An AI Investment Roadmap

I've recently been thinking about an investment roadmap that revolves around how AI will impact B2B marketplaces.

The investment thesis can be defined as:

"Intelligent B2B marketplaces coupled with AI-powered SaaS tools that automate and streamline workflows for all participants in the marketplace".

AI will reinforce the competitive advantages associated with successful marketplaces and SaaS tools. These competitive advantages are network effects, learning curve effects, and switching costs. I believe these types of businesses will create big winners in local and regional markets.

B2B marketplaces represent a disproportionately small share of all marketplaces. In the US, less than 3% of marketplaces between 2013 and 2017 were B2B-focused. I believe advancements in technology will accelerate the growth of B2B marketplaces, increasing their relative share. Marketplaces seeded using SaaS tools will emerge as viable investment candidates.

I initially came across two Saudi-based start-ups in 2023 that fit the thesis, Builtop and Sirdab. Since then, I've found a handful of start-ups that have the potential to fit this investment thesis.

1)        Why B2B marketplaces?

B2B marketplaces are the center of this investment thesis. Marketplaces benefit from network effects which are the most powerful type of competitive advantage. B2B marketplaces have several benefits that distinguish them from consumer marketplaces. I'll talk about this in more detail below.

There will be a few winner-takes-most B2B marketplace winners in the age of AI. Many verticals within a given geographic region (of substantial size and fragmentation) will likely have a type of B2B marketplace. This will create many investment opportunities for VCs.

Historically, B2B marketplaces failed to develop into large and sustainable marketplaces. This was because businesses lacked trust in digital payments. At the time, internet adoption amongst (an older generation of) business professionals was scarce. Also, maintaining marketplaces was expensive before cloud computing infrastructure existed. This also resulted in limited tools for managing marketplaces and integrating payment and lending capabilities.

The early B2B marketplaces were not sustainable because:

1) They lacked fragmentation. Fragmented buyer and supplier markets are a requirement for a sustainable marketplace.

2) They focused on generic wholesale markets. Generic wholesale markets limits the need to frequently use marketplaces, since a good match only needs to happen once. (Why look for more suppliers if all sellers / options are more or less the same)?

Marketplaces are not sustainable if they provide generic goods AND lack buyer-supplier fragmentation.

Today, cloud computing has made maintaining marketplaces affordable and accessible. Software upgrades are simple and affordable. Tools for payments and lending are widely available. App integrations are easy to use. The cloud has increased the supply and adoption of B2B technology, which can now be accessed by businesses of all sizes.

Because more businesses are online, marketplaces are more capable of building trust, a critical ingredient to building a successful marketplace. This can happen through reviews, curated experiences, secure payment check-out and user-friendly designs.

B2B marketplaces has several qualities that make them more capital efficient relative to consumer marketplaces:

1) They are more isolated from international competition. This is because local businesses have their own customs, rules, regulations, and interested parties. It would be hard for an American B2B marketplace to expand into the Middle East without having to dramatically change its solution. This is especially the case when the supplier side of the marketplace offers physical services, like in the logistics space.

2) They experience lower churn relative to consumer marketplaces. B2B marketplaces experience less churn at both the buyer and seller level. This is because sharing economy marketplaces rely on many sellers providing temporary capacity. B2B marketplace participants transact to grow profits - which is their purpose of existence.

3) They have lower supplier requirements. Sharing economy platforms need millions of suppliers to be viable. B2B marketplaces require fewer suppliers to provide value to the network. Uber needs millions of drivers and passengers to work. B2B marketplaces can be sustained with hundreds or thousands of suppliers, especially if the market is local.

4) They have higher AOVs and engagement. B2B transactions are worth more than your typical consumer purchases. B2B marketplaces experience more revenue per customer which improves unit economics.

The more capital efficient a business is, the more likely it is the venture succeeds - creating a more compelling investment thesis.

2) Why seed the marketplace with a SaaS tool?

Winning in a marketplace is tough because the marketplaces need to reach critical mass before they become self-sustaining. Buyers bring in suppliers- but suppliers only enter the marketplace if there are enough buyers. This catch-22 means that marketplaces have to spend a lot of money trying to build its user-base.  

The most effective seeding strategy to jump-start a marketplace is 'Single Player Mode'. This strategy involves building a SaaS tool that provides tangible benefits to buyers. Single Player mode was popularized by OpenTable, which is a restaurant booking platform that also provides restaurants with table management software.

This ‘come for the tool, stay for the network’ seeding strategy enhances unit economics and capital efficiency. It does this by generating recurring revenue and increasing customer switching costs. One research shows it can be 10x more capital efficient than other seeding strategies.

