A new playbook: B2B networks

There is one model of companies that we’ve been particularly excited about over the last few years and where we have made a number of early-stage investments. These companies address the SMB market (Small and Midsize Business) with a playbook that we think will produce some very large outcomes in the next decade. This playbook is emerging due to the convergence of multiple trends: the ubiquity of the smartphone, the access to payments and the growing financial services stack as well as the improvement of data infrastructure. It is the digital transformation of the SMB market driven by economic necessity (further accelerated by Covid but I have decided not to address this topic in this post), technological maturity and the cultural shift of the millennial workforce. The companies that successfully lead this transformation will have a positive impact on our economies and our society. 

These companies borrow from multiple internet playbooks: SaaS, marketplaces and even social networks. In some cases, they have already been described as SaaS-enabled marketplaces or B2B marketplaces. These are definitely useful frameworks but the businesses I’m going to mention here don’t always have a SaaS component and not all of them are marketplaces. Plus, these terms mostly speak about their business models. What I’m going to highlight is how they can get initial traction and how I think they can build enduring companies (which of course includes the ability to monetise). These companies start with a self-served productivity tool for SMB employees or owners to perform a key business function, then they have the opportunity to accelerate the growth of their user base through virality. Eventually, they reap the benefits and capture most economic value through network effects. We’re still early in the developments of these businesses so we’ll have to see how they evolve and scale but we’re already seeing that they grow in at least 2 steps or 2 sequences of loops (to use the words of Kevin Kwok in his blockbuster essay “Why Figma wins”) :

• Productivity loop: The product starts as a productivity tool that helps the small business perform a critical task by offering a 10x improvement vs the old way. It’s a critical task with high frequency (at least weekly). Successful products quickly see very high retention numbers once the user starts to complete the key action. These tools often fulfill some kind of communication or collaboration functions. The key user can invite one or more colleagues which boosts usage and further increases retention. Even more interestingly, the key action involves, in a passive or active way, an external third-party. This is key. The more they use the tool and perform the key action, the more they seed a network of other users and underlying data. There are usually 2 types of product-market-fit to achieve within this loop. The first one is achieved when the product becomes the default way to perform the key action. The second PMF is to add value to the third-party that is being involved in the “transaction” to the point where they eventually become an active user. This is harder and can take more time. At this stage, the transaction is often but not necessarily a financial one, it can also be an exchange of information.

• Network loop: As target users adopt the product and invite more people onto the platform, they build a network through their usage. They are seeding the next loop. If the first loop is the productivity tool helping a small business perform a key action, the 2nd loop is mining the graph that the sum of all the transactions is creating. When this graph reaches a certain scale, the company can start to reap the benefits by unlocking value to the whole network. The value will probably be delivered through multiple “sub-loops” attached to different value-add services. The data that the company has collected and the ability to index that data are critical. One area where the value of this graph is becoming quickly apparent is financial services. The successful tools become ideal platforms to embed a series of financial and insurance products in the network and there is a fast-growing market providing the required infrastructure. Another area where I suspect some companies will be able to add value is logistics because it’s often a data science challenge and the network loop will provide access to a unique dataset. 

Let’s look at a few examples from our portfolio:

• Breedr: A mobile app that allows farmers to capture and manage their livestock data with precision. Farmers can then set growth rates, boost the productivity of their herd and integrate all critical farm management data. Critically, they can use this to trade directly with wholesalers, end retailers and finance future contracts.  

• Goodlord: It started as a “CRM” tool to help letting agents manage and accelerate the rental process (collection and approval of documents, communication, payments, etc). In this process, not only the agent but also the tenant and landlords are involved. As they have grown their penetration into the fragmented letting agency market, they can now use their platform to deliver more products and services to all 3 stakeholders.

• Libeo (France) and Melio (US/Israel): They both address the account payable process for SMBs. While their solutions vary as they operate in 2 very different markets, the dynamics are similar. First, they have built an easy solution for the businesses to digitise, centralise and pay their invoices. As SMBs adopt the solution, they are also connecting  a fast-growing supplier network which will allow them to deliver additional value on both sides. 

