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For the final session of our Astella Expert Network (AEN) series of presentations on Marketplaces, our guest was Kent Bennett, partner in Bessemer, one of the world’s leading VC investment managers. With assets under management of more than US$20 billion, Bessemer invests in startups at the early and growth stages.
He has led investments such as Toast, Truebill and Blue Apron; he is the author of The Bessemer Playbook for B2B Marketplaces, and has contributed to other very special published material, such as Bessemer’s Consumer Earthquakes and State of the Cloud.
In his presentation, Kent commented that as an investor, he does not have a specific focus — he looks at a very wide range of models and sectors. For example, he has made deep dives into areas ranging from infrastructure, to deep tech, to consumption — he is notoriously successful with consumption — and recently has focused on vertical SaaS, which for B2B Marketplaces might be included in this field.
Our conversation covered the following areas:
1) The Radical PMF concept — a key factor that impels a startup to billion-dollar scale;
– and
2) B2B Marketplaces.
Here are some of my notes and comments on the content that Kent gave us:
Radical PMF
Looking at some of Bessemer’s best investments, Kent sees a pattern:
These are opportunities with such a powerful Product-Market Fit — way above what is normally seen in the market — that he calls it as Radical PMF.
He says a good analogy would be when, for example,
“you go fishing in a lake, and the fishes start to jump into your boat”.
In other words, the value proposal is so powerful that when it is presented to potential clients, conversion is instantaneous, or a very high percentage. Clients, as well as wanting to buy or use the product, will talk openly in favor of it in their social networks and communities.
Hence, the cost of sales of companies that have a Radical PMF is practically zero, and payback is almost immediate — clearly a recipe for sustaining growth.
Kent said that in his investment memos, the risk that he finds in companies with a Radical PMF is that the sales process hardly exists yet, simply because the platform has never needed to do any selling. The founders don’t even know where the leads are coming from — users proactively present themselves, and then share the benefits of the product with each other… The differentiation of the product’s advantage is so radical, that it sells by itself — and growth is the natural consequence.
To achieve a Radical PMF, what do you need?
1) An excellent team of founders (for Kent, this is somewhat obvious — since he believes all the teams he has invested in are excellent).
2) An extraordinary product — and, principally, one that is in line with some trend that has recently changed significantly or is undergoing significant change, and can be leveraged through new technologies, behaviors or business concepts.
These founders, intelligently, perceive these giant waves of change, and can see how to surf on them to create their Radical PMF. You could say they are radically better than any incumbent at seeing opportunities for products with these advantages.
When these companies find their Radical PMF, they could be starting on a path to reach an ARR of US$100 million in just a few years.
As with every disruption, these market waves start from the bottom up, much like the seismic signals from underground movement of tectonic plates. Thus, for founders who want to surf on a Radical PMF wave, a first and vital requirement is a profound analysis of these factors of change, and understanding how to add up-to-date technologies to their business in this new context that will give them an ‘unfair advantage’ in these markets.
Some clear examples of these waves of transformation are: Cloud Infrastructure tools, and the growth wave of companies offering SaaS; or, further back, the smartphone with a geolocation chip, enabling services like Uber to emerge; or social networks and e-commerce platforms, enabling new digital brands to launch and grow.
At Astella we believe that what we call the Atomic Growth Unit — the ‘T-Cell’ that also replicates itself for an organization’s growth — is the most efficient way to scale up, so that it should be a catalyst of innovation and of transformation in its market, and its construction is directly linked to the founding team’s strategic decisions. For example: what target segment to choose, the product’s value proposal, and what are the growth model and growth machines.
This is why the team and its experiences and ‘secrets’ are so important, for interacting with these challenges, and taking the best strategic decisions. Another important point is the building of an initial structure, before PMF is achieved — which needs to be light and focused, for it to be possible to “ride the wave” — …and not fall off it.
B2B Marketplaces
For a complete guide on how Bessemer builds B2B Marketplaces, I recommend reading their playbook on the subject: “Roadmap: B2B Marketplaces”.
In our AEN session, when we asked Kent about liquidity in marketplaces, he gave us his interesting vision on the subject. In his view, the absolutely prime objective of a B2B marketplace should be a differentiated value proposal — and you add transactions, building a B2B business network, but starting always from that differentiated value proposal, as your prime guiding factor.
Usually what heightens the efficiency of B2B transactions is software applications, and only after you have succeeded in adding these as added-value transactions within the sector you are serving, then you look for ways of indirectly monetizing over the value chain.
As he puts it, “once you have billions of dollars being transacted on your platform, you will probably find some way of monetizing”.
Indeed, he suggests that this differentiated value proposal should begin by providing solutions free of charge, or charging only one side, encouraging aggregation of transactions.
Kent sees the majority of the big B2B marketplaces not as marketplaces per se, but as a type of “B2B transaction management system”. In general, he says, they are either a tool to help the buy-side to reduce the frictions of dealing with its network/s, or a tool for the sell-side that helps to manage demand or enable new clients to discover it. These companies are not trying to dis-intermediate, as is the case in the main B2C marketplaces (eBay, Uber, etc.), but are merely providing a more efficient way — online — of doing B2B business.
Kent also says he has never found a single B2B marketplace model that functions for all industries/sectors. On the contrary, he thinks that in B2B, users have more depth, and each industry or sector has its specific, different, nuances and dynamics. He sees it as very unlikely that you will be able to replicate the model that works for one sector or industry, so that it works for another, different, sector or product chain. Thus, he believes funders need to go deep into knowledge about the particular market where they are operating, build trust and authority, and provide a specific structure that the sector or market they are dealing with really needs.
Usually, in B2B marketplaces, although users are open to technology, they tend to be averse to the risk of a new trading model — which might for example spoil their careers, or all the relationships that their company has built up in a lifetime of trading.
Thus, the ways that you present yourself to them, and get close to them, are very important.
This means:
(i) understanding the language of the industry or sector, including its nuances, and especially the specific pains that the sector suffers;
(ii) — and, then, aggregating transactions, by making negotiation easy, but with credibility, and using forms of monetization that are non-gouging — and then, he suggests, only after this aggregation, unloading the weight of monetization on a particular individual group in the chain.
