While technology now enables nearly every industry, certain markets seem too stubborn to shake up. Consider diamonds. For centuries, diamond retailers faced the same dilemma: A starry-eyed customer enters your shop, intent upon finding the perfect engagement ring, necklace, or set of earrings. The sale should be easy — this customer has karat, clarity, color, and cut down pat. But it’s not, because sourcing that perfect stone is a Herculean task. As a retailer, you do not have a secret chest of endless stones. You must penetrate the vast, global market of diamond and gemstone suppliers, review inventory, and assess reliability mostly on blind trust. This antiquated system is expensive and time-consuming, forcing retailers to rely on reputation rather than data. Its inefficiencies drive massive price hikes, which retailers pass on to customers. No one (besides perhaps the wholesaler who knew the retailer’s dad before you were born) wins.
Tech-enabled procurement solves this problem. That’s exactly what David Sutton, CEO of Nivoda, realized after spending decades in the diamond and jewelry industries in South Africa, Hong Kong, and the United Kingdom. His mission is to remove the financial and logistical obstacles diamond traders face. That’s why he created Nivoda, the world’s largest online diamond and gemstone marketplace where retailers can log in, search for the perfect stone among multiple global suppliers, and then check out in one click. Nivoda controls quality control, shipping, and invoicing, removing the wholesale middleman. As a result, retailers and customers both enjoy the most competitive prices for the best stones in the world.
Headline led Nivoda’s Series A in 2022, and we are thrilled to celebrate and participate in their recent Series B. While Nivoda epitomizes our obsession with tech-enabled procurement, we believe many other industries are ripe for disruption through software that connects retailers to wholesale suppliers, cutting out middlemen who inflate prices and restrict inventory.
Verse Medical is another perfect example — and a recent Headline investment. Verse Medical is a tech-enabled distributor that displaces Durable Medical Equipment (DME) suppliers. When a rehab facility or hospital discharges a patient with permanent or short-term disability needs, they face the Sisyphean task of sourcing DME — equipment like braces, catheters, wound care kits, bed pans, and ostomy bags — from low-tech suppliers at high costs. Just as Nivoda cuts out the diamond and gemstone middleman, Verse Medical cuts out the DME middleman, enabling rehab and hospital facilities to source the best DME from suppliers nationwide and provide patients with high-quality equipment at low prices.
Verse Medical and Nivoda aren't our only tech-enabled procurement investments, but we are thrilled to share them as a primer on the space. At Headline, we spend a lot of time across both vertical-specific software and marketplaces. We are lucky to have invested early in category leaders such as Angi, Housecall Pro, AppFolio, The RealReal, Farfetch, Heard, PlanRadar, PowerUs, and others.
By investigating Verse Medical and Nivoda, we became even more excited about the traits that facilitate a tech-enabled distributor’s success. Below, we share these traits, why now is the perfect time for tech-enabled distribution businesses, and what we are looking for next.
What makes a tech-enabled distributor succeed?
By evaluating hundreds of tech-enabled distribution businesses, we have identified five core characteristics that signal a high likelihood of success. These traits speak to the market that the tech-enabled distributor disrupts, their software structure, and customer behavior.
Commoditization: Products that are fairly commoditized tend to provide a fertile ground for the emergence of tech-enabled distribution. For example, if there is standard pricing, like the medicare pricing guide or the diamond pricing index.
Ease of Shipping: Products that are easy to ship streamline logistical challenges and enhance the efficiency of distribution processes. For example, smaller items that don’t need additional assembly or risk of perishing.
Frequency: Products that are frequently purchased create value in consolidation. Ideal usage frequency is typically weekly or monthly purchases, but could be quarterly or bi-annual depending on the industry.
Limited Value-Added Services: Products that do not necessitate extensive value-added services simplify the operational landscape for tech-enabled distributors. For example, the wholesaler does not have to provide complex assembly or consultation and instead focuses on delivery, sales, and financing.
Abundance of Suppliers: Industries with a plethora of suppliers offer opportunities for tech-enabled distributors to thrive in a competitive landscape. This means buyers have too many suppliers to choose from and must manually assess each one today.
