The B2B Marketplace Funding Napkin 2021
By: Julia Morrongiello
Tags: Marketplaces, Startups, SaaS, VC, Fundraising

What does it take to raise capital, in B2B marketplaces, in 2021?

Over the last few years, we’ve published a number of SaaS funding napkins as well as marketplace napkins. This year, we’re shaking things up with our first ever B2B marketplace napkin! Having invested in 9 B2B marketplaces and gathered data from 20+ different investors, here are our findings on what it takes to raise money in 2021 for B2B marketplaces.

Before we dive into the details, it’s worth noting a couple of things:

A majority of the data points (particularly at the seed stage), were from European VCs. In general, European rounds tend to be slightly smaller and valuations slightly lower than they are in the US. So if you’re a US-based startup, you might be able to shoot slightly higher ;)

Unlike SaaS companies which have been around for years, B2B marketplaces are a relatively new category and not many investors have invested in them yet. As a result, we could not collect as many data points as we do for our SaaS napkin. To add to this, B2B marketplaces tend to have various different business models (commission, SaaS, not monetizing in the beginning), which makes it very difficult to come up with one-size-fits-all metrics for each funding round. So if you’re building a B2B marketplace and don’t quite meet all of the criteria in the post, don’t worry about it too much, this is just a fun and friendly guideline as opposed to the end all and be all.

This post is primarily based on our experience, supported by data from over 40 funding rounds collected from VCs such as Accel, Alven, Atomico, Avenir Capital, Battery Ventures, Bain Capital Ventures, Bessemer Venture Partners, Bowery Capital, Blossom Capital, Cherry Ventures, Creandum Team, Fika VC, FJ Labs, Global Founders Capital, HV Capital, La Famiglia, Market One Capital, Nosara Capital, Northzone, OMERS Ventures, Piton Capital, Project A and Speedinvest.

As usual, I always love to hear from people if they have any feedback (positive or negative) on my posts, so please don’t hesitate to reach out if you do.

Now, let’s dive into it! What does it take to raise capital, in B2B marketplaces, in 2021?

Seed Stage

Round Dynamics 💰

Round size: $1–4m

Average pre-money valuation: $4–12m

The wide range in round sizes and valuation is due to the fact that seed-stage can also include pre-seed rounds or pre-product businesses as well as those that have demonstrated some great initial traction. Typically, the stronger the traction, the larger the round and valuation.

Team 👩‍👩‍👦‍👦

In B2B markets, which tend to be more complex than B2C ones, most investors look for teams with expertise in the given field or unique insights into the problem they are solving.

they are solving. A technical co-founder or CTO is always a great-to-have at this stage and becomes a must-have as the business scales beyond seed.

Market Characteristics 🌍

A highly fragmented demand and supply side: Generally, marketplaces with 1000s of potential buyers and suppliers find it easier to unlock marketplace liquidity than those with 10s or 100s of relevant participants. This is because the lower the fragmentation, the harder it will be to get the relevant buyers/suppliers onboard and the lower the potential bargaining power of the marketplaces. That being said, there are always exceptions to this rule ;) cargo.one, a marketplace for air freight, is killing it despite operating in an industry with a fairly concentrated supply side (airlines).

Generally, marketplaces with 1000s of potential buyers and suppliers find it easier to unlock marketplace liquidity than those with 10s or 100s of relevant participants. This is because the lower the fragmentation, the harder it will be to get the relevant buyers/suppliers onboard and the lower the potential bargaining power of the marketplaces. That being said, there are always exceptions to this rule ;) cargo.one, a marketplace for air freight, is killing it despite operating in an industry with a fairly concentrated supply side (airlines). An intransparent market: The lower the transparency of a given market, the greater the opportunity for marketplaces to add value by providing access to clear pricing and information. In other words, if it’s difficult to find the relevant buyer or seller and there is limited transparency around prices, that’s a good sign for someone building a marketplace.

The lower the transparency of a given market, the greater the opportunity for marketplaces to add value by providing access to clear pricing and information. In other words, if it’s difficult to find the relevant buyer or seller and there is limited transparency around prices, that’s a good sign for someone building a marketplace. High friction transactions: Industries where processes are still undigitized, which require a lot of back and forth or involve complex RFP and quote processes, are all great candidates for B2B marketplaces. In theory, it’s easier to build a marketplace and extract a fee from participants in markets where there are existing intermediaries (e.g. brokers or distributors) since buyers/sellers are used to paying a commission. That being said, we’ve seen plenty of exceptions to this rule!

