B2B networks are the next great software tool for SMEs

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When the SaaS model appeared two decades ago, it enabled small businesses to buy and use software over the internet, triggering a massive wave of digital transformation in the business world. During this period, SaaS has become the dominant business model in B2B. But now there is a new B2B playbook that could generate a wave of transformation and similar returns.

Say hello to ‘B2B markets’: social media in a B2B environment.

These companies typically cater to sectors of the economy that are not yet digitized and have traditionally been difficult to penetrate, such as restaurants, construction and agriculture. B2B networks are gaining ground in these sectors by handling essential functions such as ordering, invoicing, payments, etc.

Looking at these companies – sometimes described as “vertical SaaS markets,” “SaaS-enabled marketplaces”, or “B2B marketplaces” – through the lens of consumers helps us better understand the true long-term potential of these companies: the scale they can achieve and the business they can build. Like social media, the most exciting businesses start by developing a revolutionary product focused on an individual user with high engagement that builds a valuable network over time.

The network’s playbook

Consumer networks like Facebook, Instagram and Twitter have grown rapidly, mainly thanks to virality. In his blog post, ‘Come for the tool, stay for the network‘Chris Dixon, a16z partner, described very well how these applications became valuable as they developed through two successful loops: First, they built a productivity tool that gradually turned into a network. Second, they operate and monetize the networks.

This playbook is now being reproduced in B2B environments and models of success are emerging.

The starting point for these businesses is to eliminate the friction caused by inefficient offline workflows such as booking appointments with pen and paper in beauty, or using fax machines or calling. telephone to order food products in restaurants.

A second characteristic is that the task performed often requires internal collaboration (eg, authorization from a superior) helping the tool to be adopted internally and increasing retention.

A third key feature is that the product connects the business to an external third party. This is fundamental to building the network and why successful networks are often related to communication, ordering, creating contracts, managing invoices and the like.

Take REKKI, which is part of the LocalGlobe wallet. The company was launched as a mobile app to help restaurants order from their favorite vendors. This fundamental but time-consuming part of a chef’s or sous-chef’s job relied on pen and paper, or on voicemail messages left between chefs and their suppliers.

REKKI has digitized this process: it allows teams to send orders through a chat app, reducing waste and making things faster. As chefs spread awareness of the benefits, more restaurants joined, which brought in more vendors.

Network effects have allowed REKKI to extend its services beyond communication, helping suppliers manage contract creation and invoice management within the application. This brought more non-REKKI customers to the platform and the network grew further. What started as a communication tool is now a network.

The playbook is still being written, but we are seeing a growing number of companies applying some elements of this model in various markets like Cargo.one for air freight, Cosuno.de and Compa.co in construction, and Rooser.eu and Agro-league in food. In the United States, ServiceTitan is already a good example operating at scale.

Make profit

How to monetize is the key question that all successful social networks face in the beginning, and B2B networks could also delay monetization to capture the most value in the long run.

They might charge SaaS fees; however, even low fees could slow network growth.

Or these networks could charge transaction fees. However, B2B commerce often relies on established offline relationships, so startups need to be able to justify their margin by adding value to both parties. To be a significant revenue stream, that would require a massive volume of orders and payments going through the platform.

“Sophisticated research and recommendation tools… [are] a huge opportunity for B2B networks.

B2B networks can also introduce sophisticated search and recommendation tools, to make it easier for users to find, buy and sell things. For example, REKKI can help suppliers sell more to restaurants, chefs can discover new suppliers or items thus following the model established by Google and Amazon, which have effectively monetized their effective search and recommendation engines. Cargo.one has transformed its booking tool for shipping customers and airlines into an automatic matching of available freight routes. This is a huge opportunity for B2B networks.

Then there is financial services. Successful networks will have incredible data flowing through their platforms and will often be sitting in order or payment flows. Eventually, they should be able to provide financial services traditionally offered by banks such as prompt payments, invoice factoring, and lending.

B2B payment network companies like Melio (US) and Libeo (Europe), which focus on small businesses, are demonstrating this path and are rapidly growing into valuable financial institutions.

Goodlord, which started out as a SaaS-focused company for the rental industry, does so as well and now generates the majority of its revenue by selling insurance products.

Logistics orchestration is another part of the value chain where data could create an opportunity to generate revenue. Like modern financial services, logistics is often a data science problem.

The reality is that the most valuable B2B networks will be monetized through a combination of these different business models (market, recommendation, financial services). Shopify and Square are two great examples of companies that started out as business tools, but their current market capitalization is now largely dependent on the network they’ve built.

We are only in the early days of this emerging category, but we believe that B2B networks have the potential to generate similar returns to larger SaaS and mainstream companies.

George Henry is a partner at London-based venture capital firm LocalGlobe and its sister fund Latitude.

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