Nearly two decades after IndiaMart, an online trade directory, started out, investment is finally flowing into B2B (business-to-business) internet start-ups, but a shortage of credit to manufacturers and suppliers continues to hold back the expansion of the sector, founders and investors said.
So far this year, B2B e-commerce start-ups have raised a total of $196.5 million, the highest since 2010, according to Tracxn. The biggest deals: $100 million raised by Just Buy Live; Power2sme’s $35 million series E and $12 million investment into Moglix. The data also shows most start-ups—247 out of 575 incorporated since 2010—came up in 2015.
These investments are supposed to accelerate the use of technology by B2B commerce start-ups to solve legacy problems in procurement and supply, logistics and financing. Many of these companies are trying to implement a shift from merely being discovery platforms to becoming full-fledged marketplaces.
There are a variety of business models. Start-ups are supplying industrial raw materials such Power2sme and OfBusiness, some like Moglix and Tolexo are selling industrial tools, others like Avysh, Udaan, Wydr that are fulfilling sourcing needs of intermediaries like wholesalers and distributors and those such as Just Buy Live looking to become the intermediary themselves.
Further, the implementation of the goods and services tax has forced companies, especially small and medium enterprises (SMEs), into the formal economy, opening a large pool of potential B2B customers (manufacturers, suppliers and wholesalers) looking for cheaper and transparent procurement options.
“GST has accelerated internet adoption… Now even Google and Facebook are becoming interested in SMEs,” said R. Narayan, founder and chief executive, Power2sme.
Power2sme aggregates the demand for industrial inputs such as steel and polymers, procures from large producers and supplies to end-users (auto or electrical component-makers, OEMs) at lower prices.
Narayan said that over 60% of B2B procurement happens through credit, which, despite a surge in the number of lenders and NBFCs, continues to be a problem for SME manufacturers.
In a recent survey by the company and Greyhound Research of 200 SME owners, 92% said non-availability of finance or credit on easy terms was their biggest challenge.
International Finance Corporation (IFC), a unit of the World Bank, pegged the total financing gap in the SME space at Rs10.6 trillion. There are 29.8 million SMEs in India of which 94% are not registered, leaving little room for traditional lenders to serve them, according to a 2013 report by IFC.
To tackle the problem, start-ups are helping their customers raise credit, or least getting them registered with GST.
“The space is now getting into a zone where the companies are trying not only to ease fulfilment and logistics, but also become financing engines,” said Vinod Murali, managing partner at debt firm Alteria Capital.
“Many of these platforms are either themselves becoming a financing engine or aligning themselves with financers to further boost
SME consumption. Essentially this is a working capital play,” he said.
Power2sme has a division called Finansme.com which helps companies secure loans through its partnering banks and non-banking financial companies. Moglix recently launched a software tool, GreenGST, for manufacturing entities to manage GST compliance.
Start-ups are also tying up with third-party courier services, instead of having their own fleet, for cost-efficient last-mile deliveries.
In any case, market participants have recoiled from the rosy estimates research firms were quick to jump onto from the success of B2C e-commerce defined by Amazon and Flipkart.
“We will have to wait a little time before there can be larger play for creating marketplaces and creating efficiencies out of that,” said Rahul Garg, founder and chief executive of Moglix, a marketplace for manufacturing tools and machinery.
“The beauty is that there is a large market that exits and one can potentially apply technology in interesting ways but it’s not only technology that will make it win, you need to go deeper into understanding the business and the pain points as against the approach in horizontal consumer e-commerce start-ups,” said Garg.