The Rise of Latin American Vertical Marketplaces

In Feb 2020, Bessemer wrote about the rise of B2B or Vertical marketplaces and wrote the guidebook to identifying them and helping build them in the US. Since the start of the pandemic, Latin American B2B marketplaces are booming, and the trend seems to have been pulled forward by 5-10 years. You should read Bessemer’s article before reading this article.

The majority of LatAm’s biggest winners today are B2C companies. B2C has a huge head start. Take a look at neobanks: Nubank, founded in 2013, ($35B valuation, Warren Buffett investing $500M), leads the charge, followed by Albo (2016), Uala (2017) and more. The first significant neobanks for business got started in 2019/2020 with Clara/Tribal/Mendel/Cora/Oyster raising significant rounds.

In Latin America, B2B trails B2C but B2B is poised to close the gap quickly.

Ecommerce is booming, with 10 years of growth packed into 10 weeks at the start of the pandemic, and continuing to grow through 2021. New industries are being formed around logistics, ecommerce, and fintech to help serve these markets and billions of dollars are flowing to startups that are breaking out. 

But why do businesses still have to purchase the vast majority (if not all) of their goods and services using antiquated, inefficient non-digital channels?

As Bessemmer wrote, the thesis is clear:

As consumers we can buy basically anything online: car washes, deodorant, home renovations, even Albino Pac-Man Frogs. So why do restaurants have to order their most basic supplies over the phone? Why don’t dentists have an easy way to compare latex glove prices from different vendors? And why do most gas stations manage their fuel purchases in email and Excel?

I constantly ask myself: why are Latin American companies buying offline, accepting terrible customer experience, when they wouldn’t stand for it in their day to day lives? 

If I zoom out 10-20 years, what will B2B commerce look like? I can’t see a future that isn't mostly, if not fully digital, which means that current incumbents need to become more like Amazon or Mercado Libre, or marketplaces will come in and facilitate these relationships.

People know Latin America’s top consumer companies like Rappi, Cornershop, Nubank, Mercado Libre, etc but most cannot name a top B2B company. Why is that….when as Bessemer puts it:

...B2B markets are many times bigger than B2C markets (annual global B2B spend is more than $100 trillion), and they’re much more offline. Indeed, massive B2B markets like wholesale and logistics remain opaque and intermediary-driven, with orders and payments flowing via email, SMS, fax, and paper check.


The Good and Bad News About Latin American Vertical Marketplaces 

In Latin America, there’s both good and bad news. The good news is that many B2B payments already flow digitally.

The bad news is that they’re done via inefficient, hard to track bank transfers. Think instant, free wire transfers for payments under $10k-$20k, and more traditional fee-based wire transfers for “high value” transactions. Some payments are still done via paper checks, and smaller payments are done via cash.

More bad news: many large Latin American companies force small suppliers to drive 1-2 hours, sometimes outside of the city, during a specific 2 hour window on something like the 3rd Thursday of the month to pick up their check.

In all other markets, from product and service discovery, to making the purchase, to delivery, to tracking to payments, Latin America is years behind the US. The vast majority of companies don’t use credit cards to make online purchases from their suppliers. They have to pick up the phone and deal with someone who is selling via pen and paper, or maybe a spreadsheet and a rudimentary understanding of email. 

If you’re lucky, you might find some prices and products online, but they’ll be in a list (sometimes a PDF or downloadable excel), with outdated prices and product listings. You might also need to purchase from 10 different suppliers and pricing can be extremely different depending on your company or who specifically is calling.

Bessemer identifies the new trends that are creating opportunity for B2B marketplaces:

  • Millennials are taking the reins in legacy industries and hate clunky, offline workflows. The most frustrated millennials leave their industries to start software companies
  • Integrated payments and lending are unlocking new business models for software companies and vastly improving the user experience. B2B marketplaces with “indirect” business models like invoice factoring can offer core workflow and ordering applications for free to drive adoption
  • API-driven architecture is maturing as a paradigm and enabling more communication between applications across value chains. Open architectures allow B2B marketplaces to build real-time multi-vendor product catalogs with accurate SKU and pricing information
  • Software development is getting easier, cheaper, and faster in general, enabling a wider set of founders to bring their ideas to life

In Latin America, other factors are in play:

Payments are just now starting to come online, via companies like Kushki, which saw massive growth during the pandemic. You couldn’t do a vertical marketplace well until very recently.

