By Christian Dahlen & Oana Olteanu – originally published here
A seemingly endless number of B2B networks was started during the first dot-com bubble. But just as quickly as they had started, they almost all disappeared after the bubble burst in 2001. In the decade that followed, activity in the B2B network sector came to a complete halt and startup activities instead focused on launching and scaling online enterprise software companies. Outside of the enterprise space, massive B2C and C2C networks like AirBnb, Uber and Facebook emerged during the same time to a degree where it might seem that all personal interactions are becoming networks.
Buoyed by the success of these consumer networks and the movement to online enterprise software, there has been renewed interest to launch two sided or even multi sided business network startups in industries such as banking, advertising, commodities, industrial goods and consumer goods.
Is this then a new dawn for B2B networks? How can investors avoid the costly mistakes for the B2B startups during the first dot-com boom? What has changed? Is there anything that can be learned from successful B2C and C2C networks?
The Business Model Canvas has emerged as a useful tool to assess the quality of a startup idea. And while the canvas can also be used to document some of the key assumptions of a business network, it falls short in evaluating the potential success of new marketplace opportunities. The fifteen insights from two seminal blog posts about digital B2C and B2C marketplaces are far better suited to assess B2B networks: Bill Gurley to evaluate the fundamental attractiveness of a network idea, and Boris Wertz to devise an effective GTM approach.
Before a business network is rolled out to customers, the founder and her investors need to understand whether this idea will make money. A test to assess the network attractiveness is needed, just as a compass is required to know which direction to take. Gurley’s ten factors can be used to evaluate and shape such business network ideas. The three key ‘must have’ factors for successful business networks are being part of the payment flow, having high frequency of transactions, and extending the market through the network. One of the most successful B2B networks that connects buyers and suppliers is successful because the network charges a percentage of the transaction, the frequency of transactions is high, and the availability of the network and its usage extends the market for trading. A similar network with millions of users has been far less successful: the payment model consists of a fixed fee and it is not correlated with the size of the transaction; the frequency of transactions is low; and the payment is fixed and does not encourage further development. In consequence, Gurley’s ten factors not only assess the relative quality of an idea for a business network; they actually provide insight into whether the business network will be viable.
Understanding this structural attractiveness of a marketplace is a necessary, but not sufficient condition before investing. It becomes sufficient only when the idea has been validated to reduce the risk of failure. In the case of business networks, the failure risk increases exponentially due to the complexity of adoption in a network. There are two or more sides of the user groups who need to adopt the network, and they need to do it in a synchronous manner. And in the B2B world the user is often different than the economic buyer, which in turn requires multiple actors and multiple groups of actors to come together synchronously. Successful B2B networks can tackle this complexity by signing up reference customers for each of the user groups. Once this link is established, they replicate the model by connecting similar companies onto the network. This increases network attractiveness one link at a time. Each link helps to build the chain of connections in the network until the network has a sufficiently large chain of connections, and users voluntarily choose to actively contribute to adopt the network and thus increase its reach. When this happens and the adoption flourishes without push from the network provider, the network has the potential to reach the tipping point and ‘the winner takes all’.
Wertz further defines five factors for sufficiency by addressing the network specific GTM aspects. Often, this is also the place where those new networks encounter their biggest challenges: Understanding and leveraging buyer and seller communities with a narrow segment focus, relentless working to provide additional value to both sellers and buyers, defining KPIs to understand when a tipping point has been reached, and incentivizing community managers are some of the more frequent hurdles encountered. Another hurdle in the business software world is represented by the relative newness of the business network concept and the lack of community managers. Product managers and salespeople abound, but nobody is incentivized to build the community and increase the adoption. This was the case of a financial network which scored high on the Gurley test, but struggled to reach wider adoption for many years due to the fact that no one was made responsible for managing the communities.
It is a fallacy to believe that there is an evolutionary way for a typical enterprise software company to evolve into a B2B network. In a network, every part of the business system follows its own set of rules, and new GTM approaches are required to overcome the innovator’s dilemma. Just as the Matrix was rebooted multiple times, new frameworks and tools are in place to turn the failures of the first dot-com bubble networks into a distant memory and to fulfill the promise of ‘the winner takes it all’ economies.
