The Era Of B2B Manufacturing

Though B2C businesses grabbed more eyeballs in the initial years when the startup ecosystem was just evolving, today investors are realizing that B2B brings stability and profitability

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India's manufacturing sector was ripe for disruption since the turn of the decade. However, traditional businesses were either unfamiliar with the technological advancements or were too slow to adopt. This is when many entrepreneurs with strong knowledge in tech saw a huge white space and went on to launch successful B2B (business-to-business) manufacturing startups.

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By leveraging tech, these startups have been able to help many billion-dollar manufacturing businesses address operational inefficiencies. Some of them such as Zetwerk, OfBusiness, Infra.Market, Moglix have also entered the coveted unicorn club.

According to a report by IBEF, the manufacturing sector of India has the potential to reach $ 1 trillion by 2025. "The implementation of the Goods and Services Tax (GST) will make India a common market with a GDP of $ 2.5 trillion along with a population of 1.32 billion people, which will be a big draw for investors," it says.

To tap into the huge opportunity, many more players have entered the space in the recent past and raised funding. For instance, Karkhana.io raised $1.5 Mn in a seed funding round led by Vertex Ventures Southeast Asia and India in January 2021, Fashinza, which connects fashion brands with apparel factories, raised $20 Mn in Series A funding in August 2021 led by existing investors Accel Partners and Elevation Capital, Delhi NCR-based Nexprt raised $5 Mn in a seed round led by Sequoia Capital India and Lightspeed in December 2021 and about a year ago, Australia-based deeptech startup Truventor.ai acquired B2B cloud manufacturing platform Chizel to cash in on the opportunity.

What's Attracting Investors?

Even though B2C (business-to-consumer) businesses grabbed more eyeballs in the initial years when the startup ecosystem was just starting to evolve, investors were keeping an eye on the B2B sector as well. And, when the right time came, many started infusing capital into promisting startups in the space. "Since the rapid digitization post-JIO and the advent of GST and cheaper smartphones, more and more businesses have been taking their mode of operations online and formalizing themselves. This has led to many businesses adopting digital means for day-to-day operations. This has created entirely new opportunities for tech startups to enter the market and allow B2B businesses to streamline their operations and scale much faster using assistive technologies," said Anurag Ramdasan, partner, 3one4 Capital, which is fairly bullish on the space and continues to make several investments.

Stability and profitability are also two things that B2B startups offer. "By 2014 people realized that if you want a stable business and growth, along with initial profitability and if you don't want any kind of heavy marketing burn to take place, you have to concentrate on the B2B side of the business. B2B brings stability and profitability, which makes you immune to all kinds of negative cycles that take place in the economy. For example, COVID-19, demonetization and others impacted us a little bit. But given that the B2B space is inherently profitable, most of the companies managed to stay afloat and did not have too much of an impact come through. Hence, I think investors realized that for long-term growth and stability B2B is where they should be focusing," says Nitin Jain, co-founder, OfBusiness.

Further, within B2B, manufacturing is a high growth sector for India and many incentives have been announced by the government such as Production-linked investment schemes and Make in India campaign to boost it further. Additionally, exports of manufactured goods in India averaged 525.96 INR billion from 1991 until 2021, reaching an all-time high of 2012 INR billion in December of 2021, says data by Trading Economics. "India has the potential to become one of the largest manufacturing hubs globally. However, today manufacturing units in India are plagued with manual processes, inefficient sourcing and poor operations management. Moreover, accessibility to the market is difficult for several manufacturing units located in high resource areas but away from high growth consumer markets," says Pearl Agarwal, managing director and Founder, Eximius Capital Ventures.

The tech startups have cashed in on the same to help manufacturing companies in not only India but all over the world to source better, manage processes more efficiently, increase capacity utilization and access diverse end markets. "Globally, companies are seeking to reconfigure their supply chains to build resilience for events such as COVID-19 and geopolitical uncertainties. For such companies, India is emerging as one of the destinations to set up their own manufacturing facilities or to build alliances," says Sonam Motwani, founder and CEO, Karkhana, which offers on-demand manufacturing services to enterprises of all sizes.

Agarwal also feels that while horizontal solutions are currently being built to cater to manufacturers across different clusters, there is potential to create vertical solutions for high-growth industries to cater to the nuanced needs of manufacturers within those segments, thereby presenting immense opportunity for several new companies to emerge.

According to Sumir Verma, founder and managing director, Merisis Advisors, the key to success in the unorganized procurement space has been a mix of tech, finance & focus. "And, all the major startups in the space adopted a unique approach to solving the problem – One, industry-led (Infra.Market with construction); two, raw material-based (Ofbusiness with metals) and three, process-based (Moglix is into repair & maintenance sales while Zetwerk is into full production)," he said.