According to Sebastian Castro, cofounder of Kushki, “Accepting payments online was always on large companies’ todo list, but the pandemic forced companies to prioritize their move to digital channels. This change is enabling more purchasing transactions to move online.”

Businesses now have access to the internet, and buy things for themselves using their cell phones via Rappi, Cornershop, Uber, Didi, Mercado Libre, and don’t understand why B2B has to be so terrible.

Deepak Chhugani, founder of Nuvocargo, adds, “in our business most buyers use consumer apps in their day to day lives. When they see how Nuvocargo simplifies their lives, they compare it to the region's top consumer apps, and can’t believe they used pen and paper or excel spreadsheets before.”

Integrated financing via tech enabled companies gives businesses a carrot to go online

 Roger Larach, cofounder of R2 Capital, the operating system for SMB financing in Latin America, works with marketplaces to help them provide financing to their sellers. “Offering financing for sellers in a marketplace helps retain sellers, gives them an incentive to spend more time in the marketplace, and increases GMV and ARPU for the marketplace." 

There aren’t many legacy horizontal ecommerce or marketplaces to compete with

Maribel Dominguez, founder of Circulo de Belleza, a vertical marketplace to supply beauty professionals entered into a wide open market, “In beauty, there are few suppliers and no legacy ecommerce platforms. We are able to enable large suppliers to connect directly with their customers, providing better service and selection, and increasing sales for these suppliers.

Startups are offering much better payment terms than legacy businesses

Circulo de Belleza’s Dominguez adds “we can be more flexible than large suppliers with order sizes, payment terms and geographies we ship to, which helps us reach more clients.”

Startups are offering anti-fraud tools so that the risk of trying a new supplier is much lower

Some marketplaces create their own antifraud tools, others partner with companies like Truora, the operating system for identity, to vet clients.

According to Truora’s cofounder Daniel Bilbao, “working with a startup like Truora lowers the risk of bad actors in the marketplace, and makes it easier for lesser known suppliers to get traction. If you can eliminate fraud in Latin America, you can increase trust and build a high trust marketplace.”

Startups are brining offline historical transactions and reputation online, making markets more transparent 

According to CargoX founder Federico Vega, ”we’re able to bring a trucking company’s historical reputation into our marketplace, adding valuable data and transparency into the marketplace.”

APIs that are powering the “operating system for X” are allowing vertical marketplaces to quickly add more services to give a more complete offering from very early on.

Prometeo, an open banking API, allows marketplaces to move money or get financial data to offer other products. Ximena Aleman, Prometeo’s cofounder, adds, “by adding prometeo’s financial data and transaction ability, they are able move toward a frictionless onboarding, and then to add products more quickly, which increases stickiness.”

Corruption is a massive opportunity

CargoX’s Vega adds, One of the reasons B2B marketplaces are tougher to implement, than B2C, specially in LATAM, is the high level of corruption throughout the society. Unlike consumers that buy the most cost efficient products in the market, when businesses consume a product, the person making the decision on which product or service to buy is not necessarily looking after the best interest of the company but their personal interest. The most common example is the supplier that overcharges a business and pays a rebate in the employee’s personal account. The opportunity for startups here is to help business owners by providing more visibility on the value chain of the services the company is buying. 

Building true network effect businesses are becoming possible

Adds CargoX’s Vega, “since there is very little competition in the B2B space and TAMs are very large, any company that operates a true network effect driven business model will have the opportunity to build a large monopoly in their sector. These opportunities to control entire industries of massive size are very rare in the rest of the world, where competitors are already established.”

What’s the difference between a vertical and horizontal marketplace?

Vertical - You sell products and services to specialize in one industry, for example, supplying beauty salons, like Magma portfolio company Circulo de Belleza.

Horizontal - Everyone who uses your product and services does the same thing, regardless of the industry they’re in, for example companies that sell paper on the internet.

We strongly believe that vertical marketplaces are going to replace much of Latin America’s B2B economy, bringing it online. Some legacy suppliers will be disrupted completely (the ones with poor service and that don’t update technology quickly), and others will grow very quickly, as they get better distribution via the marketplaces.

We believe that these marketplaces will be a boon to non-pedigreed, non-elite, underestimated suppliers who make the transition, because as the saying goes “nobody knows you’re a dog on the internet” all they care about is your price, payment terms, your customer reviews and your marketplace reputation.

