Welcome to Issue 6, which focuses on a theme that has featured heavily in my newsletter so far: Marketplaces.
Firstly, lets have a look at the companies I have tracked in the Newsletter so far. No single category has raised more capital, has elevated expectations and simultaneously stirred more debate.
Indigo and FBN stand out in particular as they have raised significant funds in the past 18 months ($535m Series F and $250m Series F respectively!) and have had lofty expectations and valuations (or maybe valuations and then expectations 🤷♂️) cast upon them. Indigo even made it to the pages of the Wall Street Journal no less.
Pinduoduo is in another league entirely and wants to invest $1.5bn into the agriculture sector in China. I discuss them below specifically as their model has completely flipped the script.
Why focus on marketplaces?
Despite the media attention the main reason for me to take a look at marketplaces and refine it to one thing they should achieve is the importance they have in digital agriculture and agri fintech generally.
Take my last article on Blockchain in Agriculture for example. My conclusion was that a blockchain strategy was viable only in a fully digital value chain or ecosystem. That digital ecosystem is likely to include a marketplace or exchange which can quickly and transparently value and settle transactions taking place.
But not all value chains need a marketplace. So how do we decide if a marketplace is viable or relevant. Here is my cheatsheet to consider.. 🤔
BTW - I won't write about the different types of marketplaces (transaction vs innovation / platform vs ecosystem) in this article as this has been widely covered elsewhere. Take Upstream Ag for example which covered this recently.
Setting up a Marketplace
If this appears really simple - thats because it is 😆 😆 😅 .
Just not on this planet.
Let me know what you think.👇
1️⃣ Value add
Introducing a marketplace into established value chains where buyers and sellers know each other is a difficult route to success. This is where criticism is often levelled at FBN and Indigo. Operating in the US grains market which has been operational for over 100 years will be difficult to disrupt. (But are they even marketplaces - I think both companies have several lines of business, some competing and some not).
But any marketplace needs to add value and figuring this out is critical.
This is where my thoughts on the one thing that matters below come in. I couldn't possibly just leaving it hanging could I?
2️⃣ Market dynamics
Who operates in the market and ecosystem that is in place currently. For example is it formal or informal? Is the market big enough to sustain a platform?
I love trying to figure out who the buyer of last resort is for any market, borrowing from the 'Lender of Last Resort' concept used in economics and banking.
What about government intervention? Last year in Tanzania the government sent the Army out to buy Cashews - is that the type of market you want to build a marketplace for?
Very simply, how do your activities sit with the local version of the Sale of Goods and Supply of Services legislation? Will you act as buyer/ seller or agent?
Are agri inputs covered by specific marketing laws? What about produce? In lots of countries they are.
Will anything look financial and if so, do activities need to be regulated by financial regulators? hmm. 🤔
4️⃣ Governance (my favourite)
There is nothing more cringeworthy than a trader starting or investing in a platform or a marketplace. NGMI.
'Oh really, you want to disrupt your entire business and the shareholders and Board support that?' 😅 Good luck.
If you are building a marketplace for a dedicated ecosystem, the governance of that ecosystem is also very important. The ecosystem should ideally chase common goals, pursue shared values and address common risks.
Independence and objectivity is a super power when it comes to marketplaces, particularly in agriculture.
5️⃣ Physical Infrastructure
Agriculture deals with physical goods. Do you need to?
Can you just match buyers and sellers electronically or will physical inspections need to take place at some point?
What about shipping and transport?
6️⃣ Digital Infrastructure
Is the market ready for digital innovation and can buyers and sellers interact with the marketplace? Are business needs met for reporting and decision making?
In relation to financial infrastructure specifically - Payments, settlements, clearing, guarantees. Is there a mechanism for this or do you need to create one? No, that is not a ridiculous question.
I loved the recent Agtech so what article and podcast covering this issue.
Patient capital, by the way, is one of the major barriers for ALL Agri Fintech models 😌.
But value add comes down to one thing...
Most marketplaces that really add value in Agriculture manage some form of risk. Let's look at some examples of risk and how value can be added.
Most exchanges offer and escrow type service to protect buyers and sellers. Mediation services are another common tool used to facilitate smooth transactions.
But lets have a look at one often overlooked model, which could be very valuable in agriculture. In fact it has already netted one Irish company a $1bn buy out in the past month.
