Recent weeks have seen headlines in the financial press heralding the death of unicorns — tech companies that are (or were) valued at $1 billion or more, that went public, crashed and burned.
WeWork comes to mind, of course, once valued at $47 billion, now teetering on the brink of collapse. Busted initial public offerings (IPOs) are well in evidence — Uber and Lyft among them.
Regardless of how these companies have fared on public exchanges, they have the commonality of having attracted tens of billions of dollars in venture capital and private equity funding.
Interestingly, the overwhelming majority of these firms have focused on disrupting the way consumers go about their daily lives and pay for everything from transportation to clothes shopping to movie passes. They promised enough disruption that the capital backing flowed freely.
FinTech business-to-business (B2B) payments firms that have achieved unicorn status? Well, you can count them on two hands and have some fingers left over.
But that might be changing.
In an interview with Karen Webster, Matt Harris, partner with Bain Capital Ventures, delved into the challenges and opportunities that lie ahead for B2B firms as they seek to attract capital and evolve their business models.
Bain, it should be noted, lists among its portfolio of holdings a number of B2B-focused companies such as Billtrust, AvidXchange and Flywire.
The General Landscape
The skewed flow of funds to the business-to-consumer (B2C) space comes amid a backdrop where valuations for domestic FinTech unicorns have been inflated. VCs have been pushing money toward a number of peer-to-peer (P2P) companies with questionable economics.
“The economics may get better over time or they may not matter because these firms build a customer base that is valuable to somebody, and that somebody buys them regardless of the economics,” Harris told Webster.
Thus far, the frictionless growth associated with B2C has been preferred to what he called the “grind it out, ROI-based sales model required of B2B.”
Kids On The Soccer Field
Even as investor attention may indeed shift beyond the B2C space and toward B2B, there are other issues to consider — namely, a dearth of hyper-growth, sexy, attention-grabbing headlines focused on waves of innovation.
As Webster noted, B2B startups and early-stage companies tend to congregate — like kids on the soccer field — around certain “balls of play.”
Alt-finance is hot, of course, and so is eInvoicing. Payables have also been an area of focus.
For the B2B companies themselves, proving themselves out in the field and gaining enough scale to attract capital in the first place can be a challenge too.
“One of the things that is an issue in this space is that the road to glory begins and ends with selling to a CFO and treasurer,” said Harris, who noted that such an audience demands systems with mature tech functionality and the ability to scale vertically.
And as is the case with so much in business, marketing is crucial. The reason at least some B2B firms die before gaining traction, he added, is because “you build your functionality. But if you can’t talk to a media company like a media company and a property management company like a property management company, all these things make the road much longer and harder.”
Harris contended that much of the early action has been on the accounts payable (AP) side, and that has created enough challenges on the accounts receivables (AR) side that suppliers are looking for solutions.
His comments echoed findings in the recent PYMNTS Trade Credit Dilemma Report, which estimated that $3.1 trillion is the net amount that U.S. firms are owed in accounts receivable on any given day. After all, suppliers want to get paid as quickly as possible for the goods and services they deliver. Buyers want to hold onto their cash and defer payment as long as possible. Friction is the result, traditionally.
Now, “I’m seeing the [B2B] space working like it is supposed to work,” Harris said, “with both sides interested in solving the problems around the economics and ergonomics of transactions.”
To streamline that interaction between buyers and suppliers (and thus the fund flows between AP/AR side of the cash flow equations), Harris cautioned against one-size-fits-all solutions.
“Holy Grail ideas — and they keep coming up — are always going to lose,” he told Webster, as B2B transactions have nuances that must be considered, spanning the industry verticals, gross margins, ticket sizes and other issues.
Harris also noted that enthusiasm over real-time payments might not extend to B2B. As he told Webster, the only reason to be excited about real-time payments is that they carry more information in the payments file than an ACH. In fact, he said, real-time payments carry a relatively higher risk of fraud.
“Businesses prefer some latency and they do not mind some batching, but if the payments can come with more information? Well, then, that’s interesting. But there’s so much more bank transfer fraud than there ever was. The idea that you have zero time to recover funds is a huge drawback to the system.”
In the words of Wayne Gretzky, the trick is not to skate to where the puck is — but where it’s going.
Asked about how B2B tech may evolve and even accelerate, Harris said momentum might lie beyond pure-play FinTechs. As for payments, well, they’re becoming embedded as part of a broader experience for end-users.
For a general recipe for success, he said, “Start with a company that has a broad and exciting customer base that likes what they are doing and are deeply embedded with those customers. And then, you add FinTech. The next decade of innovation in B2B is going to come from companies that we today think of as pure software companies.”
There’s some precedent here, as the fastest growing merchant acquirers had their origin as software companies and embedded payments in their product and service offerings that solve a range of problems.
In 10 years, he said, “going in to sell just payments to a treasurer will be impossible.”