You can think of many of these vertical marketplaces as “the operating system” for their specific vertical. Some start with fintech. Some start with ecommerce. Others start with SaaS. All have a specific wedge to get into the workflow, then expand out from there into the holy grail:

B2B Super Apps: SaaS + Fintech + Ecommerce + Insurance = High NPS + High ARPU + High network effects

Emerging markets consumer companies that win sometimes turn into superapps. WeChat, Gojek, Didi, Rappi, and more are great examples. I expect vertical marketplaces that integrate SaaS, Fintech and Insurance to be B2B super apps, which will be native born to emerging markets, as market conditions are much different when compared to the US and Europe.

If founders build a SaaS in LatAm, multiples aren’t that great until you hit $10-15M ARR. If founders build ecommerce, multiples are generally bad until you’re huge. 

If you build a marketplace, the multiples get better. But when you add Saas + vertical marketplaces, or SaaS + Fintech, or Marketplace + Fintech, you have a big win.  And when you can add all 3 in, you can have a unicorn if you execute well. Embedded insurance is the cherry on top.

Two Types of Vertical Marketplaces

There are two types of vertical marketplaces. From BVP:

Wholesale marketplaces which facilitate smaller, more frequent B2B transactions of relatively standard and commoditized goods (e.g., apparel, restaurant supplies, boutique goods)
High-friction marketplaces which facilitate larger, less frequent transactions of non-standard goods or services (e.g., logistics services, manufacturing, used cars) which today flow through brokers or lengthy RFP/RFQ processes.

Some examples for both:

Wholesale:

Frubana - supplying restaurants with food

Tul - Supplying hardware stores and construction companies with building materials

Circulo de Belleza - Supplying beauty salons

High Friction

Nuvocargo - building the operating system to unify 10+ different actors to facilitate transport across the Mexico/US border.

CargoX - the operating system for trucking in Brazil, connecting small and medium sized industries and 3PLs to truck owner operators, while offering cost efficient credit, payments, insurance and anti-fraud services to the industry. 

How we think about vertical marketplaces in LatAm

Wholesale vs. High Friction: Which are you?

The industry structure dictates strategy. Generally wholesale have fewer suppliers and are less fragmented (think Tul and concrete suppliers vs. CargoX with massively fragmented trucking suppliers.) Neither is a bad market, but the strategy and probably money needed to prove traction are different.

Find the Wedge: Don’t try to do all 4 to start

Find the biggest problem you can solve for the company. This could be SaaS, it could be selling them a product via ecommerce, it could be lending or taking payments. It’s almost for sure not insurance, because SMEs generally don’t see insurance as being that important, and there’s more regulatory risk than starting in other markets, but it could be.

Don’t try to do more than one. You’re biting off more than you can chew, and it will be too complex to start. Pick one and expand.

Caterine Castillo, cofounder and CEO of Neivor, started with SaaS, then added fintech, likes the SaaS-first approach. "The beauty of starting with a SaaS approach is that it allows us to capture valuable data and create network effects that help us deeply understand our client's needs before expanding into other products or services. This is how we discovered we should add payment processing capabilities to our product."

Find a big TAM, or a niche industry with lower TAM that’s unattractive to competitors

Frubana, CargoX, Tul, Nuvocargo all have massive TAMs. They are digitizing major pillars of the economy. Other vertical marketplaces have a smaller TAM, but are unlikely to have many entrants into the market.

Look for low NPS, bad discovery, no trust metrics and broken payments

We love vertical marketplaces that have bad NPS, discovery of new suppliers is extremely hard, and you can’t verify if the new supplier is any good without a marketplace. If payments are broken (which is in most cases in LatAm), it's a solid choice.

Look for true network effects, not just scale effects

It is very important not to confuse network effect with scale effect, in a network effect driven business model the first mover advantage is more important than in any other business, because the winner takes most of the industry and locks future competition almost entirely. This opportunity is opening up in LATAM now because VCs are willing to invest heavily to help these businesses achieve market domination very quickly.  

We love vertical marketplaces and have invested in many of them. If you are building a vertical marketplace in Latin America, we’d love to chat. If you think we should change something in this article, or add something, please let us know. We’re always trying to learn from entrepreneurs on the ground executing in Latin America. Feel free to contact us via our contact form, or fill out our Magma Memo.