Kinnek raises $10M from Matrix to help SMBs handle procurement like the big boys

By Michael Carney , written on September 15, 2014

From The News Desk

For consumers there’s no shortage of online destinations to discover, compare, read reviews, and price-hunt for nearly any product or service we can think of. Whether it’s Amazon, eBay, Google Shopping, Consumer Reports, Yelp, AngiesLIst, or any number of other destinations, it’s never been easier to shop for consumer electronics, fashion, housewares, restaurants, household services, and countless other categories.

But for merchants and small businesses (SMBs) who need to procure equipment and supplies to run their business, the reality is far different. Unlike large corporations which employ large procurement departments and often hire outside consultants to drive additional efficiency, it can be extremely difficult for these smaller operations to source essential supplies and to have any confidence in whether a price is fair and a seller is trustworthy.

Kinnek is an online marketplace startup looking to solve this problem by connecting SMBs with suppliers, wholesalers, and resellers of across the spectrum business products. The two year old New York City-based company today announced the close of a $10 million Series A funding round led by Matrix Partners, with participation from previous investors including Sierra Ventures, Version One Ventures, CrunchFund, TriplePoint Ventures, AngelPad accelerator, Naval Ravikant, Richard Chen, and Benjamin Ling. The round brings Kinnek’s total capitalization to $13 million, including a larger than previously reported $3 million Seed round in late 2012.

“The question with all marketplaces is can you get from zero to one, can you get the ball rolling,” says Matrix parner Josh Hannah. “In January of this year the business really turned a corner when they got density in terms of bids. Since that point, every time a buyer posted a request, they would get three to four competitive bids – that type of liquidity really opens up the process. It was a competitive round with lots of people interested. The numbers are clearly working.”

Unlike most consumer marketplaces, suppliers don’t list products on Kinnek and then wait for buyers to browse and purchase. Instead, this platform operates in the inverse, where SMBs post requests (commonly called requests for proposal or RFPs) for the products that they need against which suppliers then submit bids. For example, a new restaurant might post details of the size and layout of their kitchen and request bids for an HVAC system and desired ovens, stovetops, and refrigeration units. In this way, Kinnek is a lot like Alibaba or the “Wanted” section of Craigslist.

Kinnek looks to solve three core issues for SMBs: discovery, workflow and data management, and price transparency. On the former, the company has spent two years creating a custom taxonomy and analytics engine that helps to efficiently match demand-side listings and search queries with relevant suppliers. Once suppliers deliver bids on these listings, Kinnek helps merchants organize relevant information to aid in comparison, negotiating, order-tracking, and future re-ordering. Finally, simply by virtue of delivering liquidity in the form of multiple supply-side bids for each listing, Kinnek is adding price-transparency to these markets. Over time, the company will collect detailed data on price, supply, and demand across a variety of product categories, which, like Amazon and others on the consumer side, it can use to improve marketplace efficiency.

“The key for us in looking at their business to date is that people come in looking for just one thing, but once they engage with the platform, we see them coming back again and again,” Hannah says.

The other key difference between Kinnek and consumer marketplaces like Amazon or Ebay is that, at least at the outset, transactions aren’t happening within the platform. Instead, Kinnek is acting only as a facilitator of introductions, while seeking to provide reputation, workflow management, and price transparency. At this early stage, however,  buyers and sellers transact outside of the platform as they would if they had met through a simple Google search, the Yellow Pages, or via any other channel.

This would seem to present a challenge for Kinnek to monetize and foster repeat business on its platform, but neither the company’s founders nor its investors seem too worried about this issue.

“Right now focusing on delivering liquidity and making sure that the discovery and price transparency experiences are top notch,” says Kinnek co-founder Rui Ma, who before launching the company was a management consultant specializing in procurement. “There’s a reason no one has succeeded with B2B transactions in the past. These are not small transactions, these are transactions worth tens if not hundreds of thousands of dollars, typically involving third-party financing and paid on installments. These are really complicated, customized transactions that, if we tried to handle them at our scale, we’d get crushed.”

Ma adds that facilitating transactions is part of the long-term vision for Kinnek, but first the company needs to reach sufficient density and liquidity within individual categories – currently it’s focusing on restaurants, hotels, food and beverage manufacturing, and confectionary. In several of those categories, suppliers pay platform access fees and (self-reported) commissions on offline transactions, he says, while declining to specify which categories have reached this stage.

