I. B2B May Not Be So Reliable

  1. Traditional Internet In the past few years, traditional internet projects could achieve certain results by seizing the right timing and focusing on cost-saving and revenue-increasing strategies to build a good online product. Investors could relatively easily assess a project's progress by looking at DAU, MAU, total user count, retention rate, and specific user behavior data.
  2. O2O Bubble As online opportunities dwindled, last year investors began pouring money into O2O projects. This year, after the capital market cooled, they realized that most O2O projects couldn't operate without subsidies, and only then did they realize that the concept was misleading. The essence of O2O here should refer to the upgrade of personal consumer service industries, and the essence of the service industry is profitability. While many O2O projects abandoned seemingly capital-intensive and inefficient physical stores, they significantly increased spending on online promotion, service worker efficiency, and solving consumer trust issues. Without verifying profitability, they began疯狂补贴 to inflate market demand, aiming to present a satisfactory report to VCs. One reason for O2O investment mistakes might be an insufficient understanding of traditional service industries in the early stages, overestimating the value of internet concepts.
  3. B2B Frenzy Since the end of last year, rapidly growing "B2B-like" e-commerce platforms such as Zhaogang.com and Yimutian have attracted widespread attention from investors and entrepreneurs due to their huge transaction volumes and the potential for沉淀资金 (deposited funds). These B2B e-commerce platforms generally only solve the information flow problem. However, a transaction in traditional industry trade requires at least three flows: information flow, capital flow, and logistics. When only information flow is solved, the proportion of transactions that can be converted varies greatly across industries. Capital flow, especially for traditional enterprises and merchants, is crucial, and payment terms vary significantly. For example, 80% of mid-to-high-end restaurants in Beijing require a one-month payment period for ingredient procurement. In agricultural distribution, there is widespread credit sales behavior, with payment terms aligned with crop maturity cycles. In construction, it's common for purchases to be settled at the beginning of the following year. Similarly, the leverage effect of different subsidy amounts varies by industry. In agriculture, a small subsidy can achieve monthly transaction volumes of 100 million yuan. In steel, subsidizing logistics can also attract transactions through the platform. Of course, orders driven by subsidies are not considered "brushing" (刷单), which refers to transactions already completed offline, where warehouse receipts, bank transfer receipts, etc., are then processed through the platform. B2B platforms are also learning from O2O companies, using heavy subsidies to drive transaction volumes to attract VCs. However, VCs, while saying O2O is unreliable, are still willing to pay for B2B that similarly inflates demand through subsidies... However, during due diligence, it's difficult to distinguish between brushed orders, subsidized orders, and real orders. A better way to judge might be to rationally study the input-output composition and transaction details of different types of merchants at various stages in the corresponding industry, to assess their demand for the platform, and then value the platform based on demand and market penetration speed, rather than primarily on transaction volume. II. Challenges in Traditional Industry Supply Chain Upgrades Looking at many PR articles about "Zhao XX Wang" (find XX network), several issues seem important: Is it a buyer's market or a seller's market? How many levels of intermediaries are there, and how much do they mark up? How concentrated are upstream and downstream players? How many SKUs are there? ... Everything has two sides, and behind the answers we expect lie many challenges. Let's use the agricultural trade chain as an example to illustrate these issues.
  4. Buyer's and Seller's Market Issues China's manufacturing industry generally has severe overcapacity, and macro-wise, most industries are buyer's markets. Looking further, high-quality brands are often seller's markets, which is why top-tier fertilizer brands like Stanley (史丹利) and Kingenta (金正大) are almost absent from agricultural resource platforms.
  5. Intermediary Dealer Issues In traditional industries, manufacturers mainly establish sales channels through two methods: setting up branch companies or building dealer channels, both aimed at getting closer to end consumers at lower overall costs. For example, in agricultural distribution channels:
  • First-level provincial dealers: They need to regularly purchase from manufacturers to maintain dealership rights. They mainly play a warehousing role, and marketing-oriented dealers may even need to provide logistics services downstream.
  • Second-level county dealers: They purchase from first-level dealers mainly on a cash basis, but they need to provide credit sales to downstream retailers, showing that second-level dealers provide financial services.
  • Township and village retailers: Retailers sell agricultural products to farmers mainly on credit, with farmers repaying after selling their crops. Since villagers know each other well, deliberate defaults are rare. Rural areas are vast with poor logistics infrastructure, and farmers have plenty of free time to go to retail stores themselves. Additionally, many retailers have agronomist certificates and provide agricultural technical services to farmers. When B2B e-commerce platforms attempt to eliminate a certain level of dealers, they also need to provide alternative services. Finance, warehousing, and logistics are capital-intensive services. Simply making information transparent may reveal that new upstream and downstream players cannot transact due to payment term needs. Even if they truly replace dealers, it would require high costs, and it's questionable whether the new model can surpass the decades-old model in terms of input-output ratio and time efficiency.