The software tool attracts buyers without needing to already have a self-sustaining marketplace because it offers buyers a day-1 ROI. As the tool grows in adoption, so will the number of users in the marketplace.

A large part of why the Single Player mode is so effective is because the most important side of the marketplace to develop is the buyer's side. Suppliers look for marketplaces with a large buyer base. So, the larger the buyer base, the better the odds of a successful match with the supplier.

3) How does AI enhance value?

AI will drive an exponential shift in user experiences and analytical capabilities. It will accelerate the network effects, learning, and switching costs within a B2B marketplace that uses Single Player mode.

AI will augment the entire ecosystem by:

1.       Enhancing user experiences

2.       Embedding predictive insights as a service

There are many ways AI can augment this ecosystem:

• Language-based interfaces: Instead of having to learn how to navigate through software, the user can speak directly with it. AI will instruct the user on how to perform tasks and can even perform the task for the user. This will shorten the learning curves associated with learning how to use new software. It will ultimately result in higher usability and adoption.

• Personalized discovery, recommendations and guidance: AI will customize content, product suggestions, and service recommendations. It will simplify the process for buyers to find what they need. Automated tools will also deliver personalized notifications and promotions to re-engage users effectively. AI-driven chatbots will provide instant tailored support.

• Curated matches based on needs and capabilities: AI will optimally match sellers with buyers and projects. This will boost transaction success rates and the efficiency of marketplaces.

• Automation of workflows: AI will automate repetitive tasks like scheduling, CRM and inventory management. It will allow both users and sellers to streamline operations and enhance productivity.

• Advanced performance analytics: Predictive insights will empower both buyers and sellers to improve workflows, planning, and decision-making. AI will analyze buyer preferences and behavior patterns which will help sellers adapt their offerings and strategies effectively within the marketplace.

AI continuously learns from user behavior, creating feedback loops that improve how well the ecosystem works with time (and usage). AI will better leverage its insights as the user base grows. It will be able to offer users increasingly better recommendations.

Users won’t have to do much manual ‘busy work’ since AI learns from them. Instead, users and developers will define outcomes and guardrails for AI, which will work to deliver the optimal outcomes.

4) Why will this work for large and fragmented markets?

The thesis works best within large and fragmented markets characterized by specialized buyer needs. These B2B marketplaces can be both horizontal or vertical marketplaces as long as the market is large and characterized by fragmented buyers and suppliers. Vertical marketplaces offer a more compelling value proposition to their customers because they offer truly unique solutions that international competition can't easily duplicate.

1)        A large market

A large market increases the probability of building a self-sustainable marketplace. It also increases the likelihood of achieving healthy growth rates for longer periods. The definition of a large market is relative to the geographic location. A large market in the Middle-East could start at $10 billion.  

2)        Fragmented markets

You need regular and unique matchmaking to develop a thriving marketplace. Fragmented markets foster healthier and more sustainable marketplaces because new and unique matches are made regularly. This drives value for all parties involved. Having a diverse, fragmented buyer base is crucial, but supplier diversity provides value and flexibility to the buyers.

3)        Project-based needs and Specialized services

Marketplaces are especially valuable when buyer requirements constantly change. The marketplace becomes more valuable if buyers require a range of services at different scopes and varying price points. This type of marketplace enables more interactions between buyers and sellers. In this scenario, buyers will likely procure managed services from the suppliers within the marketplace.

A marketplace can include more than two sides. Builtop, a procurement marketplace for the construction sector, has multiple sides to the marketplace. Within their platform, they have: real estate developers (buyers), construction material and equipment suppliers (supplier), contractors (suppliers and buyers of equipment and labor) and even a financing partner (supplier).

Having multiple sides to the marketplace strengthens the marketplace. It creates network effects that can be more powerful than traditional double-sided marketplaces. AI can optimally curate a complex ecosystem with multiple participants. It can create tailored matches between 2,3,4 or more parties based on project needs, historical preferences, and quality benchmarks. Doing this can make comparisons and decisions seamless for users.

AI-powered curation, automated workflows, and real-time insights improve lead times and speeds up projects. With AI, marketplaces can provide a streamlined experience for complex B2B transactions.

I’ve summarized this thesis and highlighted promising (GCC-based) investment candidates that align with its principles in the attached deck.

Want to learn more?

Download the PDF summary to explore the full thesis and potential investment opportunities.

If you’re in VC, work in startups, or find this thesis interesting, I’d love to hear your thoughts. Feel free to share this post with your network or reach out directly to discuss further!