ACV Auctions and Xometry made headlines a couple of years ago as one of the first B2B marketplaces to go public. ACV operates in the automotive sector while Xometry is an on-demand manufacturing marketplace. Other successful examples of companies operating in similar sectors exist like Auto1, PartsTrader, Fictiv and Moov. These platforms have demonstrated the potential of disrupting legacy sectors. Curiously, none of these platforms were started in one of Europe’s biggest manufacturing and automotive hubs: Italy.

Il Bel Paese has long been celebrated for its rich history, gastronomy and iconic fashion houses. All these elements make it an ideal tourist destination, a sector that Italy highly depends on, as it accounts for ~12% of the GDP. However, Italy also makes its fortune from other more legacy sectors, such as manufacturing, pharmaceutical and automotive. As investors in B2B marketplaces, this is where we like to spend our time. These “overlooked” legacy industries have all the characteristics that make it ripe for marketplaces to disrupt: large and highly fragmented markets, underdigitized, low trust levels between parties and with layers of (inefficient and expensive) middlemen.

In this ongoing series, we will be exploring Italy’s economy in more detail and diving deeper into varying sectors to uncover where the opportunities for B2B marketplaces in Italy are.

Market Overview

Italy’s private enterprise sector accounts for ~€2.85tr of production value per year. ~70% of this comes from three sectors: the (whole)sale of motor vehicles and spare parts, manufacturing (including pharmaceuticals, aviation, machinery, automotive etc.) and construction. Obviously, these are macro terms that include various sub sectors but it shows the scale of certain industries in Italy’s economy and the opportunity they present.

Figure 1: Revenue by Industry in Italy

Interestingly enough, the enterprise demographic across Italy’s economy is extremely skewed towards SMEs and family run businesses. Over 95% of the 4.2m enterprises in Italy have at most 9 employees, and 99.9% have less than 250 employees. This shows the extremely fragmented and non-concentrated nature of the country’s private sector. The perfect breeding ground for marketplaces to arise.

Figure 2: Enterprise demographic profile in Italy

What is even more interesting is assessing the export flows of Italy to its main partners (i.e. Germany, France, Spain and the UK amongst others). Predictably, the largest industries in the Italian economy also represent the largest portion of total export. More specifically, manufacturing accounts for 28% (including metals and steel manufacturing as well) of the total ~€600bn worth of exports, while the automotive sector and pharmaceuticals represent 7% and 6% respectively. What is perhaps more interesting to note here is the role of metals (precious metals as well as iron and steel) in the Italian outflows. It follows that the largest industries within the Italian economy are also the ones that attract most of the international demand for their products. This is not merely due to the size of the industry and number of players within these sectors but more importantly because of the quality of the products as well as the knowledge of the people involved within these processes. We will dive deeper into the characteristics of each sector within the Italian peninsula in the upcoming blog pieces to highlight the opportunities that are hiding in plain sight.

Figure 3: Exports of Italy by HS2 Category

So far we’ve shown that Italy is more than pizza, pasta, fashion and football (more or less), that it’s dominated by SMEs and family run businesses and its main exporting industries. The high level analysis above should already point to the where (i.e. Italy), why (i.e. incredibly fragmented market) and what (i.e. manufacturing, machinery, automotive, mechanical appliances, pharmaceuticals etc.) of building B2B vertical-specific marketplace businesses.

Why Now?

Need for Businesses to Operate Online

Enterprise digitization has been a major driver of B2B marketplace adoption across the world. While the vast majority of Italian society ranks highly in terms of connectivity and digital adoption, SME digitization lags behind other European peers. Even accounting for Northern vs Southern differences within the country, Italian companies can still highly benefit from digital adoption in their businesses.

Figure 4: Digitization level for SMEs in Europe

Industry specific data shows us that only 4% of manufacturing companies have conducted at least one transaction online, while automotive companies fare a bit better, with 15%. Still, there is massive room for improvement. Perhaps there was no need from the market, perhaps it’s because there were no platforms to support them.

No Digital Winner

The Italian tech ecosystem has always been a few years behind its Spanish, Portuguese and French cousins. Since 2020 however, we’ve seen larger rounds being raised by successful tech companies (like Scalapay’s $497m Series B and Casavo’s Series D round) in Italy from international and local investors alike. While that alone is no sign of ultimate success, it has definitely helped in spurring the Italian startup ecosystem further.