• REKKI: A mobile app helping restaurants to communicate with and order from the best suppliers. They help chefs and their team to send orders via a chat app. As they are building the network on both sides, they have unique visibility on the supply chain and can add value to the entire network. They just published an interesting case study highlighting how their app helped a restaurant grow its profit margin during lockdown.

It’s worth noticing that these products often look like consumer products. This is not only by coincidence or because the level playing field in design has gone up dramatically in the last few years. It’s particularly critical for these tools to behave like consumer ones. SMBs are notoriously hard to acquire and monetise. The productivity loop is mainly about acquisition and retention (minimise CAC and churn). While you can monetise the low hanging fruits in the productivity loop (saas fee, transaction fee), the network loop is where you will have the opportunity to further increase LTV. This is the social network playbook. First, you focus on engagement, retention and low CAC so you can build a valuable network, then you can start focusing on maximising your LTV by increasing your revenue per user.  I think it is important to insist on the difference between virality and network effects here. A viral product doesn’t always have network effects (e.g. Gmail is a viral product but has no network effects, Facebook has both) and in this playbook, I think you ultimately need to have network effects to build a very large business. 

There has been a lot of discussion (at least in VC circles) around what are the next opportunities in the mature consumer landscape. In a way, I like to think about these SMB products as a “new consumer frontier” . They look like consumer tools, they borrow from the most successful consumer playbooks but they address business use cases and transactions. Their networks could have massive upside potential as the LTV of an SMB is potentially much higher than a consumer. More than an exciting venture opportunity, these companies also fulfill a critical mission: they help bring the “little economy” (SMBs, independent businesses, etc) into the fast-growing internet economy. They create value and make money by making the participants in their network stronger businesses for the digital age. As the little economy is the economic and cultural lifeblood of our society, we think it’s an incredibly exciting and important mission. 

This playbook is still being written so please comment and share your thoughts. We’re planning to dig more in further posts. As always, there will be many nuances. From the list of companies I’ve mentioned above, you can already separate the horizontal plays like Melio and Libeo vs the vertical ones approaching specific industries: restaurants (REKKI), lettings (Goodlord), agriculture (Breedr). There are many more SMB segments to bring into the internet economy and we hope to invest in many of them so if you’re building one of these platform tools, please get in touch, I’m at george at localglobe dot vc

PS: if you have an exciting product that doesn’t fit this playbook, you can still get in touch :). My friend Paul @ Northzone has tweeted a good template to cold email VCs.

PS 2: Thank you to my LocalGlobe colleagues who have contributed to this post by making great investments ;)

The Climate Zeitgeist

Climate has reached a cultural tipping point. In the past few weeks, millions of people have been marching for the future of our planet all over the world. Greta Thunberg sailed across the Atlantic, shook the UN and continued her rise as the activist icon of millennials and Gen Z. Anyone wants to take bets for the TIME Person of the Year? As my friend Jackie said: “these teens are in activism mode in a way they haven’t been since the 60s”. The Climate Zeitgeist is here.

In its recent Climate issue, The Economist, with one of its best covers in recent years, argued that “decarbonizing our economy will require a complete overhaul” and that so far “the market economy has done very little to help”. Tech entrepreneurs and startups have an opportunity to tap into the cultural moment that climate is having to come up with new solutions that could help accelerate the shift to sustainability. Until now, the pressure has been mostly on governments and corporations to act on reversing climate change. As a society, we’ve tended to look towards philanthropic and scientific efforts to find the solutions. Yes it will require some drastic measures and a large coordinated effort but we should not ignore our individual responsibility. It’s great we’re marching and going on strike but what should we expect from ourselves? What are the choices we need to make? The planet is bearing the cost of our modern and urban consumer lifestyle. Carbon footprints are concentrated into a small number of dense, high-income cities and affluent suburbs. Our sustainable future will primarily come from a shift in consumer behaviour and spending in the most developed parts of the world.