Verse Medical and Nivoda demonstrate these five traits in action. When evaluating Verse Medical, we observed that insurers standardized pricing (typically a crucial factor). For example, a wholesaler could not powerfully manipulate the cost of a bedpan because insurers set the bar for what a patient will be reimbursed for. This shifted hospitals' focus to factors like ease of use, speed of delivery, and customer satisfaction. Getting the patient home as quickly as possible with all necessary care items became a hospital’s top priority for turning over a bed. Verse Medical strategically positions itself by concentrating on smaller, easily shipped items, like ostomy bags, bed pans, and wound care materials, while coordinating services for categories it does not directly serve, like in-home measurement for wheelchairs. By meeting diverse customer needs and driving digital solutions for discharge nurses, Verse Medical seamlessly replaces numerous existing solutions and workflows. Hospitals no longer need to call various DME providers to see who has the items they need to send a patient home.
A parallel trend emerged with our investment in Nivoda. The small size, commoditization, and abundance of diamond and gemstone suppliers enable Nivoda to effectively replace wholesalers. Diamonds are commodity products that are small, easy to ship, and often purchased to avoid tying up too much cash. Additionally, diamond wholesalers add little value beyond financing and access to thousands of global suppliers. Together, these factors make the diamond industry ideal for tech enablement to surround the distributor.
While not all retailers transition their entire ordering process to Nivoda, the platform’s consolidated purchasing, competitive pricing, and value-added benefits facilitate rapid market share acquisition. Some retailers were initially skeptical about moving their ordering process online, but quickly realized they could access more inventory at better prices, with embedded quality control and fast shipping and returns.
Why now is the time for tech-enabled distributors
While evaluating Nivoda and Verse Medical, we learned that timing — especially the COVID-19 pandemic — is essential to fuel market penetration. For Durable Medical Equipment, the surge in patient volume during the pandemic, coupled with the growing popularity of Direct-to-Consumer (DTC) drop-ship offerings, created an opportune moment to capture hospitals' attention. Similarly, in the diamond industry, the increasing prevalence of lab-grown stones prompted retailers to reconsider traditional wholesaler and Rapnet (the incumbent provider) structures. The pandemic forced many previously tech-resistant industries to adopt tech-driven solutions, a trend continuing today.
Vetcove, also proves the “why now.” Vetcove runs a B2B marketplace for veterinary supplies that drives loyalty and love from veterinary hospitals by offering competitive pricing, fast service, and consolidated ordering. Vet supplies are high-frequency, commoditized, supplied by a plethora of vendors, and fairly small for transport. Similar to Nivoda, Vetcove faced ingrained purchasing behavior that was hard to disrupt, but over time proved it could deliver better, faster experiences for vet hospitals.
For some industries, software solutions beat becoming the distributor
Despite the benefits of tech-enabled distribution, certain industries are better positioned to provide software solutions to incumbents than to assume the role of a distributor. This is especially true in industries where the items being sold are large and challenging to transport, perishable, or require extensive support. Examples include construction, food distribution, freight forwarding, and trucking — categories where being a tech enabler rather than a middleman may be more advantageous. Typically, these situations arise when distributors are not easily interchangeable, and there must be enough distributors to create a large market opportunity.
A few examples of companies focused on building technology to enable and maintain a traditional distribution process include Pepper (food distribution), Knowde (chemicals), Prokeep (materials distribution), Parade (trucking), and Gearflow (heavy equipment). While established tech-enabled distributors continue to succeed in these sectors, we believe that building technology to empower existing incumbents will yield greater long-term success.
Breaking into traditional industries necessitates patience and capital efficiency to secure a lasting foothold. Many entrepreneurs in food distribution attempted to circumvent the end restaurants or manufacturers. Due to the distributor’s crucial role in this equation and the economics of each element of the value chain, we believe that in food distribution, the path to success is (1) building technology to enable the distributor, then (2) continuing connections between manufacturers and restaurants through traditional middlemen.
What we are searching for next
Looking ahead, we anticipate more industries will be disrupted through a tech-enabled distributor as the ideal entry point. We plan to keep investing in the next generation of tech-enabled distribution. A few criteria we are looking for when trying to tech-enable distributors include:
High Switching Friction: Customers cannot easily switch across distributors due to product quality risk.
Enough Distributors: If there are only a few key players in distribution, it becomes quite hard to disrupt the industry because those key players are more likely to build their own software, and insufficient customers exist for new external products.
Customer Willingness to Pay (Profit Margin to Play With): Providers need to charge a large ACV over time to build a large market and cover sales costs, likely mapped to a percentage of the distributor’s revenue and ability to offset labor.
Overall, replacing a distributor or tech enabling an incumbent is not for the faint of heart. Each path presents its own challenges to achieving real venture-scale growth, penetration, and customer love. If you are building in the tech-enabled distributor space or building tools for distributors, we would love to connect. You can reach us at taylor@headline.com or jh@headline.com.