Euro Auctions is an equipment marketplace focused mostly on construction equipment but also some agricultural equipment. They sold last month for over $1bn to a Canadian buyer Ritchie Bros. They started out as a physical business but quickly learned that reliability was a key issue to be solved in the market they were serving and that technology could work to their advantage.
So, armed with data, they set buyers to work across Europe and North America to source equipment for purchase and resale - not just listing. In this 'managed marketplace' model they became a direct counterparty in the market, acting like a clearing house. This brought reliability into the market as they stood behind most transactions and had an excellent reputation for payment (to sellers) and for product (to buyers).
This does not come without risks and in particular the cashflow required to implement this is significant. But this strategy is not impossible.
In fact, one Silicon Valley investor thinks this approach is underrated and the cashflow impact is often over rated. Alex Taussig of Lightspeed Ventures in a recent Wharton Fintech Podcast noted the opportunity to manage this cash impact in managed marketplaces by balancing payment terms for both sides of the market. He has invested in Thredup, a clothes marketplace which employs this tactic and had several similar investment in niche marketplaces which have used the same technique.
This managed approach is one means of de-risking value chains, especially where value chains are opaque and counterparties are unknown to each other.
Value chain risk
In fragmented value chains there is a huge amount of value to be added by just coordinating buyers and sellers. From my examples above, various platforms are tackling specific value chains, such as:
- AquaConnect - aquaculture in India
- ReshaMandi - silk in India
- Kibanda Top Up - produce for restaurants in Kenya, and to a lesser extent
- Produce Pay and Silo in the US.
But Pinduoduo in China exemplify this model and have completely turned the value chain around into a market led model - C2M or Consumer-to-Manufacturer. See below.
This changes the risk dynamic massively. In energy markets for example, Power Purchase Agreements underpin financing arrangements for capital and operational expenditure. You don't really see this in agricultural off-take markets. You might from some of the larger Traders, but it is certainly not the norm, especially for garlic. This is a specific example of how it works in the agriculture sector for Pinduoduo, using Garlic as an example 👇
I just spotted GoBillion applying the same model in India - I wonder if this will be the go-to model in emerging markets?
If you are in this sector in India or sub-Saharan Africa what do you think? Maybe there are already lots of similar models out there.
Are there still fragmented segments of developed markets where this might work?
It is a fascinating script change and copious transaction data enables this type of innovation.
Just like the CBOT (Chicago Board of Trade) and the Chicago Mercantile Exchange (CME) precursors figured out in the late 1800's, matching buyers and sellers was difficult without participants bypassing the market entirely. They eventually moved into warehouse receipt systems and into price risk management contracts for both producers and consumers.
But in the absence of futures contracts can a price risk mechanism be put in place?
Absolutely! This is where time series data comes in, which trade marketplaces (or even trade services) collect and which is their real intellectual property. These data series can allow deliverable (or non deliverable) forward contracts to be developed or even over the counter options.
But if offering actual financial products is too onerous due to capital or regulatory requirements, there are plenty of innovators in this area which use data to provide forecasting services, such as Hedgit and Decision Next.
Hedgit has established an integrated portfolio management system by running quant analysis on markets for both sellers (producers or elevators) and the consumer end of the market in Latin America. Similarly, Decision Next uses machine learning to develop price forecasting models for livestock in the US for example.
A marketplace could easily offer similar price intelligence tools as a valuable service.
Marketplaces always appear like an easy route to success. But generating the network effects required is onerous. They can only be generated by solving a specific problem for users (or at least one side of the user experience) in a big enough market.
When thinking about marketplaces in Agriculture it is natural to think about the 'Amazon for Agriculture' comparison. But I would prefer to be more ambitious.
For example, the average Amazon Prime user spends $1.4k per annum on the site and they dominate almost 50% of e-commerce trade in the U.S - see here. Individually, these are small transactions where the risk is small if things go wrong. Personally, I am not sure I would spend more than $500 on a single item on any platform without knowing a lot about the product in advance. Would you?
Ultimately, agriculture is a business and setting up a marketplace from that perspective requires a little more thought.
The opportunity certainly exists to make trade more efficient, but in order to capture that opportunity, managing the risks of those transactions are fundamental.
I hope you have enjoyed this
Please do send me feedback on this article and send me any questions.
And don't forget to subscribe if you haven't done so already. I have a lot of fascinating content lined up for Autumn already.
Thanks for reading!