Nevertheless, we’ve seen very little funding going to B2B marketplaces or vertical specific SaaS solutions. A few standout examples exist, operating in the Italian “darling” industries such as Fashion (Mirta) and Food (Deliveristo and Soplaya) as well as more B2B horizontal solutions like Kampaay. However, vertically specific marketplaces built around key sectors such as manufacturing, pharmaceuticals or automotive have received little attention from entrepreneurs and investors alike. Low digital savvyness — especially in those industries — might have tempered interest, but also creates many opportunities for a digital-native player to capture marketshare quick.

Changing (for the better) Regulatory Environment

Industry 4.0: Since 2016 the Italian government has been encouraging companies to grow and invest in R&D through a scheme called Industry 4.0. The governments’ plan for growth offers tax benefits to support critical and innovative investment and empowerment of skills related to the fourth industrial revolution.

Decreto Crescita: Fellow expats living in the Netherlands may be familiar with this — as of 2019, the Italian government has adopted a special tax regime for expatriate workers (and more importantly also for Italians living abroad looking to come back to their homeland), wherein anyone who decides to move to Italy can benefit from a 70% tax exemption on their personal income. This will help cash-poor startups to attract, hire and retain the best talent around (with the benefit of living in Italy ;) ).

DFF’s View on Italy

A Large yet Underserved Market

Italy is the 8th largest economy worldwide, with a large and profitable private sector and highly specialized and fragmented SMEs across various industries. The low digital adoption rate across these enterprises points to a large opportunity to serve as a highly-trusted distribution channel to underserved buyers in other countries (i.e. increasing revenue) as well as improving their operations through basic software implementation to help them manage their business (i.e. reducing OPEX). The lack of digital players across these legacy industries is a blue-ocean opportunity for ambitious entrepreneurs looking to support the next generation of business owners in Italy.

Country-Specific Specialization

One of the underlying principles in our investment framework here at DFF is the opportunity to leverage a country’s ability to produce certain types of goods at lower opportunity costs compared to other countries — the Comparative Advantage theory to be academically specific. Countries specialize in trading the goods they are best positioned to produce from a quality and cost perspective. We believe that this leads to a natural geographical arbitrage — at least on a supply-aggregation basis — especially in an interconnected continent such as Europe. Our investments in VonWood — connecting sawmills from CEE to buyers in the Netherlands — and Metycle — connecting scrap collectors in Europe to recyclers in Southeast Asia and metal smelters in China- were done on the basis of this principle. While we are not advocating for B2B marketplaces to focus on only aggregating supply in a particular country and demand in another, in order to take advantage of (input) price differences, it is an extremely useful tactic to kickstart your platform.

How does this relate to Italy? Well, we have just shown the key export sectors for Italy and their relative size (both in terms of outflows as well as in total market opportunity). A thoughtful entrepreneur may think about starting a B2B marketplace in the mechanical machinery space, aggregating the thousands of high-quality suppliers across the Italian peninsula and matching them with demand that is underserved both from a price and quality perspective.

Opportunities for B2B Marketplaces in Italy

At DFF we like to focus on businesses that are tackling large, unaddressed and fragmented markets. Typically these also tend to be the most important sectors in their respective countries as the current incumbents are not incentivized to innovate (i.e. maximize their rent extraction). Italy has all these key traits. We’re particularly excited about companies operating in the manufacturing space — be it mechanical machines, automotive, steel etc.

We also see a unique possibility to support the B2B circular economy. Italy ranks first in Europe in terms of its rate of circular economy — 18.5% of the total raw material consumption comes from secondary raw materials. Some digital players have already started to tackle this space and we are excited for vertically specific solutions aimed at the larger industries in the country.

We believe that the upcoming decade represents a turning point for Italy’s B2B sector, and marketplaces will play a big part in this. Italy has the benefit of operating in an incredibly well served market with open trade lines and a sound technological infrastructure with all the plug-and-play solutions already available. What is missing now is a team that is willing to embark on the challenge of aggregating the thousands of SMEs operating in Italy’s largest sectors and connecting them with eagerly awaiting buyers in other markets. A key consideration to make here — Italy is just the starting point. Naturally, you will see that as you scale your marketplace, you will get requests from suppliers outside of Italy so start by building with an international mindset from day 1 and scale from there.

If you’re building a B2B marketplace in Italy or are thinking about starting one please reach out to federico@dutchfoundersfund.com

Federico Maroli

Investor at DFF

Juventus Fan

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