Transcript of B2B / Sumit Jain Interview

Amit Nawka: The SME segment in India is large and a significant contributor to India's GDP.

Over the past several years many companies have focused in this segment. This year, there has been an increase excitement about the B2B e-commerce space and many companies have surpassed the unicorn valuation. To understand the B2B ecommerce space better, we have with us today, Sumit Jain, senior partner at Sisema who has watched and invested in several B2B e-commerce companies over the years.

Sumit, can you help us in understanding the value proposition of these companies? We have seen several B2B. e-commerce players in India. How do they differentiate from one and other?

Sumit Jain: The value proposition of B2 B, commerce companies really is about trying to disrupt one or the other part of the supply chain which has issues of fragmentation and organisation. It could be to do with procurement, supply-chain financing or credit, widening of market access, quality standardisation or reliability and SLA standardisation and things like that. Now, the way that many of these B2B e-commerce players are differentiating from each another is by verticals. So, you have somebody focused on agrotech and somebody focused on grocery and staples and FMCG or somebody else focused on construction and so on. The other way they're differentiating from one another is that they are trying to solve

A specific problem in the supply chain. So, somebody could be just focused on becoming a one-stop shop solution for procurement. Somebody else to be just providing credit and so on and so forth.  I think the market is still not crowded enough that there are multiple players trying to do the same thing in the same vertical So, I really, there's plenty of differentiation with players as of now in the B2B e-commerce market.

Amit: Thank-you, Sumit. You have seen this segment over a number of years. How has it evolved over the years and what is led to the significant scale-up and investments in this year?

Sumit: So, I think the biggest evolution is basically in the market adoption. So what was an early mover phenomenon five years ago is actually now mainstream. You will find plenty of shop owners and business owners who were not really considering digital procurement as a mainstream source of procurement. And now, you struggle to find someone who doesn’t, especially in the larger cities. I think the biggest evolution is really about market adoption.

Now there are multiple reasons why that has happened. I would say the 2016 demonetisation is maybe one of the biggest factors. So therefore, large scale adoption of digital payments, including UPI happened. The ever-increasing smartphone omnipresence

Is a large factor as well. And I would say, you know, the reason you are seeing a lot of investment this year is because fundamentally the way businesses are doing a lot of their operations is COVID impacted. So, you're seeing people work through WhatsApp rather than phone calls or going offline and procuring. So, really the impact of COVID has meant that maybe some of these processes have fundamentally shifted and shifted forever. And obviously the investment community realises that there's a paradigm shift in which businesses are actually running their operations and that is really triggering this investment flurry for the segment.

Amit: When I speak to companies and investors in this space, I find that M&A is a core part of their growth plans. What drives this M&A focus?

Sumit: As companies have scaled in the sector, they've also got access to additional capital,

they have built comfort around adjacencies in their own supply chain. Somebody who was just doing a procurement also wants to get into logistics. Somebody who is in logistics also wants to get into financing. Basically, expanding yourself into adjacencies in the supply chain

and that can also happen through a M&A. The other reason why this is happening is, because many of these companies have to set up their businesses on a very local basis.

So, it's not like these are very scalable country-wide, because some of these are actually very brick-and-mortar associated businesses. So, geographical expansion through M&A is also one of the big drivers of why B2B e-commerce companies are interested in acquisitions.

As I said, there are examples of procurement companies acquiring rental equipment companies. There may be some brick-and-mortar old-school setups that get acquired and become part of the machinery driven by these tech businesses. If you're breaking out in your own space and you have access to capital and you have ability to expand into your adjacencies, that's really what's driving this M&A focus today.

Amit: When we compare the Indian B2B e-commerce companies with the global ones, what would be some of the similarities and differences?

Sumit: B2B landscape in evolved markets like China and the US are a little bit more mature and largely driven by industrial commodities like metals, automotive and things like those.

Whereas in India, you're looking at relatively smaller areas, like staples, grocery, agri and things like those. So, it's not happening at an industrial level. I think, that reflects in the differences in the scale of operations, the kind of AOVs, GMV build-ups you see and and the number of people that need to come together to give rise to a certain size of business. And the other thing is in India, if you're doing any B2B business like that, there's a lot of dependency on working capital. So, you have to solve the problem of the Indian SME

which is working capital financing which is not really so core in the other markets where B2B aggregators are happening.  I think the similarities are probably, you know, the opportunity to aggregate fragmented markets, fragmented supply chains. So some of the problems are very similar - solving for logistics and so on - but the key differences are really in the scale of operations and the need for working capital, which is very core to India.

Amit: How do you see the space evolve in the coming years? Is there space for new players to scale or have we reached a state where the current players will continue to be the market drivers?

Sumit: Now, depending on who's numbers you believe, the B2B market is nearly a 700-Billion-dollar annual opportunity in India. We are only at the beginning of this phenomenon

Lots of industries there are untouched by the impact of tech and marketplace aggregation.

We have the garment industry, agriculture equipment and inputs industry, MRO is still nascent, automotive components – there isn’t a very big company today. So these are all at very early stages and given the vast scale of the market, I think this phenomenon is just starting. The other thing is that there's a lot of ecommerce that has already happened in India and it has its own set of unit economics. The unit economics construct in B2B businesses are such that it's very palatable to investors to be able to deploy large amounts of capital and still expect a relatively de-risked, good outcome. So, there is a market need, there is investor appetite, relatively healthy unit economics – so all of these things are probably going to ensure that you're going to see a lot of new B2B ecommerce or B2B marketplace type companies come up. I would say the increasing digitisation which is really omnibus phenomenon that's happening in India - with small shopkeepers, store owners,

using apps to procure, to get finance, etc. - is also really a core pillar of this phenomenon.

We really see this as a as a very early stage of this large phenomenon for the coming few decades.

Amit: Thank you so much, Sumit for your valuable insights, and to our viewers for joining us.

We will soon be back with another theme that is shaping the startups environment in India today.