Industries where processes are still undigitized, which require a lot of back and forth or involve complex RFP and quote processes, are all great candidates for B2B marketplaces. In theory, it’s easier to build a marketplace and extract a fee from participants in markets where there are existing intermediaries (e.g. brokers or distributors) since buyers/sellers are used to paying a commission. That being said, we’ve seen plenty of exceptions to this rule! Addressable revenue opportunity of $1bn+: As is the case for any startup, VCs optimise for investing in markets where there is a huge potential upside. For marketplaces, the market size generally needs to be even larger than for a typical SaaS business since the marketplace will only be able to take a cut out of the overall transaction value. I highly recommend checking out Peter Specht’s calculator here which will help give you a good idea of whether the market you’re tackling is big enough.

As is the case for any startup, VCs optimise for investing in markets where there is a huge potential upside. For marketplaces, the market size generally needs to be even larger than for a typical SaaS business since the marketplace will only be able to take a cut out of the overall transaction value. I highly recommend checking out Peter Specht’s calculator here which will help give you a good idea of whether the market you’re tackling is big enough. Potential for additional revenue streams: In certain cases, B2B markets may not be big enough if we look at pure commission revenue. In these cases, it’s worth evaluating whether there is an opportunity to build additional products and services to expand this market size. LeafLink, a B2B marketplace in the cannabis industry (yes, you read that correctly), is a great example of this. They recently launched LeafLink Payments to provide their customers with trade credit; this is now a key revenue stream for them. To add to that, they’ve also added a shipping/logistics component to their businesses as well as a data offering to help brands better understand their own performance relative to the market.

Growth 📈

10–50% MoM revenue or GMV growth: From the data we’ve gathered, most companies are at about 10–50% MoM revenue growth or GMV growth when they raise their seed. That being said, there are plenty of B2B marketplaces that manage to close their seed prior to hitting these milestones so don’t despair if you’re not quite there yet ;)

From the data we’ve gathered, most companies are at about 10–50% MoM revenue growth or GMV growth when they raise their seed. That being said, there are plenty of B2B marketplaces that manage to close their seed prior to hitting these milestones so don’t despair if you’re not quite there yet ;) GMV and take rates (there is no magic formula on this one): GMV and take rates are highly dependent on the type of business you’re building. In general, we see more high-touch, less commoditized businesses being able to extract larger take rates (up to 20%). On the flip side, marketplaces with higher average order values have significantly lower take rates (as low as 1%). For businesses with lower take rates, the expectations around GMV will typically be much higher than for businesses with higher take rates and vice versa.

GMV and take rates are highly dependent on the type of business you’re building. In general, we see more high-touch, less commoditized businesses being able to extract larger take rates (up to 20%). On the flip side, marketplaces with higher average order values have significantly lower take rates (as low as 1%). For businesses with lower take rates, the expectations around GMV will typically be much higher than for businesses with higher take rates and vice versa. $0-$50k in monthly revenue: In certain cases, we’ve seen companies forgo revenue and take rates completely in favour of growth, so the good news is that revenue is not a must-have at this stage. This was the case for Rekki, a platform that connects restaurants to their suppliers, and Circular, a candidate referral platform. It’s also worth noting that not all B2B marketplace operate under commission-based monetization; we’ve seen many charging SaaS fees, a combination of both, or monetizing via upselling additional products/services.

Buyer and Seller Engagement 🛍️

Healthy revenue and logo/user retention: At the seed stage, investors like to see that a sub-segment of buyers and sellers (does not have to be the entire user base yet) are starting to become dependent on the marketplace for the buying or selling of a specific product or service. Net revenue retention* of over 100% (for one or both sides of the platform) is a VC’s dream! It indicates that once a user interacts on the platform once, they continue to interact on a regular basis and increase their spend (or earnings if referring to a supplier) each time. This is easier to achieve for high-frequency type marketplaces and for certain categories, so don’t be discouraged if it takes a little longer to get there.

At the seed stage, investors like to see that a sub-segment of buyers and sellers (does not have to be the entire user base yet) are starting to become dependent on the marketplace for the buying or selling of a specific product or service. Net revenue retention* of over 100% (for one or both sides of the platform) is a VC’s dream! It indicates that once a user interacts on the platform once, they continue to interact on a regular basis and increase their spend (or earnings if referring to a supplier) each time. This is easier to achieve for high-frequency type marketplaces and for certain categories, so don’t be discouraged if it takes a little longer to get there. Increasing share of wallet: A bonus is if you start to see the share of wallet on the buyer side or share of earnings on the supplier side increasing over time. In other words, suppliers start generating more and more of their total revenue via the marketplace over time (or buyers start spending more and more of their budget on your marketplace). For a deep dive on this topic, check out my post on share of wallet and how to go about measuring it.

