For consumers, huge new internet marketplaces have upended industries ranging from taxis (Uber) to hotels (Airbnb) and even some types of consumer loans (LendingClub). Now, new types of online marketplaces — we call them “cloud-commerce” companies — are popping up to serve businesses. We think they have the potential to radically remake sectors like construction, real estate, procurement and finance, and generate plenty of behind-the-scenes value in the process.
These B2B companies are definitely not as sexy as marketplaces for vacation condos or online dates. But like their consumer counterparts, cloud-commerce companies exist mainly to connect buyers and sellers online. One big difference, though: They also leverage cloud-based software for business users.
A good example is Zenefits, which offers a marketplace of benefits plans for HR managers but also gives them tools to help with tasks like payroll and employee onboarding. It’s important for these companies to offer software tools because transactions between businesses are often more complicated than ordering a cab or renting a house.
Cloud-commerce businesses throw off traditional marketplace “network effects,” meaning they become more valuable the more people use them. But they are also extremely “sticky,” meaning customers wind up using them for so many daily tasks, and to keep track of so many supplier or vendor relationships, that switching to a competitor is often extremely difficult.
So how do you actually get one of these businesses off the ground? The bottom line is that it’s complicated, given the complexities of these markets. But as cloud commerce becomes an even-hotter sector for entrepreneurs and investors, we humbly offer a few tips in terms of market dynamics that entrepreneurs should look out for as they’re figuring out their business models.
Look for market “constraints” — is there a shortage of buyers or sellers?
Once you’ve figured out which market you’re addressing — whether it’s health plans or office supplies or real estate — you need to figure out which customers are most likely to use your software. Specifically, do you target the buyer or the seller? In the Zenefits example, are you targeting the company that buys health plans, or the insurance companies that sell them?
Zenefits focuses on the buyer — that overworked and overburdened HR exec who has to sort through hundreds of complex health plans to find the right ones for his or her company’s employees. This is a demand-constrained market, as there are plenty of health plans out there, but it’s tough to sort through them all and pick the right one.
In addition, these HR executives need technology to manage hiring, onboarding and payroll. Solving their workflow challenges (largely for free) was a brilliant strategy by Zenefits. It allowed the company to aggregate buyers in a cheap way, and then make money by offering a marketplace that made finding benefits plans simple.
Sometimes, though, markets have a shortage of suppliers. This is the case in the restaurant market, where there are many more eateries than vendors to supply food to them. An average restaurant might work with 10 vendors to supply their food, whereas each vendor works 200 restaurants. This is therefore a supply-constrained market — and our advice here would be to focus on the harried food vendors, which must manage hundreds of relationships, invoices and payments and are likely to be highly receptive to new technology that could help ease their pain.
In each of these cases, focusing on the side of the market that is the most constrained and experiences the most friction/difficulty in the transaction process is, in our view, the best way to jumpstart a new marketplace.
Look for the side of the transaction that holds the most power
Each cloud-commerce business marketplace will have a different set of power dynamics. Certain stakeholders always hold more market power and influence than others. So when you’re getting a new company off the ground, solving challenges for the most powerful participant in the marketplace is usually a good strategy.
E-procurement giant Ariba, for example, started by offering software to procurement professionals who would push their requests-for-proposals out to vendors, who would then join the network. Starting with the all-powerful buyers meant that vendors — people who sold office supplies, chairs, snacks, etc. — were forced to join the Ariba platform if they wanted to bid on business. In a way, the buyers forced the vendors onto the network because they held all the power.
Look for high connectivity
Another key to getting a cloud-commerce business off the ground successfully is finding the party in your market that is the most connected, and will help onboard the most people onto your platform. This helps the marketplace grow virally and builds networks effects quickly.
In the construction market, for instance, the company BuildingConnected is attempting to build a LinkedIn-type platform for general contractors (GCs) and subcontractors (subs). The company started by offering bid-management software to GCs to help them evaluate bids from subs. This led to exponential growth in BuildingConnected’s network, as a typical subcontractor might work with five to 10 GCs, but a GC usually works with dozens, if not hundreds of subs. By onboarding GCs with free bid-management tools, the BuildingConnected network has grown exponentially.
Tools and networks
Fellow venture capitalist Chris Dixon, another fan of online marketplaces, coined the term, “come for the tools, stay for the network” to describe the power of consumer marketplaces. But on the B2B web, we believe the best cloud-commerce companies will focus on both software tools and powerful networks from the very beginning. Robust software platforms will create stickiness, drive ROI and lead buyers to the best suppliers — creating a virtuous cycle of revenue creation for cloud-commerce companies that approach their businesses smartly.
This post originally appeared on TechCrunch.