Author: Yuemei Lv Editor’s Note The next decade is expected to be a golden decade for the B2B sector. In this article, we have mapped out some of the biggest opportunities and described the general logic behind how to capture these golden investment opportunities. We also discuss some unique challenges facing B2B startups. Based on thorough analysis and research, Source Code Capital exclusively presents Source Code Research Report Issue No. 6. Viewpoints Industrial Internet encompasses all offline verticals, and Source Code has invested in many of them. The ultimate goal is to better serve end-customers; the back-end will use data and intelligence to serve the front-end. Products, Circulation and Retail - there are new challenges for B2B. 1. An Overview of Industrial Internet In the past three years, Source Code Capital has been closely engaged in the B2B investment track through continuous research and engagement. We have a broad concept for B2B – we call it “industrial internet” or “upgrade of traditional Industries,” which includes the processes of Internet+ and Intelligence+. “Industrial Internet,” in our definition, refers to the entire process from production to distribution, as well as the retail of all physical goods and contents within its verticals. Vertically, there are sectors such as FMCG (fast-moving consumer goods), pharmaceuticals, clothing, industrial goods, decoration, auto parts, and others. Horizontally, it is categorized into several parts: collection and production of raw materials – distribution – product manufacturing – distribution – retail. Therefore, it can be seen that “Industrial Internet” contains most sectors in the market economy, and we could put almost every part in every sector on the axis of this large map. Only very few enterprises based completely on the Internet are omitted, such as social media, online ads, and content media. The online 2C business is already what we call “red ocean” – the BAT and emerging giants have taken up most of the consumer traffic already. By Source Code Capital We believe that in the long-run, the massive offline industry, from production to retail, will be a huge opportunity for venture capital investment. Industrial Internet is aimed at helping transform various different verticals with different entry points and paths. B2B is one such path. 2. Practice and Observation Looking at the above map, Source Code Capital has already made quite a few investments in Industrial Internet, mostly in the 2C category, and some in 2B. There are many large sub-categories in 2C: clothing, food, housing and transportation, and there are many sub-sectors within each. Taking “food” as an example, it can be divided into many sub-sectors, such as catering, fresh food, FMCG, beverages, and others. 2C： Yijiupi, an e-commerce business that mainly handles beverages distribution, is one example of a Source Code investment in the 2C category and it has achieved considerable scale. Looking forward, apart from further scale expansion, Yijiupi aims to exert greater influence on the upstream and downstream businesses in the food industry. ZSKX is dedicated to FMCG B2B transactions in Tier 2-6 cities in China, where people’s access to chain stores and e-Commerce is much more limited than residents in Tier 1 cities. The company ensures steady supplies for convenience stores and small mom-and-pop shops that are far from from premium supply chains, which in turn enables rapid growth. 2B： The 2B category includes any product that goes into the supply of factories, such as commodities, raw materials, components and parts, MRO, machinery, and electronic components. Ruigushop aggregates upstream producers to offer better services to end channels on Baibu, China’s largest online mobile textile transaction platform. It leverages the potential of raw fabrics at the upstream with its financial strength, and greatly improves the production capacity utilization of upstream enterprises. In addition, by selling goods directly to end-users, it succeeds in enhancing circulation efficiency. Although all of these examples are self-run B2B enterprises, each competes in their own way, as different sectors have different characteristics. In competing against each other, they have honed on their competitiveness, conducted in-depth exploration of upstream and downstream businesses, and achieved their goals of fast growth in the first stage. They have either completed or are in the process of building additional barriers to safeguard their development. 3. Investment Logic The industry covers a wide scope. After continuous observation and research, we conclude that the general investment logic is to first set great goals, and then chart out the development path. There are two goals of industry upgrade: Ensure the end-users obtain more quality products and services that cater to their demands; Improve the efficiency of retailing and all relevant aspects. Eventually, we believe that the entire industrial chain will be driven by data and intelligence technology, with the back-end serving front-end retail and operations, thus providing premium service for end-users. As breakthroughs in circulation are the easiest to achieve, establishing B2B e-commerce platforms may be one of the most feasible approaches to achieve these goals. The platforms cover multiple levels of distribution systems and wholesale markets, the storage and distribution system of trunk-road transportation and landing match, and a large amount of supply and demand information. Taking a closer look at the offline market, we can see that the number of circulation levels is sharply decreasing, the wholesale markets are disappearing, the market is becoming more transparent, and that even policies are promoting the integration of circulation enterprises. This change can reflect the general paradigm that circulation needs to serve end-users more efficiently. In circulation at all levels, the goods should be stored and distributed in a unified way so that the utilization rates and efficiency can be enhanced, and the matching of supply and demand information should be continuously optimized. B2B e-commerce platforms can directly deal with circulation through transactions, hence realizing the Internet-empowered, large-scale businesses at a fast pace and achieving more effective offline integration and operations. In 2015, we analyzed the operational logic of B2B e-commerce platforms – mainly some key indicators and the formula of the gross margin after paying fulfillment cost (not repeated...