Economics and Acquisition ⚙️

Early signs that sales and marketing can scale: At the seed stage, we usually see founder-driven sales as opposed to a well-oiled sales machine. Nonetheless, founders should start having some great ideas on how they can scale this moving forward.

At the seed stage, we usually see founder-driven sales as opposed to a well-oiled sales machine. Nonetheless, founders should start having some great ideas on how they can scale this moving forward. Potential for positive unit economics: VCs, at this stage, need to believe that unit economics can be scalable in the long run. However, given that sales tend to be founder-led, it’s difficult to get precise data around payback time and CAC. So this is less of a priority than it is for later-stage funding rounds.

Series A

Round Dynamics 💰

Round size: $7–12m

Average pre-money valuation: $20–50m

Team 👩‍👩‍👦‍👦

The founding team has started to hire some initial VPs or Heads Of with more experience and has demonstrated the ability to iterate and scale fast.

Market Characteristics 🌍

See the section above! This remains pretty much constant across all stages.

Growth 📈

2–3x annual revenue or GMV growth: This is fairly similar to the expectations of a typical SaaS business. As mentioned above, we sometimes see companies choosing to delay monetization in favour of GMV growth, in these cases, VCs may want to see 3x or more annual GMV growth.

This is fairly similar to the expectations of a typical SaaS business. As mentioned above, we sometimes see companies choosing to delay monetization in favour of GMV growth, in these cases, VCs may want to see 3x or more annual GMV growth. $1m+ in annual revenue : For companies that have chosen to monetize, we typically see them going out to raise a Series A once they’ve reached $1m+ in annual revenue. For those businesses that have not yet started monetizing, they should ideally have a very clear picture of how they can eventually convert growth into revenue.

: For companies that have chosen to monetize, we typically see them going out to raise a Series A once they’ve reached $1m+ in annual revenue. For those businesses that have not yet started monetizing, they should ideally have a very clear picture of how they can eventually convert growth into revenue. Starting to introduce additional products or services: At this stage, many B2B marketplaces have started to experiment with new products and services (insurance, payments, logistics, data, etc.) as a means to increase stickiness, although they are not necessarily monetizing them at this stage.

Buyer and Seller Engagement 🛍️

An increase in net revenue retention over time: As discussed above, the closer the net revenue retention is to 100% and above, the better. For many B2B marketplaces, we’ve seen this as high as 200% after 6 months as their buyers or suppliers get more and more addicted to the platform. As liquidity on the platform increases, we should also see cohorts getting better and better over time. Depending on the type of marketplace you’re building, 100% net revenue retention can take longer to achieve so this is not the be-all and end-all at this stage.

As discussed above, the closer the net revenue retention is to 100% and above, the better. For many B2B marketplaces, we’ve seen this as high as 200% after 6 months as their buyers or suppliers get more and more addicted to the platform. As liquidity on the platform increases, we should also see cohorts getting better and better over time. Depending on the type of marketplace you’re building, 100% net revenue retention can take longer to achieve so this is not the be-all and end-all at this stage. A clear increase in the share of wallet: Particularly on the supply side, we should start to see the marketplace becoming an increasingly important revenue stream for the suppliers. Likewise, we should see the marketplace becoming the primary purchasing channel for at least a segment of buyers. As mentioned at the bottom of my post on share of wallet, you should aim to get to the minimum share of wallet required to keep the side of your marketplace that is constrained continuously interacting on your platform.

Particularly on the supply side, we should start to see the marketplace becoming an increasingly important revenue stream for the suppliers. Likewise, we should see the marketplace becoming the primary purchasing channel for at least a segment of buyers. As mentioned at the bottom of my post on share of wallet, you should aim to get to the minimum share of wallet required to keep the side of your marketplace that is constrained continuously interacting on your platform. Clear improvement in marketplace liquidity: The marketplace should start becoming more and more efficient at matching the demand and supply side of the platform. For instance, we should start to see an increase in the fill rate of orders and utilization of supply should be increasing as more participants get added to the platform. In case you need a quick recap on how to measure marketplace liquidity, check out the following post: WTF is marketplace liquidity?

Economics and Acquisition ⚙️

Acquisition becomes more scalable: At this stage, sales has moved away from being founder-driven and has become a more repeatable sales engine. We start to see an increasing number of referrals or organic inbound leads as network effects start to kick in. There should start to be some indications that one side of the marketplace can be acquired for free or very cheaply.