Technology observers like to describe the impact of the Internet as an economic shift from scarcity to abundance. We’ve gone from the prudence of our parents and grandparents post war years to the gluttony of today. For those who can afford it, a majority of products and services (books, food, rides, movies, music, etc) are now, same day delivery, available as an « all you can eat buffet ». Every day, social media feeds us with new things to buy, new places to go to. We live in an age of consumption abundance but in parallel we are quickly creating environmental scarcity. But if consumer tech has demonstrated its ability to drive new forms of behaviours and spending, how could we use that to contribute to reversing climate change? What about using the power of consumer technology to create environmental abundance?

Consumer behaviour: It has been increasingly well documented over the years but we still need to do a lot more efforts to live more sustainably. We have to change how we live, how we move, what we eat, etc. It’s hard and most of us are not doing enough. I’m certainly not doing enough. Part of my motivation to write publicly about this topic is to keep myself accountable. I’ve been thinking about a relevant analogy and I think that changing our lifestyle could share a lot of similarities with people who have tried to quit smoking. I’ve never smoked so I never had to quit… but I have had a lot of people around me who went through this process. As we know, it’s hard and requires a lot of commitment. Behavioural science teaches us that there are a number of human biases that are difficult to overcome. The Behavioural Insight’s team set up a couple of years ago by David Cameron’s government applied the nudge theory to health (among other policy topics) and came up with a framework to help people quit smoking: Easy, Attractive, Social and Timely. A similar framework could potentially be applied to encourage a more sustainable lifestyle. For example, it’s not enough to talk about global catastrophe and end of the world scenarios. As humans we tend to suffer from an overconfidence bias and we think it won’t apply to us. Another human bias is the present one that makes us value disproportionately the costs and benefits with immediate effects vs those delivered later. A good solution could include making the present effects of climate change (ideally at a local level) more visible and highlight them. We should also emphasise the change required in consumer behaviour and lifestyle using social proof bias. As social creatures, we’re strongly influenced by what others do, especially the people we relate to. That’s why climate having a cultural and generational moment represents a great opportunity. Now, as always, this theory would need a great execution. That’s where our modern communication tools and digital products could make a real difference. We need to make the impact of climate change more real, more visible. Stories have become the dominant communication medium on Instagram, Snap, etc and we stream them all day long. How can we use that to make the effects of climate change more present and tangible? Our smartphones and watches are already giving us more and more health-related data based on our lifestyle, activity, sleep, etc. What about the same level of insights about our environmental footprint? How can I become more aware of what my friends, neighbours or even influencers are doing to live more sustainably? What could a Strava for a sustainable lifestyle look like?

Consumer spending: Despite our best efforts, our footprint will remain. We should also put our money where our mouth is to finance the cost of our lifestyle on the planet but also repair the damages done. One solution is taxes. They help incorporate the costs of a more sustainable supply chain into the prices of goods and services. However, I think that we’re also going to need more direct ways to funnel consumer capital into climate initiatives. Climate becoming a cultural topic makes it a prime candidate to become a category where people are more likely to spend their money. We’re increasingly paying everything through a subscription. Should we pay our environmental footprint as a subscription as well? We’re paying our utility bills in this way and it seems perfectly normal. In the UK, a brand like Bulb has done a great job at offering sustainable energy as a a service. Why not go further and finance the broader environmental impact of our lifestyle? We like to say we live in an attention economy because we feel this is our scarcest resource and we are increasingly paying productivity tools as a service (e.g Superhuman). What if we actually live in a planet economy? The earth is quickly becoming our scarcest resource. Shouldn’t the people who consume the most pay for it? Offsetting at scale could be a good start. The danger is that it just serves as a guilt-free service and we continue to avoid the environmental externalities of our lifestyle. Should we aim at using technology to create “environmental abundance”? What if as a consumer we could effectively spend money to decarbonise our economy? The biggest Internet platforms of the last 10 years have powered and financed new brands, small retailers, mini hoteliers, artists and startups. What about normalising sustainable behaviours, powering the most exciting climate projects, supporting climate activists or funding the “greenest” products?

