established psychological phenomena could combine to produce this illusion of moral decline. First, there’s biased exposure: People predominantly encounter and pay attention to negative information about others — mischief and misdeeds make the news and dominate our conversations. Second, there’s biased memory: The negativity of negative information fades faster than the positivity of positive information."
Most of the time, life is about ups and downs. But here the trend is distinctly up. This artistic demonstration sums it up visually for me perfectly:
So next time you ask yourself if things are getting worse all the time, reflect as well about your natural biases.
Book of the Month
This month I saw a movie that prompted me to buy a biography on someone I had never heard about before: The Chevalier de Saint-Georges.
“What we know is that Boulogne, the illegitimate son of a wealthy French plantation owner and an enslaved African-Guadeloupean woman, was born between 1739 and ’49 on the island of Basse-Terre, the western half of the archipelago of Guadeloupe… His first claim to fame, in fact, was as a champion fencer…Boulogne’s extraordinary fencing talent led Louis XV to name him Chevalier de Saint-Georges, after his father’s noble title, even though France’s Code Noir prohibited Boulogne from officially inheriting the title because of his African ancestry.”
He later became a celebrated musician and opera composer in France, perhaps one of the greatest at the time and a contemporary to Mozart.
I hope you enjoy the movie: