Investing in the things that build our world

November 7, 2022     ·      8 min read     · 

By Matias Barbero and Fabrice Grinda

Those of us building and investing in tech spend most of our time thinking about the future. We ponder the impossible, the cutting edge, even the esoteric: software, artificial intelligence, crypto, asset-light services delivered through digital apps. Mars and outer space might often represent a larger share of one’s daily musings than dull terrestrial matters. Yet here we are. We live on planet Earth. We inhabit the physical world, at least for now! Almost everything we do in our daily lives involves – directly or indirectly – tangible materials, machinery, chemicals, etc. We want to push the boundaries of how our world currently works by digitizing legacy industries and making them more efficient. All of this is deflationary, making goods cheaper for everybody, which in turn is inclusionary, aligning with our overarching purpose as investors.

The future is already here, it’s just not evenly distributed. That’s true for different industries, as it is for different countries around the globe. Consumer marketplaces have a huge head start over their B2B counterparts, for example. There are also varying levels of tech adoption across geographies. B2B marketplaces have been at the core of FJ Labs’ thesis in recent years and are one of the best tools with which entrepreneurs can take on the challenges and limitations present in the physical realm.

Within our B2B marketplace thesis, we focus on many different verticals, including staffing, FMCG, wholesale commerce, and others. Today we want to zoom into one of the categories: marketplaces dealing inputs and raw materials, or put differently, the things that build our physical world. This excludes other very compelling B2B marketplace categories such as staffing and labor, food and beverages, services, logistics, and many others.

Let’s double click on the focus of this post: inputs and raw materials. They all deal with physical components and help build our world, in the most literal sense. Under this definition, some of what we consider “inputs” could be deemed by others as “outputs” too, but for today’s purpose we view things like precision parts and heavy machinery as key “inputs” in the value chain that build the most prevalent things in our world.

We could look at this thesis from two different dimensions (see table below): A. Across different categories such as raw materials, precision parts, or heavy machinery, and B. Across different verticals like construction, agriculture, and many others. Note that through this lens Boom & Bucket, for instance, belongs both to the ‘heavy machinery’ category and the ‘construction’ vertical.

Let’s use the “raw materials” category as an example. Besides steel and chemicals, there could also be marketplaces for concrete, sand and gravel, minerals, among others. There are still many other companies to be built in each category and across verticals. We’re excited to see the creativity with which entrepreneurs tackle each of these.

We will cover two companies that are disrupting their respective industries: Reibus and Knowde. These are just two case studies we’ll be using today to highlight and layout important points within this broader thesis, but we see lots of opportunities ahead and we’ll conclude with some insights and comments for entrepreneurs to consider when exploring them.

My Chemical Romance

The chemical industry is ~$5 trillion in size and supports roughly 25% of the world’s GPD. The vast majority of the chemicals manufactured are used to make every physical product we love. If you’re reading this from an iPhone, if you’re wearing your favorite Nike’s today, or if you’re enjoying your midday salad, all roads will lead to chemicals in some way or another.

You would think that such an important industry would be supported by the latest technology, with streamlined and efficient internal processes to ensure a key layer in the world’s supply chain runs smoothly. But stakeholders in the chemical industry are operating the same way they did 100 years ago: sellers are offline and have not caught up with ecommerce advances, the buying process is extremely inefficient with transactions done over phone calls and emails, and product information is ridiculously opaque, lost in static pdf documents and a fragmented supply base.

Our portfolio company Knowde is out to solve this by bringing the entire buying experience online. They are building a Shopify and Amazon hybrid model whereby sellers can create their online storefronts with ecommerce, payments, and fulfilment capabilities while aggregating the collective supply under the Knowde umbrella so buyers can have a one-stop-shop for their chemicals.

There are different tactical ways in which a B2B marketplace can go about their go-to-market strategy; Knowde chose to start by tackling the opacity of the chemicals market through a relentless focus on search and discovery.

In practice, this means laying the groundwork of what will later become a fully online transactional marketplace. Until there’s enough liquidity on the supply side to ensure smooth transactions, the initial business model is predominantly based on storefronts monetized through SaaS in lieu of the traditional marketplace take rate.

This hyper-focus is yielding impressive results for Knowde as they are currently adding around 5 new suppliers per day (!) to their platform. To put matters into perspective, there are ~15k total global sellers and ~8k of them already have a live storefront with Knowde. This is roughly half of the world’s supply in one platform. Once they become the de facto industry destination for suppliers, there’s a clear path to keep upgrading key accounts into paid subscriptions and ultimately enabling online transactions, among many other value-added services.

Pedal to the Metal

We can’t have a proper conversation about the things that build our world without a word on steel. This raw material is as prevalent as it gets. From forks and knives to NYC’s skyscrapers; from refrigerators and washing machines to cargo ships cruising around the world. Since the late 19th century, steel has become a synonym for our modern infrastructure.

Manufacturers and distributors transact steel (think sheets, coils, bars coming out of steel mills) with OEMs who then use it to manufacture components and end products.