Series B

Round Dynamics 💰

Average round size: $20–50m

Average pre-money valuation: $90–300m

Team 👩‍👩‍👦‍👦

Proven ability to recruit. Experienced VPs with a track record of building successful companies have been hired across multiple functions.

Market Characteristics 🌍

See the section above! This remains pretty much constant across all stages.

Growth 📈

1.5–3x annual revenue or GMV growth: This tends to be similar to the expectations of a traditional SaaS or marketplace business. In the rare cases where monetization is not yet occurring, VCs expectations around GMV growth can be up to 3x YoY or more.

This tends to be similar to the expectations of a traditional SaaS or marketplace business. In the rare cases where monetization is not yet occurring, VCs expectations around GMV growth can be up to 3x YoY or more. $5m+ revenue or rapid increase in GMV: In general, a $25–50m annualized GMV at 10%-25% take rate (or some other combination that gets you to around $5m in revenue) is a healthy position to be in. As mentioned above, the lower the take rates, the higher the expectations around GMV will be and vice versa. A lot of times though, we see companies delaying monetization while focusing on building liquidity. In these situations, we typically expect a company to reach a much higher level of GMV so that once they introduce a take rate they will be at a large net revenue opportunity.

In general, a $25–50m annualized GMV at 10%-25% take rate (or some other combination that gets you to around $5m in revenue) is a healthy position to be in. As mentioned above, the lower the take rates, the higher the expectations around GMV will be and vice versa. A lot of times though, we see companies delaying monetization while focusing on building liquidity. In these situations, we typically expect a company to reach a much higher level of GMV so that once they introduce a take rate they will be at a large net revenue opportunity. Roll-out of additional products starting to have a positive impact on monetization and customer retention: VCs generally like to see that the roll-out of these additional features increases the ability to monetize customers. In some cases, they start to drive additional growth to the platform and are becoming a key revenue stream.

VCs generally like to see that the roll-out of these additional features increases the ability to monetize customers. In some cases, they start to drive additional growth to the platform and are becoming a key revenue stream. Clear signs of internationalization: For companies based outside of the US or in countries that are not large enough to get to $1bn revenue potential, we should start to see growth and expansion outside of their home market.

Buyer and Seller Engagement 🛍️

Closing in on 100% net dollar retention on at least one side of the platform: By this stage, it should be increasingly clear that both buyers and suppliers are becoming dependent on the marketplace and increasing their engagement with it over time. As new products and services are rolled out, this effect should compound as you expand your ability to monetize customers.

By this stage, it should be increasingly clear that both buyers and suppliers are becoming dependent on the marketplace and increasing their engagement with it over time. As new products and services are rolled out, this effect should compound as you expand your ability to monetize customers. High share of wallet within a given category: As mentioned above, there should be increasing evidence that the marketplace is becoming a preferred channel to sell and/or source rather than being one of many channels.

Economics and Acquisition ⚙️

Sustainable acquisition channels and scalable growth loops have been established: Marketing and sales engines should be set up. Once investors add fuel to the fire, there should be a clear and predictable acceleration in growth.

Marketing and sales engines should be set up. Once investors add fuel to the fire, there should be a clear and predictable acceleration in growth. Payback periods should stabilise: As a rule of thumb, a payback period of 12 months is usually best although, for businesses with very high ARPAs, this could potentially be extended. Bessemer Venture Partners suggests a useful metric or payback ratio for evaluating this:

As a rule of thumb, a payback period of 12 months is usually best although, for businesses with very high ARPAs, this could potentially be extended. Bessemer Venture Partners suggests a useful metric or payback ratio for evaluating this: Cumulative contribution margin within 18 months >= 2*CAC. Where contribution margin = revenue - COGS - variable operating costs. For more details, check out this link.

That’s pretty much it folks!

Before I leave you, one thing to bear in mind is that B2B marketplaces can be drastically different, so the above is not necessarily a one-size-fits-all. In other words, if you don’t meet some of the above criteria, do not despair! There are always exceptions to the rules particularly when it comes to B2B marketplaces which are all fairly unique and special in their own way. In general, it’s all about the narrative and contextualizing the business within its given market and landscape. We usually find that some companies tend to be ahead on certain metrics and behind on others depending on different factors such as industry dynamics, business model, whether it's a product or service marketplace, high-frequency or low-frequency, the take rates, etc.

I hope that this post will be useful for entrepreneurs that are going out to fundraise for their B2B marketplaces and, as usual, I would love to hear any comments and feedback on the above. And, if you’re building a B2B marketplace at the seed or pre-seed stage, please don’t hesitate to get in touch. My email is julia@pointnine.com.

Thanks again to all the individuals that helped out and gave me feedback on this post, I really appreciate it!

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