Why procurement tech is the hottest space for investors right now
Our guest post this week is from Paua Ventures‘ very own lead investor Felix Plapperer on why he loves procurement tech right now, the wave of disruption in the space that is accumulating, and why it’s a red hot area for the next unicorns of tech.
Why we fell in love with Procurement
At Paua Ventures we always ask ourselves: Where will the next wave of disruption hit shore? After investments in Sales (Pipedrive), Payments (Stripe) or Marketing Automation (Outfunnel), we are currently taking a closer look at procurement. Why (now)?
First, past exits and significant financing rounds 💰 indicate procurement market potential. They include Ariba (acquired by SAP for $4.3BN in 2012) and Coupa (IPO in 2016, reached $1.7BN valuation in ten years), for example. Besides that, Procurement companies attract significant VC funding as well. For instance, Tradeshift raised a $250M Series E last year.
Second, Procurement is a topic with increasing strategic relevance 🔮 and a clear ROI. Nailing Digital Procurement directly adds to the bottom-line and leads to meaningful results: 5% -10% in purchasing cost savings and a 30% to 50% increase in efficiencies, according to my former colleagues at BCG. Thus, 33% of CPOs believe that their digital procurement strategy will enable them to deliver on their objectives according to Deloitte. Efficio says that 78% even believe it should be a boardroom priority. For the best Procurement startups, this hefty impact makes Sales a piece of cake.
Third, the untapped potential for startups is huge🌊. Digital champions disrupted back- and front-office functions such as Finance, HR and Sales already. What Hubspot does for Marketing, what Salesforce/Pipedrive do for Sales and what Personio does for HR redefines how these functions work. In Procurement, digitization is just about to kick in. McKinsey thinks so, too.
So, what the heck is “Procurement”?
“The act of obtaining or buying goods and services. The process includes preparation and processing of a demand as well as the end receipt and approval of payment.”
While Procurement & Purchasing are often used as synonyms “Purchasing is a small subset of the broader procurement function” encompassing only the transactional side of Procurement. To talk about Procurement more precisely, let’s look at strategic, transactional (i.e., purchasing) and supporting steps of the Procurement value chain (each step can be broken down further):
Strategic procurement 📡
Step 1: Need Analysis and Budgeting First, Procurement departments have to analyze company needs strategically and define key materials/services to be purchased accordingly. That is crucial to make sure that budgets are aligned with corporate strategy and that purchased inputs contribute to the bottom line.
Step 2: Strategic Sourcing Once needs are clear, the optimal suppliers (highest quality & reliability at lowest price) have to be identified, which requires extensive market screening, product and offer comparison.
Step 3: Negotiation and Contract Next is negotiation (and signing) of supplier contracts. That can get complex because there are diverse aspects to consider besides price and since, mostly, many individuals are involved.
Step 4: Supplier Relationship Management (SRM) Strategic Procurement doesn’t end with a signed contract. Ongoing key supplier relationship management (incl. monitoring, close communication and co-innovation projects with key suppliers) prevents issues such as quality drops or delays.
(Transactional) purchasing 🛒
Purchasing starts internally — with a formal request towards the purchasing department to order certain goods/services. If approved, the purchase department identifies the best suppliers (which can include a “request for proposal”) and places the order. After delivery, the invoice check ensures compliance with supplier agreements before paying the bill.
Supporting processes 🤜🤛
Team Collaboration Many internal parties are involved in Procurement: Strategy defining guiding principles, Finance setting budgets, other departments requesting purchases and so on. Consequently, efficient collaboration inside and across departments is crucial.
Data Driven Optimisation Increasingly sophisticated analytics/automation tools pop up to make the lives of Procurement managers easier. Use cases range from strategic spend optimisation to rule-based automation of transactional purchasing processes.
How do we slice the market
Now that we are on the same page about what procurement is and how the process works, let’s look at the market. We defined eight clusters focusing on different aspects of the value chain. This is far from perfect, some companies might fall into several clusters at the same time — or just partially into one (take Genlots: Razor sharp focus on Purchase Requisitioning). As always: Your feedback is more than welcome!
e-Procurement: Some companies have a clear focus on transactional ordering: e-auctioning solutions empower users to run tendering processes with multiple suppliers digitally. An example is RFP360— the two-sided platform empowers the buyer side to issue requests for proposals and the supply side to answer to these online.