Climate change and the solutions to reverse it are a complex topic. I avoided addressing the complexity in this post. You could say that broken markets forces have gotten us into the climate mess and since startups are subject to market forces, it is a real question whether entrepreneurs and startups can be the answer. As The Economist argued in its Climate issue: “Concluding that climate change should mean shackling capitalism would be wrong-headed and damaging. There is immense value in the vigour, innovation and adaptability that free markets bring to the economies that took shape over the past century. Competitive markets properly incentivised, and politicians serving a genuine popular thirst for action, can do more than any other system. Market economies are the wells that produce the response climate change requires”. I would tend to agree with this view but I need to educate myself a lot more on the whole topic. The ideas I have suggested in this post are very preliminary. I’m planning to spend more time thinking about what great consumer tech products and services to normalise a sustainable lifestyle and “create environmental abundance” could look like. As my colleague Michelle pointed out, the notion of environmental abundance might be the wrong objective: “we need to build in the very real planetary boundaries and actual scarcities of our resources into whatever new economy we create to figure this out.”

I wrote this post to better structure my thoughts on this topic and start a discussion around me. At this point, my excitement and optimism come from the simple belief that climate has become a cultural topic. Culture moves people and those we understand how to marry culture with the market economy create the most powerful companies. The Internet has the potential to help scale a more sustainable lifestyle and make it go viral. Let’s do it.

Thank you to Jackie Annesley, my sister Rosalie, my wife Isabelle, my brother Lance and my colleagues Michelle, Mish and Saul for their valuable feedback and their suggestions.

Some interesting projects to watch:

https://projectwren.com/

https://www.climeworks.com/

https://www.pachama.com/

https://www.regen.network/

The blurring lines between investing, collecting and consuming

Technology has massively lowered what economists call “transaction costs”: the cost in making any economic trade when participating in a market.

I’m not gonna re-visit the whole history of the technology industry but starting from the Internet and the networking age, the impact first became visible through the access to information. The cost of creating, publishing, distributing and consuming content dropped. With the likes of Google and Wikipedia, knowledge became pretty much free. Then came the rise of marketplaces like eBay, Etsy, Airbnb and Uber where buyers and sellers could find each other much more easily than ever before. The term “sharing economy” was born and it marked a behavioural shift from ownership to access. The underlying currency for these marketplaces is trust. Many people argue that as technology progresses, these costs will continue to go down and the “sharing economy” will continue to grow. I will talk more broadly about digital marketplaces in a future letter but if you’re interested in this topic, you can read Michael Munger’s book Tomorrow 3.0. Bill Gurley from Benchmark also published a great post last week on how online marketplaces unlock economic wealth.

I think we’re now seeing a new type of marketplace facilitated by lower transaction costs that I describe as the “blurring lines between investing, collecting and consuming”. Maybe we can call it the “collecting economy”. This time, consumers value ownership and the underlying currency is social status. People are increasingly building their social profile by allocating capital to scarce assets (both physical and digital) that match their cultural interests. A number of interesting companies are building on this trend which I think is one of the next big opportunities in consumer internet.

I started thinking about this phenomenon as I read about the activity on Robinhood, the highly popular zero-commission trading app loved by millennials. One of the most traded stock on Robinhood is Tesla. I don’t know this for sure but my assumption is that many Robinhood users don’t analyse Tesla’s numbers. They are buying it as a testimony of their interest in the brand and for what the company and Elon Musk stand. For a millennial, before you can afford or drive a Tesla, the best way to join the cult is to buy the stock. A customer in the waiting becomes an investor first. By making trading frictionless, Robinhood let their users “collect” the stocks of their favourite brands. If Supreme was listed, I bet they would be among the most populars stocks.

Crowdfunding platforms were the first marketplaces to blur the lines between investing, consuming and collecting. Kickstarter, Crowdcube and more recently Patreon let consumers use their money to back projects, companies and individuals. Here in the UK, some of the most popular equity crowdfunding rounds were done by emerging brands with a really strong community: cult craft beer Brewdog or more recently neo-bank Monzo.

While crowdfunding is a horizontal trend, we’re now starting to see the emergence of marketplaces blurring the lines across entire verticals by facilitating the ownership of scarce assets.