Another trillion-dollar global industry (starting to see the common appeal here?) fraught with inefficiencies and lack of innovation. There are structural issues coming from decades of stale and offline processes, exacerbated by logistical headaches proper of a heavy product that is expensive to move.

Reibus, one of FJ’s portfolio companies in this category, is a B2B marketplace servicing the industrial metals industry (mainly steel and aluminum) with purpose-built features for both buyers and sellers. What does this mean concretely? They provide much more than just a matching platform: Reibus embeds fintech (financing, payment options, etc.) and logistics capabilities (digital brokerage, shipment dashboard, etc.). They are a heavily managed SaaS-enabled marketplace.

Industry stakeholders were quick to adopt Reibus’ hands-on marketplace. Founded in 2018, Reibus has scaled in-platform transactions to several hundred million in annual GMV, with plenty of room to grow as they are still a tiny fraction of the offline market.

Building inputs & raw materials B2B marketplaces

We’re truly excited about this opportunity to invest in the things that build our world and think there are many unexplored avenues for future entrepreneurs to start new B2B marketplaces aligned with this input & raw materials thesis. As discussed at the beginning of this post, there are countless areas to explore and we see a lots of openings across both categories and verticals, and even geographic arbitrage plays.

It’s important to bear in mind, though, that not every industry will be suited for a marketplace model, and that certain conditions and core strengths will play an important role in the success of these ventures.

  1. Founder-market-fit matters: B2B marketplaces benefit from having at least one founder who is a true industry insider. They lived through the pain points in the industry and have been deeply frustrated by them. They would ideally combine this first-hand industry knowledge with a co-founder and/or founding team member that could think from first principles on how to best design frameworks to dramatically improve the current experience. They also have the credibility to convince existing players to change their processes. Just to name some examples, John Armstrong, Reibus’ CEO, had bought $1bn+ of materials before starting his tech entrepreneurial journey, and Knowde’s CEO, Ali Amin-Javaheri, spent 10+ years working for ChemPoint, an incumbent in the space he began to disrupt right after he left.
  2. Marketplace dynamics: Ask yourself if the buyer and seller base is fragmented enough. This is true for most marketplaces but especially true in B2B where many verticals are concentrated on the supply side. The more concentrated the industry, the harder it is to have a meaningful take rate. In fact, you may be merely a distributor for a few incumbents rather than a real marketplace if the market is concentrated enough. The incentive and easiness to circumvent your platform would also be higher.  
  3. Find your unlock: Aggregation is often not sufficient. The platform should quickly focus on value-added services to create strong value propositions for both supply and demand. Founders need to figure out which specific services or features will unlock the greatest amount of liquidity for the marketplace. For Knowde, it was solving discovery and price opacity with information locked into siloed pdfs. For Reibus, it was offering financing and logistics services.
  4. Different paths to start monetizing: Charging a take rate on each transaction is the classic way a marketplace can begin to generate revenue, but it shouldn’t necessarily be the first choice in the monetization toolkit, and it’s certainly not the only one. In some cases, you cannot charge a take rate right away and must find alternatives. Reibus, which leverages real material pricing in commodities to facilitate their RFQ process, was able to have a take rate from the get-go, but that would not have worked for Knowde, which needed to bring discovery online first, hence a SaaS business model made more sense in the beginning.
  5. Juice up the blended take rate: It’s often hard to take more than 1-3% in B2B marketplaces. As a result, they may also monetize through SaaS subscription or listing fees instead of, or in addition to a take rate. Moreover, revenues are usually complemented by offering and monetizing additional services: advertising/placement, financing, insurance, logistics are all options. Once network effects kick in, a mix of business models can create a multiplier effect on net revenues. Many end up being able to increase their blended revenues to 10% of GMV as a result of the monetization diversity.
  6. Geographic arbitrage: For certain businesses, you can bring an idea from one country to another. This arbitrage is not always going to be possible in B2B marketplaces for inputs and raw materials as some of the markets are truly global in nature, likely leading to global winners. Does this mean that there couldn’t be an “X model for Y country” play? No, but it’s less obvious than with other categories within the B2B marketplace realm (e.g., FMCG products, fresh food, labor, etc.). This is driven by how local the supply is, how transportable the good is, and the extent to which the price is set locally. The market for oil for instance is global – with a fungible, interchangeable commodity that can be easily transported and has a global price. Natural gas on the other hand is local, with prices that vary by region based on local supply and market conditions suggesting that regional players can emerge. That said, even if dealing with mostly global supply, startups in other regions might have a window of opportunity to focus on local differentiated supply, especially on the long tail, and compete before potentially stepping into someone else’s shoes.

Inputs & raw materials: investing in the things that build our world

Marketplaces have had many evolutions over the years. B2B marketplaces are now in their infancy but poised to catch up with the digitalization of their B2C counterparts. As a result, as counter intuitive as it sounds, we believe that many of the best opportunities lie in forgotten old industries.

We’ve been actively investing in the inputs and raw materials category and looking forward to meeting entrepreneurs thinking about these big challenges with deep industry knowledge and innovative approaches. The future of the things that build our world is only getting started.


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