There has been so much talk in recent weeks about B2C v B2B. The general thrust of the writing is twofold.
First, that there has been too much attention and investment going into the consumer internet market and that it’s become over-heated as a result. This is likely to lead to a market ‘correction’ as the hype dies down, leaving many of the start-ups fighting for survival as they struggle to raise another round of funding.
Second, that the flip side of this is that the B2B market has been under-served, is generally performing better and is therefore where you should be putting your money.
While I think that this is generally true, I also think it’s rather an over-simplification. Either way, Notion has only ever invested in B2B companies. This is because it’s the market we have come from and therefore where we are best placed to make the right decisions and add value to our companies. But this whole debate has made me think more broadly about what I like about B2B relative to the consumer space.
Here are my five good reasons to invest in the B2B market:
1. Businesses represent around 50% of the world’s technology market
Depending on what report you read businesses make up around half of the world’s technology spending. Because we are all consumers and surrounded by consumer products and services it’s easy to forget that.
2. Businesses have budgets and expect to pay for their technology
Businesses have budgets set aside for technology they usually increase general every year. Consumers rarely have personal budgets and generally buy things more impulsively without as much planning. This would suggest that business spending is more solid and reliable.
The other point to make here is that many consumer web services are ostensibly free and expect to make money further down the line as and when their user base reaches ‘scale.’ Businesses always expect to pay for their technology. They see it as a cost of doing business and, in many cases, of gaining competitive advantage. My experience is that businesses actually prefer to pay for their technology as it makes the supplier more accountable and establishes a clear contract between the two parties.
3. Businesses have longer upgrade cycles and are less faddy
Businesses upgrade their technology less often than consumers. It means that businesses will take longer over their decisions and conduct more due diligence. But once a decision is made they are unlikely to review the supplier for years rather than the months or even weeks that is more common on the consumer side. This means that you might not get periods of extraordinary and viral growth that you get in consumer markets but the growth that you do have is often more sustainable.
4. Businesses are more practical
Consumer markets can be very hype-driven. I think this is because we are all consumers and word can spread very quickly especially now with the social communication tools at our fingertips. Businesses tend to look more closely at the facts and are more practical in the way they make decisions. This means that there is less of a hits-driven boom and bust performance in B2B that gives you more control over your business and time to react to market changes.
5. Businesses are easier to value
One way of measuring a B2B start-up is through traditional metrics like customers, revenues and profits. Increasingly, consumer web services are offered for free, and plan to monetize once they have reached some kind of critical mass in their user base, usually through advertising or a premium version of the service. In this way I would argue that consumer start-ups are more difficult to put a value on. This can lead to a kind of ‘financial vacuum’ in the early years that make consumer start-ups more difficult to value and more open to interpretation.
The valuation of a B2B start-up is usually through some kind of multiple of their revenues. There are of course other factors but this is often the most important one. This is not dissimilar to how the company will be valued by potential acquirers or by the public markets. In this way there is valuation alignment. An early stage consumer company usually has to be valued based on non-financial attributes and yet, further down the road, valuation will get more and more closely tied to financial performance. This means that there is not the same valuation alignment at different stages of the company’s maturity thereby increasing the risk of a disconnect between one form of valuation and another.
So my conclusion is that consumer start-ups often go through periods of amazing growth. They are also offering products and services that we are familiar with and want to use ourselves. For these reasons B2C can attract a great deal of hype and be a very exciting place to be. But growth doesn’t necessarily translate into financial performance and everything that can be used to propel their growth can also apply in reverse. This is why I look at the consumer market as more of a higher risk roller-coaster ride.
B2B might be less sexy but is also more solid and more predictable. You know where you stand in that they pay you money, you provide a service and they will then usually stick with you for some time to come. It might be less sexy but it’s where we like to be.