Hi, it’s Aarzoo from the HEC Paris AIS VC & Growth team. Under the Hood is a newsletter about recent developments in the Venture Capital industry, our perspective on key trends, and deep dives into how VC works.

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1. B2B vs B2C e-commerce
2. Brief history of B2B marketplaces & overview of B2B commerce
3. Are we going to witness a B2B marketplace explosion?
4. How will incumbents and corporates defend?
5. Where can B2B Marketplaces add value?
6. Avoiding disintermediation using SaaS and Fintech
7. Winner takes most dynamics and first mover advantages
8. What are VCs looking for when evaluating B2B marketplaces?

1) B2B e-commerce has lagged behind B2C e-commerce

Over the past two decades we've seen an explosion of B2C marketplaces that started with Craigslist and eBay and gave way to giants such as Amazon, Shopify, Stripe and Etsy. The covid-19 pandemic accelerated consumer spending online (in the US, for instance, e-commerce spending jumped by 44% YoY to $861bn+). We're also experiencing a trend of verticalisation in B2C marketplaces, marked by the success of companies such as Uber, Lyft, Airbnb, GOAT and Rent the Runway (go further with TechCrunch and CB Insights' coverage on the unbundling of Craigslist).

Here is where B2B e-commerce stands in comparison:

• B2B commerce remains largely offline but is much larger in terms of total global payments volume: Despite being much bigger than B2C markets, B2B markets have lagged behind in terms of digitisation and are still much more offline (orders and payments in wholesale and logistics are still processed via email, SMS, fax and checks). Moreover, there is high information asymmetry in industries such as freight forwarding and a lack of focus on customer experience (unlike in B2C). The annual global cross-border payments volume was estimated to be $133 trillion for B2B and ~1.2 trillion for B2C in 2019 (including internal payment flows will render larger figures).
• B2B marketplaces have not kept up with buyer demands: Consumers also find a gap between the value sought and value offered on B2B marketplaces: "50% of B2B buyers and users report that they prefer making work-related purchases on B2C websites, suggesting that providers of goods & services for businesses aren’t responding quickly enough to their buyers’ demands." (Mirakl).

This indicates that there is significant untapped potential in B2B marketplaces and room for vertical-specific winners to emerge.

2) Why haven't we seen a B2B marketplace explosion yet?

Despite there being several B2B e-commerce success stories such as Alibaba (1999), Global Healthcare Exchange (2000) and more, the global ratio of e-commerce Gross Merchandise Volume (GMV)/ global B2B payments volume is still quite small (an exact number is tough to find, but one can get an idea by comparing the $133 trillion of flows for cross-border B2B payments with the $12.2 trillion of global GMV in 2019).

1. **Legacy digital procurement vendors did not pick up** on a large scale over the past two decades largely due the lack of specialisation (horizontal players do not address vertical-specific workflows), high cost and poor UX, lack of integrated payments & lending and low focus on facilitating trust.
2. Moreover, B2B commerce is very complex, making it incredibly challenging to set up digital marketplaces due to the large number of moving pieces and industry-specific processes. HBR classifies the goods and services availed by businesses into two categories: manufacturing inputs (part of the final product, industry specific, specialised supply chains) and operating inputs (also called MRO: maintenance - repair - operations, not industry specific).