For instance, for Zetwerk, the investor interest has primarily been driven by the fact that they were able to create a new category and solve major pain points plaguing Indian manufacturing by unifying the fragmented manufacturing ecosystem. "Additionally, global trends such as the China plus 1 strategy and the U.S supply chains crisis position us well to capitalize and drive global business to India, thus reinforcing investor confidence in us. The government has also placed major emphasis on manufacturing and infrastructure over the years," said Srinath Ramakrushnan, co-founder and COO, Zetwerk Manufacturing.

The Edge Of Unit Economics

High-margin business, that's the buzzword here. "A good product in B2B space is normally able to command a high gross margin business. Leveraging technology, the startups can scale up without any incremental fixed Capex costs during deployment of the product, resulting in healthy unit economics," says Ankur Mittal, co-founder, Inflection Point Ventures, that has invested in Fabheads, a carbon fiber part manufacturer.

Agarwal cites a few other reasons contributing to the better unit economics of these B2B manufacturing startups. "These startups eliminate several middlemen in between that each takes up to 15-20 per cent in commissions enabling them to take a higher take rate. Secondly, the order size, as well as the total value generated from a customer, is higher in this segment compared to retail due to the high frequency of transactions, thereby creating a path to profitability at scale," she says.

Since B2B businesses are traditionally high-value business, a single large manufacturing B2B order can have a very high potential gross merchandise value (GMV). "This can lead to superior unit economics at scale compared to traditional B2C models. Since the market is still at a very early stage some of the players have been able to move very quickly to grab a very large share of the market at fairly superior unit economics than traditional businesses," says Ramdasan.

Challenges and Scope

Though the opportunities in the space surpass the challenges, one cannot ignore the potential hurdles in scaling up. Firstly, unlike many industries, having a strong technology background may not be enough in this. One or two founders need to have deep knowledge of the manufacturing industry and the challenges there to bring in successful solutions. "Ideally, at least one of the founders should have deep domain knowledge and experience, with a strong grasp of technology. The founders should be good problem-solvers and be able to look at the big picture in this specialized sector," says Mittal.

Prominent Players: An Overview

Startup

Launch Year

Founders

Key Investors

Last Round Of Funding

Zetwerk

2018

Srinath Ramakkrushnan, Amrit Acharya, Vishal Chaudhary, Rahul Sharma

D1 Capital Partners, Avenir, IIFL AMC, Sequoia Capital, Accel Partners, Greenoaks Capital, Lightspeed Venture Partners and Kae Capital

$210Mn as part of Series E in December 2021

OfBusiness


2015

Asish Mohapatra, Vasant Sridhar, Ruchi Kalra, Bhuvan Gupta, Nitin Jain

Matrix Partners, SoftBank, Falcon Edge Capital, Alpha Wave Ventures II, Tiger Global Management

$325 Mn in Series G funding round in December 2021

Infra.Market


2016

Aaditya Sharda, Souvik Sengupta,

NAVI Finserv, Tiger Global, Vivriti Capital, IFK Finance, Vidit Aatrey, Incred Wealth, Credavenue, Sanjeev Kumar

$125 Mn in Series D in August 2021



Moglix

2015

Rahul Garg

Falcon Edge Capital, Harvard Management Company, Tiger Global, Sequoia Capital India, Venture Highway

$120 million Series E in May 2021

Karkhana

2018

Sonam Motwani

Vertex Ventures Southeast Asia and India

$1.5 Mn in seed round in January 2021

Groyyo

2021

Subin Mitra, Pratik Tiwari and Ridam Upadhyay

Alpha Wave Incubation, angels including Deepak Jain, Arpan Seth

$4.6 Mn seed round in January 2022

Nexprt

2020

Harsha Vardhan Kalipatnapu, Manav Garg, Kunal Jain

Sequoia Capital India, Lightspeed

$5 Mn in a seed round in December 2021

Fashinza

2020

Abhishek Sharma, Pawan Gupta

Accel Partners, Elevation Capital

$20 Mn in Series A in August 2021

Further, patience and perseverance are key to any business, more so in this space, as the market is huge yet under-penetrated. "Manufacturing units are often run by family businesses that have no technology background and as a result of this, there is almost zero technology integration. Explaining the value proposition to these customers and getting them to adopt the solution is the biggest challenge for these companies. But, the pandemic has forced manufacturing units to adapt which has led to increased adoption," says Agarwal.

The space also suffers from sales and marketing challenges. "Sales cycles are long in this segment. Lead generation, unlike B2C, is time-taking, and purchase decisions are not born out of somebody's impulse. At the same time, once a customer is acquired, they tend to stick for longer so that's a positive side of the same coin. Leveraging online channels, a well-planned marketing campaign can not only help the B2B startup dive deeper into the market but also reach the target audience," says Mittal. Experts feel that B2B businesses involve highly complex operations and since these businesses operate across borders and involve complex logistics to move goods across, operating at a very high scale becomes a very challenging proposition. "It is important for companies in the space to not falter at scale, have a highly qualified OPS team and manage working capital in a superior manner," says Ramdasan.

However, the pandemic has played a huge positive role in creating awareness about the usefulness of tech. As acceptability among MSMEs increases further, we will see several new startups emerge in the space.