Rethinking B2B Entrepreneurship with NLVC’s Figo Zhang

2022-04-06

There is no better time to be an entrepreneur in the enterprise services sector in China, where digital transformation is revitalizing industries and driving new products and services. The numbers illustrate this trajectory. The "2021 Human Capital Management Trend Report" published by Zhilian Zhaopin shows that 35.6% of Chinese enterprises have gone digital representing a 8% increase comparing to 2020 . In 2021 alone, there were 1,045 investment/financing transactions in the enterprise market totaling RMB 254.168 billion (approximately USD $39B) — that’s a monthly average of 87 transactions valued at RMB 21.18 billion (USD $3.3B).

How can entrepreneurs best plan their business strategies to capitalize on this huge opportunity? How do they develop technical capabilities? How do they become the next unicorn? Figo Zhang, Partner of Northern Light Venture Capital provides three pieces of advice to entrepreneurs thinking about starting a business in the enterprise services field:

  1. Find opportunities in vertical industries and business scenarios.
  2. Be the first mover and build product barriers.
  3. Think long-term. Success depends on market penetration, not just innovation.

1. Opportunities in Vertical Industries and Business Scenarios

With the popularity of cloud computing, the enterprise services industry has grown exponentially. In 2015, to enhance efficiency, enterprises began to focus on finding ways to reduce internal costs. Internet giants like Alibaba, Tencent, and Baidu began to invest heavily in B2B products, creating the second-growth curve and causing the industry to receive more attention from the capital market. However, as they mainly focused on general-purpose traffic products, such as OA and online documentation tools, they have created high barriers for the general platform play, which should be avoided by the new entrants.

Just three to five years ago, traditional companies were still not sure what problems B2B products could solve. But with the digitalization of businesses, that all changed. And now that entrepreneurs no longer need to “educate” customers about B2B products, they can directly discuss products based on customer needs. But what criteria should entrepreneurs look for to build products that meet those needs?

Products that are developed for a vertical market are closely related to industry and customer characteristics. And these can largely determine the success or failure of the project. In terms of product positioning, customers can be divided into large, medium, and small, based on their different needs, quality, and life cycle:

  • Large Customers: large budget, highly-customized products and services.
  • Medium Customers: small budget, only a certain degree of customized products and services.
  • Small Customers: less-than-sufficient budget and simplest business requirements/standardized products.

The core drivers of B2B services in different industries are different.

  • In the financial industry, it’s compliance.
  • In manufacturing, it’s the replacement of labor costs and the reduction of production costs brought about by aging.
  • In the consumer field, it’s reducing the cost of circulation links and improving turnover rate, network security, emphasizing autonomy and control, as well as carbon neutrality.

It’s important to keep these core drivers in mind for they represent customer needs, product positioning and industry forces.

2) Be the First Mover and Build Product Barriers

History has shown how being the “first mover” has many advantages in many industries, including receiving better access to capital, talent, and customers. However, even when a startup is a first mover, it is also critical to build long-term product barriers, such as the following:

a. Industry Know-How: Industry know-how is having an in-depth knowledge of the operations and management experiences accumulated by similar companies in the industry, including process design, indicator definition, and permission setting. Enterprise customers place high value on such knowledge and appreciate learning about best practices from established and proven ERP or enterprise software companies from Europe and the United States.

b. Data Barriers: The barriers to data are two-fold. One: third-party data can provide customers with information such as industry data monitoring, financial data processing, and trading. Customers appreciate and understand that the earlier they have access to data, the better their advantage. Second: processing and analyzing large amounts of first-party data can be a challenge. In many cases, a company has no idea how to effectively apply data to help operations and management. And herein lies an opportunity for big data to be of better service.

c. Network Effects: Synergistic products have an inherent advantage, as exemplified in the collaboration between upstream and downstream industries. Compared to single-point products, synergistic products have higher customer replacement costs and better customer retention.

Currently, China is following closely the development of the enterprise services market in the United States and the emergence of new companies. When a good product appears, many products of the same type will follow, so for entrepreneurs, differentiation and an understanding of the barriers is key to a company’s survival.

3) Think Long-Term. Success Depends on Market Penetration and Innovation. 

Finding the perfect time and suitable entry point to enter the industry with the correct product positioning and industry scenario are the first two steps for the B2B entrepreneur to succeed. It’s important to think long term with customer growth and continuous innovation.

In the recent 10 years, the multi-faceted, fast-growing enterprise services industry has experienced many ups and downs. Domestic capital has become familiar with the B2B industry but is approaching investing in a similar approach to consumer Internet investments, expecting B2B companies to grow rapidly with capital infusion. For enterprise service companies, capital can accelerate the process of productization, but it cannot accelerate the speed of market penetration. Enterprise customers are very cautious in their product selection and require long-term verification.

Thinking and planning for the long-term is a critical success factor for the B2B entrepreneur as well as the necessary attitude for investors. Keeping in perspective the ebb and flow of B2B market performance will serve stakeholders well, as we saw with cloud computing in 2012, SaaS in 2014-2015, AI in 2017, data center in 2018, and SaaS again in 2020.

Even as cloud computing has undergone rapid development in China, its enterprise services market is still in the very early stages. With the increase in labor costs and technological advancement, corporate customers have a greater appreciation for the value B2B products can bring to their businesses.

NLVC is highly optimistic about the growth of China's enterprise service market and is keen to work with B2B entrepreneurs to explore business opportunities for the next 10 years and beyond.