• Fashion and sneakers is the category that I think has seen the most illustrative activity. When you buy a pair of Nike x Off White or Yeezys, are you buying, collecting or investing? You’re definitely allocating capital to a product with limited supply while joining a cultural tribe. Stockx is probably the leader here and initially grew by publishing great contentaround this phenomenon but there are other competitors like Goat, Grailed, etc. The underlying economics and mechanisms around these marketplaces are fascinating.

• Rallyrd is trying to apply a somewhat similar marketplace model to vintage cars. It lets members invest in individual blue-chip collector automobiles like Ferraris, Porsches, Lamborghinis and other classic models for as little as $50 per share. So far, they have made 10 cars available and they claim that more than 50,000 members have invested millions.

• Otis is a marketplace claiming that “culture” is a new asset. It wants to allow its members to build a portfolio and collection by investing in collectibles, fine art, and physical spaces for as little as $100. On their homepage, they quote Ray Dalio (who else), founder of Bridgewater: “I learned that if I could have 10 or 15 uncorrelated bets, I could cut my risk by 75% or 85%.”

• Crypto: as an asset class, crypto is a great embodiment of scarce assets blurring the lines between investment and collection. People buying BTC, ETH and other cryptoassets thought they were making a good investment but a lot of them also felt they were joining a tribe. I have said already that I would write a post about the relationship between crypto and culture so more on that later.

We live in an age where there could be a stockmarket for everything. While lower transaction costs and frictionless (micro)payments have facilitated this trend, why is it happening? Why might consumers want this? Why is culture becoming an asset?

As social creatures, we like to find ways to distinguish ourselves. We want to stand out. Eugene Wei published a fantastic essay last week talking about social networks as “Status as a Service” platforms. He starts by stating the following principles:

Let’s begin with two principles:

People are status-seeking monkeys*

People seek out the most efficient path to maximizing social capital

I begin with these two observations of human nature because few would dispute them, yet I seldom see social networks, some of the largest and fastest-growing companies in the history of the world, analyzed on the dimension of status or social capital.

“Status as a Service (StaaS)” by Eugene Wei

I think the same can be said about these new marketplaces as we can look at them under the prism of social capital. Culture has always been a way to stand out and allocating money to cultural assets is a way to build social capital. In the last century, music and movies were the dominant cultural forces but they have now been digitised and as a result are available in abundance. As subscription has emerged as the dominant business model for content, payment has been decoupled from consumption. Spotify or Netflix are all you can eat propositions. You can’t build social capital by watching “Roma” or “Fyre Festival” on Netflix. We can too easily access them if we haven’t seen them. So we’re turning to new forms of scarcity that we can own, embracing brands and collectibles with our money and other cultural movements with our time (after money, what is more scarce than our time?). Owning an iPhone is not really scarce but owning an Apple share is.

As Instagram has arguably become the most influential social network, we’re also going through a shift where visual culture is dominating. Hence, it’s probably not surprising that people have turned their attention to highly recognisable products like sneakers. The impact of Instagram on culture is worth a whole essay on its own.

So where is it going next? Making predictions is a difficult exercise but let’s try.

First, I think we’re going to continue to see the growth of marketplaces like StockX, RallyRd, etc that make it frictionless for people to allocate capital to cultural goods. Some will fail but I think the best projects with the best teams could reach significant scale.

Then I predict a second and potentially more significant evolution will be the growth of digital scarcity. As mentioned above, when things get digitised it creates abundance. Part of the crypto innovation has been to create digital scarcity and it’s one of the main reasons why people are excited about it. While Cryptokitties became the most popular non fungible token, a very interesting project here is Decentraland. An asset like land, that historically has been a great source of wealth, can now be re-produced in a digital world while keeping its scarcity. I can imagine a future where the ultimate social status is not your art collection but the digital estate you build and own. The younger generation is already hanging out a lot in a digital world… I’m looking forward to seeing more businesses leveraging this trend and backing some of them… or maybe we have already :) ?

Thanks for reading!

P.S. 1: I want to insist that these ideas are very much work in progress and I expect my thoughts on this topic to continue to evolve. Please share yours.

P.S. 2: thank you to my friend Ricardo and the LocalGlobe team for providing valuable feedback on this post.