  1. Upstream and Downstream Concentration Issues The lower the concentration of upstream and downstream players in an industry, the greater the value of an internet platform, which is a common view now. Theoretically, this is true, but whether things can be done and the speed of development often depend on details. When upstream and downstream are highly fragmented, the needs of different merchants vary greatly, and the manpower and time costs for promotion increase significantly, making actual conversion rates hard to guarantee. For example, the restaurant industry is highly fragmented, and there are already dozens of platforms providing food distribution services. During promotion, you'll find:
  • Large and chain restaurants: They have large purchase volumes, and the total cost of self-arranging a truck from the North Fifth Ring Road to Xinfadi in the south might be lower than the quoted price from food delivery e-commerce platforms.
  • Medium and small chain restaurants: 80% of merchants will ask for a one-month or half-month payment period. BD personnel need multiple communications and appropriate compromises to reach cooperation. After cooperation, in most cases, the chef orders through the platform, and BD personnel still need to give the chef about 20% in kickbacks to maintain the relationship.
  • Small restaurants: They have no bargaining power and won't ask for payment terms, settling on the same day. They have basically no requirements for food quality, and their biggest need is low prices. However, early-stage platforms lack sufficient SKUs to achieve low prices. In personal consumer e-commerce platforms, Mitau, Vipshop, and Chuchujie have all risen quickly by targeting different consumer spending levels. When an industry is highly fragmented, merchant needs also stratify. B2B platforms hoping to quickly capture the market with a single solution in the early stage may see results far below expectations. Of course, subsidies might make results look better than expected.
  1. SKU Judgment Issues When we don't understand a traditional industry well, we might see a platform with 3 or 4 types of potatoes and think the SKU is already rich. However, there are thousands of potato varieties. Lay's has developed over 2,000 potato seed varieties, and there are over 40 common types in agricultural markets. Judging SKU richness requires more market research.
  2. An Important Question: Is B2B E-commerce Truly Needed by These Industries Now? Why did we initially focus on B2B investment? Similar to how the "sharing economy" concept was ignited, after Airbnb and Uber quickly gained capital market favor, people began abstracting their business models and expecting to use the same thinking to transform other industries, rather than first analyzing the current state of a new industry and exploring its inherent needs. Seeing platforms like Zhaogang.com attract large amounts of deposited funds, the market hopes to replicate this model in other similar traditional industries, ignoring the actual demand for B2B platforms in those industries. B2B itself has some significance, but whether it can truly channel transaction funds through the platform without subsidies remains a question. It's not hard to see that numerous professional reports point out that China's agriculture and manufacturing are 20-30 years behind developed countries, with low technology and capacity utilization:
  • Agriculture: Israel, a small country, has very modern drip irrigation infrastructure, with one pipe for water intake and one for drainage nationwide, and farmers control drip irrigation speed via mobile apps. Drip irrigation technology was actually invented in China but hasn't been well applied. Chinese agriculture faces problems like backward production levels, severe soil pollution, and frequent food safety issues. The root cause is that Chinese farmers' average income is too low (about 10,000 yuan per year), preventing them from buying quality agricultural inputs, consuming agricultural technical services, or investing in equipment, leading to irrational planting, which in turn fails to guarantee next year's income, creating a vicious cycle.
  • Manufacturing: As a developing country, China's manufacturing has long lacked proprietary core technology, focusing mainly on labor-intensive, low-margin businesses like assembly and OEM. Such enterprises have low entry barriers; when one makes money, many others flood in, gradually causing overcapacity, lower industry-wide capacity utilization, and declining gross margins. The state has tried to address overcapacity by restricting bank lending to SMEs in these industries, but SMEs often resort to private financing at annual costs of over 12%, preventing them from having good cash flow to optimize internal efficiency and reduce production costs. Compared to the urgency of trade chain optimization, improving technology and providing low-cost, industry-specific financial services seem more meaningful. Trade chain optimization should be supplementary, not dominant. III. Rational Investment and Entrepreneurship Also Reduce Resource Waste When traditional industries combine with the internet, people from traditional industry backgrounds see internal problems earlier than internet people and join the internet entrepreneurship wave. During exchanges, there are significant differences in business thinking between traditional industry and internet people, rooted in their different survival and development approaches:
  • Internet companies: The Matthew effect is very obvious in the internet industry. They need to continuously occupy resources to increase market share to gain user and capital support. Especially platform-type companies, only one survives in the end, and they all merge—Youku and Tudou, Didi and Kuaidi, 58 and Ganji, Qunar and Ctrip...
