Deal focus: ShopUp champions the iron triangle

In 2017, not long after Afeef Zaman founded ShopUp, research was published indicating that Dhaka, the capital of Bangladesh, had the second-largest Facebook population of any city globally, trailing Bangkok. “People often say, ‘I don’t have the internet, but I have Facebook,’” Zamen observes. “That is their introduction to the internet, so we thought we could use Facebook to help people reach customers.”

If Facebook was the initial technology enabler behind ShopUp, the village where Zaman’s grandfather lives helped crystallize the problem that needed to be solved. The village is home to the largest pottery cluster in Bangladesh, comprising a community of 5,000 tradespeople with the production volume of a larger small to medium-sized enterprise (SMEs) yet no top-down ownership.

The introduction of plastic homeware threatened the livelihoods of these tradespeople, who primarily made daily-use utensils. Zaman realized the key was distribution. Large plastics players established retail networks by signing up hundreds of neighborhood shops, while the potters relied on middlemen. They had to wait a long time for their revenue, with each intermediary taking a cut on the way.

ShopUp’s response was to build what Zaman describes as the “iron triangle of commerce” – interrelated supply chain, logistics, and finance offerings aimed at the 4.5 million small-scale retailers in Bangladesh that cater to 98% of domestic consumption. The company found the right product-market fit.

Revenue has grown more than 10x in the past 12 months, and it grew 10x in the 12 months before that. ShopUp continues to add 100,000 new customers every week. Meanwhile, after COVID-19 lockdowns crippled most of Bangladesh’s legacy infrastructure, it started handling 50% of all last-mile e-commerce deliveries, serving customers regardless of whether they used its supply chain solutions.

Valar Ventures, a firm set up by PayPal co-founder and early Facebook investor Peter Thiel, recently led a $75 million Series B round for ShopUp. Prosus Ventures, Flourish Ventures, Sequoia Capital India, and Veon Ventures also took part. It follows a $22.5 million Series A last year led by Flourish and Sequoia.

Flourish was the company’s first institutional investor, committing $500,000 in seed funding in 2018. The VC firm, a financial technology specialist established by eBay founder Pierre Omidyar, was primarily interested in India at the time, but the combination of Bangladesh’s robust economic growth, aspirational new digital economy, and the needs of its informal retail sector proved a compelling draw.

“People were doing social media in terms of front-end usage, but the back-end infrastructure wasn’t there. Afeef said, ‘I’ve looked at the small merchants and what is happening in the economy. Shopify has a solution for small merchants, but it doesn’t work in a Bangladesh context. I understand the context.’ That’s what got my attention,” recalls Smita Aggarwal, a global investments advisor at Flourish.

It also helped that Zaman had run a pilot to test his concept and secured Bangladesh Rural Advancement Committee (BRAC), a leading local non-profit organization, as a financing partner. Many of the Facebook-based entrepreneurs ShopUp served were women running beauty businesses from home. For BRAC, it was an opportunity to expand their offline microfinance activities into the digital domain.

Bangladesh is the world’s second-largest manufacturer of ready-made garments after China. This industry is expected to account for 82% of the country’s $46 billion in exports this year. Most of ShopUp’s early customers were garment businesses that had no physical premises, only Facebook.

The company provided a B2B platform for sourcing, sales, marketing, logistics, and payment. ShopUp aggregated demand for raw materials, enabling merchants to cut back their supplier relationships, overcome minimum order requirements, and achieve better financial terms. The other functions followed naturally, notably logistics to payment, given Bangladesh is 80%-plus cash-on-delivery.

From there, it branched into the reseller market, providing a full outsourced service to entrepreneurs who operate via WhatsApp groups. “The average neighborhood shop aggregates demand from about 300 customers. Resellers have no shop, but they aggregate among friends and family,” Zaman explains.

When COVID-19 hit, many logistics providers decided to wait out the pandemic; ShopUp felt that it was imperative to keep running or SME incomes would dry up. Within 12 weeks, it became a market leader in the logistics segment, as what was primarily an online-only customer base broadened to include offline stores that wanted to arrest sliding sales. Offline players now account for 95% of business.

There was also a shift in the nature of the goods being shipped. While demand for apparel was declining, consumers were desperate for deliveries of essential fast-moving consumer goods (FMCG).

Nine months ago, a buy now, pay later (BNPL) product was added to the mix. Financing was always going to be part of ShopUp’s offering – like every B2B platform, it accumulates data on customers, which can be leveraged to underwrite loans. The initial focus was on working capital, but it soon became apparent that an embedded offering where the credit lifecycle matched the product lifecycle made more sense.

The BRAC relationship continues, but ShopUp now works with three other local lending institutions. While logistics remains the main revenue driver, ahead of B2B services, finance offers the biggest margins. Building out a financing business means plugging more lenders into the platform – so the company can leverage its balance sheet, rather than lend off it directly – but this is difficult.

“Debt providers are more conservative with start-ups. They begin with small debt limits and increase over time,” says Aggarwal. “Currently, ShopUp’s credit is about 10% penetration – they give credit on only 10% of their NMV [net merchandise value]. I think they should be at 50-60%.”

The new equity funding will go towards scaling the business in terms of category coverage and geography, investing in logistics infrastructure, and launching more financial products. The scope for geographic expansion is enormous. ShopUp’s logistics footprint covers 300 micro-markets nationwide, while it offers B2B services in 30. There are 500 micro-markets in Dhaka alone.

On entering a new micro-market, the company establishes supply partnerships with local operators. There is an emphasis on regional sourcing, rather than centralized sourcing – essentially approaching manufacturers and offering to handle distribution. The next step is securing exclusivity on distribution of certain products and using that to reel in retailers. Then ShopUp launches an app.

Zaman stresses that logistics is essential to establishing a presence in B2B commerce: “The logistics piece is key, even though we aren’t a logistics business. As a first mover, you need to build the infrastructure, because you can’t rely on other players. Right now, our logistics platform is mostly individual riders and trucks. We want more larger fleets, so we can do delivery within 24 hours.”

In this way, ShopUp became a one-stop super app by necessity as much as by design, which sets it apart from peers in other markets. “Logistics is their biggest advantage, but they got into it because no one else could provide the scale and quality they needed,” Aggarwal adds. “In markets that are early in their evolution and relatively small in size, you have to work across adjacencies rather than be narrow.”

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• Topics
• South Asia
• Support services
• Early-stage
• Bangladesh
• Valar Ventures
• Prosus Ventures
• Sequoia Capital
• Flourish Ventures
• e-commerce
• Logistics
• SME
• manufacturing