Procure-to-Pay: Digital Procure-to-Pay solutions cover the entire transactional side of Procurement. They enable companies to run the purchasing process online. For instance, Precoro enables the digitization of all steps from purchase requisition to payment processing.
Source-to-Contract: On the other side of the Procurement value chain, there are startups covering the strategic Procurement process. For example, Scout offers a solution to analyze spending, source strategic suppliers, negotiate contracts and manage supplier relationships.
Source-to-Pay: Source-to-Pay solutions go even further; they cover the entire Procurement value chain — strategic as well as transactional. Solutions such as Coupa digitize the entire process from budgeting and spend analysis to invoicing and payment.
Strategic Sourcing: Another company cluster focuses the strategic sourcing step of the value chain. Startups such as Scoutbee and Globality offer solutions to discover and evaluate potential key suppliers.
Supplier Relationship Management (SRM): With Procurement becoming increasingly strategic, several startups have recognized the rising need to better manage key supplier relationships. For instance, Kodiak Rating primarily helps to ensure supplier quality through close monitoring while Vizibl drives value creation through supplier collaboration and co-innovation solutions.
Team Collaboration: Some other startups tailor their solutions to the team collaboration aspect of Procurement. Task management/ collaboration tools such as Procurement Flow built the “Trello of Procurement”.
Procurement Optimization: Startups in this cluster bring data analytics to Procurement. Their solutions make different steps of the value chain smarter. For instance, SpareTech leverages data and analytics to identify spare parts that are identical but carry different names from different suppliers, thus enabling companies to pool inventory and reduce working capital requirements.
Based on this assessment we created a market landscape. This is by no means exhaustive (and an evolving endeavour!).
Now where is the “So What” for you as a founder?
Looking at quite a few companies in the Procurement space over the last couple of months I noticed that – beyond prime execution capability – the most promising ventures tend to have three characteristics in common (note to self: these observations from the VC-tower might be proven wrong in the future):
(Initial) focus on a clearly defined problem (step of the value chain) and/or vertical to generate early traction based on a real problem that’s easy to sell on. Many B2B start-ups choose to build out their solution with an early enterprise “prototyping customer”(as Celonis did with Siemens, ScoutBee did with Audi or SpareTech is doing with Porsche).
A technological edge that allows to substantiate the defensibility of the value proposition fast enough to win the race that starts once incumbents or others try to jump on the bandwagon.
Expansion of your “footprint on the value chain” from an initial “on-point solution” into a suite/integrated product that interacts with 3rd party solutions, thereby giving access to yet untapped pools of value and creating an ever more defensible ecosystem.
ScoutBee is a case in point: Founded in early 2015 already, it took them a while to build their product and establish PMF. In late 2018, however, ScoutBee took off like a rocket when raising their Seed round. Today, less than a year later — as rumour has it — the company is in the process of raising their Series B (!) round with international Tier 1 investors. Let’s recap this breakout journey:
Early days: Clearly defined problem + technological edge
Scouting and evaluating new and existing suppliers is an ongoing procurement process that, despite massive time & resource investments, rarely results in reliable outcomes. Scoutbee started tackling this problem with a data enabled supplier listing tool. An AI driven discovery engine identified new vendors that were added to an ever growing database. Purchasers could use this tool to find new suppliers.
Launching the rocket: Expansion into a product suite
The best platforms are more than matchmakers. Thus, when ScoutBee started to seriously take off, the business model had evolved into a sophisticated supplier discovery, matchmaking & evaluation tool fuelled by internal and (lots of) external data that could be ingested into its category management systems. This, for instance, enabled external data vendors to indirectly sell into ScoutBee’s large enterprise clients who, suddenly, could make use of new sources of information. Also, the company disrupted the sourcing process by building workflow management (evaluation and onboarding) and communication tools that additionally empowered their clients to better execute their daily work.