  • Traditional enterprises: Traditional businesses are cash-flow-oriented. When the industry isn't saturated, opening 1,000 stores means everyone eats; when overcapacity occurs, only those with good cash flow can laugh last. When combining traditional + internet, one must maintain the wolf-like aggression of internet resource competition without departing from the profitability essence of traditional industries. Of course, the internet isn't as magical as legend says. The internet is better at providing information transparency and improving internal and external efficiency through data accumulation. Traditional offline stores have value in stable customer acquisition and brand trust. No matter how the internet upgrades traditional industries, it won't change their profitability essence. Many entrepreneurs are told, "Do something you love, and success will follow," and then we see all sorts of whimsical projects. However, internet investors' ambitions far exceed the stable profits of opening a chain restaurant. For internet entrepreneurship, the full sentence should be: "Do something you love, the market loves, and investors love, and success will follow!" Entrepreneurship is exciting; most people don't want to let opportunities pass by, but few can rationally judge whether they are suitable as founders. Some founders might create greater value by joining a stronger team as COO, CTO, etc., rather than as founders, where they might hit a clear ceiling. Nationwide entrepreneurship might also be a waste of social resources; nationwide innovation might be more meaningful. IV. Investment Logic for Internet + Traditional Industries Here are some insights from angel investing for discussion, in order of importance:
  1. Strong Founder & Quality Team The founder needs to be strong, reflected in:
  • Strong ability to attract talent
  • Strong execution ability
  • Strong product capability The above three points can be translated as: A seasoned, charismatic founder can continuously attract high-end talent to the team, and an efficient team working in the right direction on the right thing is more likely to succeed. In projects combining traditional industries and the internet, most investors still expect to see projects led by internet veterans. The ideal founding team is:
  • Internet people hold 60-70% equity, traditional industry people 30-40%;
  • Internet people have an average of 8+ years of experience, preferably with mid-to-senior management experience at internet companies like BAT, 360, JD, 58 (Microsoft, IBM, Lenovo are IT companies, not internet companies, similar to advertising/media companies), and experience from 0 to 1 to 100 is preferred. Previous entrepreneurial success is a plus;
  • Traditional industry people have 12+ years of experience. If starting an internet platform, they need resources covering the whole country, or at least a large region; if starting a brand project, they need familiarity with the production supply chain. Of course, a traditional industry person with very strong internet thinking can also be a good founder, but internet thinking here doesn't just mean reading a lot of internet news, but truly understanding the complete project process.
  1. Sufficiently Large Market Size When internet investors choose which direction to focus on, they first look at how wide the track is: For example, directions with a traditional internet market size of over 100 billion yuan are more likely to attract investor attention, because a 100 billion market can give birth to a 10 billion-level internet company; for internet + traditional industry directions, a market size of over 300 billion yuan is worth attention. For traditional industries with very low gross margins, the market size might even need to be at the trillion level to gain attention.
  2. Appropriate Investment Timing For angel-stage internet investments, there's generally a window of about half a year for each direction. Since reliable teams are harder to find in traditional industry upgrade directions, the window might extend. The first teams to enter a new field usually "educate" investors. When 5-6 entrepreneurial teams appear in a direction, it might attract more attention, and investors start looking for the team with the strongest background and resources on that track. Investing in the middle of the window might be more appropriate; investing too early might mean no strong team has emerged, and investing too late might mean the team's business data lags behind those who got funded earlier, affecting subsequent financing. There are special cases, such as when the first teams have serious model problems preventing rapid growth, or when a team entering late in the window has exceptionally strong backgrounds.
  3. Good Model First, a good model is not the same as a good concept. A good model should be superior to the original model in overall results, which should at least include:
  • Quality of product or service
  • Human and time efficiency
  • Financial input-output ratio Especially during a capital market winter, investors prefer projects that can be profitable without funding, and with funding, can use appropriate subsidies to quickly gain market share. Why put "good model" last? Because models have no secrets domestically; hiring a few employees or discreetly inquiring can easily reveal a project's actual situation. Entrepreneurship is more about team and execution. Finally, investors at any stage need subsequent investor support to realize their returns. For entrepreneurs, if they do things investors don't understand, the entrepreneurial path will be tough. For angel investors, it's also important to align with the investment logic and cognitive level of subsequent VCs. Early-stage investors who back projects they strongly believe in but outsiders doubt will also face difficulties; this requires joint effort from entrepreneurs and investors. If after deep and careful consideration you remain firm, it's okay to bet together once. -END- The best FMCG distributor learning platform in China Focusing on providing professional, practical, and actionable tutorials for enterprises and distributors Committed to helping Chinese FMCG distributors grow rapidly The most professional and practical knowledge base in the FMCG industry Reply with the red number below to get corresponding content Reply with number 1 to view the complete knowledge base | 001 Excellent Article Selection | 002 Distributor Market Operations | 003 Terminal Visit Management | 004 Sales Supervisor Skills | 005 Sales Boost Techniques | 006 Channel Expansion | 007 Managing Distributors | 008 Distributor Development | 009 Distributor Internal Operations Management | 010 Team Management | 011 Efficient Distribution Techniques | 012 Sales Manager's 18 Skills | 013 KA Operation Strategies | 014 First Lesson for New Salespeople | 015 Internet, Brands | [Long press QR code to follow]