“The good news is that B2B users are less reluctant to pay than consumers,” Ma says. “In this industry, the standard commission is 10 to 20 percent. We’ll probably charge less than this market rate because we’re looking to provide a more efficient online marketplace, but we’re confident that the opportunity to monetize is there. People really care about their reviews and profiles – there’s nowhere else this information exists online – so we’re confident that we’re getting good data when it comes to self-reported offline transactions. We want to start facilitating transactions in select categories by the end of the year.”

“We were initially concerned about the transactions not happening on the marketplace today,” Hannah says. “But we’re comfortable that they can add value throughout, which makes it easier to track and intermediate these offline transactions. Google has proven that if you can get great scale, you can create value. For example, you could even adopt a model like Google AdWords and one day have suppliers bid to deliver their RFPs and let the market demand clears these leads. Our bigger concern at this stage is just making sure they provide a service that SMBs and suppliers love.”

Kinnek is not the first attempt at solving this broken SMB procurement marketplace. This idea was tried a number of times in the late 90s and without much success. It’s not surprising then that the number one question during fundraising, according to Ma, was “Why now?”

“When we went out to raise our seed round almost two years ago, investors were skeptical initially around the why now question,” Ma says. “We believe we’re at an interesting inflection point currently where SMBs are now using online tools for everything they do. For example, even old school NYC restaurant owners are on Seamless, OpenTable, and Quickbooks. Using software to operate your business more efficiently is a lot less radical than it was five years ago.”

The first generation of SMB marketplaces were little more than digitized product catalogs. But with that information changing regularly, not to mention highly impersonal and generic, they added little value. Kinnek is looking to build a far richer experience that supports collaboration between buyers and sellers, workflow management. The company is also

It’s not just buyers that are behaving differently today. According to Ma, sellers are also changing their approach and leaning more heavily on inside rather than outside sales. It’s a market trend that supports the emergence of an online marketplace to act as a clearinghouse in this otherwise fragmented and opaque market.

Kinnek has been growing quickly, Ma says, despite being relatively resource constrained to date. With this new funding round, the company plans to scale up its engineering team and build out marketing in an effort to grow the smaller (by a factor of 3X) and more critical supply-side of its business.

“With Alibaba about to go public, we think people are going to turn more attention to the B2B sector so we wanted to make sure we had enough money, enough ammunition to not need to be distracted by fundraising for a while,” Ma says. He adds that the company does not view Alibaba as not a direct competitor, despite its size and profile. “All their vendors are in China and they have no experience dealing with US buyers, not to mention the currency issues. Alibaba works for large us businesses, but not SMBs. They’re really a glorified listings site – although a huge one. We’re far more active in facilitating introductions and transactions.”

“I have long believed in this category of serving small businesses,” Matrix’s Hannah says. “And my partner Dana [Stalder], before he was at eBay, he founded in 1999 which did something similar. But the issue has always been, even though it makes economic sense, how do you get this up and rolling. I needed to see proof that people could get liquidity. My investment is based seeing evidence of that and on the belief that is a really big area.”

Today, a lot of Kinnek’s traffic comes from SEO, Hannah notes, with the site featuring prominently on Google in a number of strategic categories. But longer term, the goal is to create enough brand awareness that buyers and sellers come directly to the company’s website and conduct their searches there.

“It has a lot of commonalities with Yelp, which successfully transitioned from business built on the back of Google, to a stand alone one built on direct traffic – I think that was really an inflection point for Yelp’s business,” Hannah says. Another corollary might be TrueCar, which offers consumers data around pricing and dealer reliability, the result of which might be described as the confidence to transact. If Kinnek can deliver a similar value to the SMB market, it will have the makings of a very large business.

Like any two-sided marketplace, Kinnek’s biggest challenge will be maintaining a healthy balance between supply and demand while growing large enough to deliver sufficient liquidity and provide defensibility against copycats. The company appears to be off to a good start and the $10 million vote of confidence from Matrix and its existing investors mean Ma and his team can keep their foot on the accelerator.

[Image via Stuck in Customs]