Building a True Market Network For The Chemical Industry – BluePallet CEO Scott Barrows

Scott Barrows jumps on Winner Take All to discuss his chemical market network startup, BluePallet, coming out of stealth to launch its online marketplace backed by The National Association of Chemical Distributors (NACD). Scott and Alex discuss BluePallet’s formation, a merger between echosystem and B2B FinTech engine Velloci, and securing BluePallet’s seed funding. Also discussed, how BluePallet was able to partner with the NACD while other marketplaces got turned down, BluePallet’s unique platform business model, and why the chemical industry requires a bespoke platform solution.

This is an excerpt from episode XX of Winner Take All. Watch the full episode here:

Originally Aired: 05/26/21
#Chemicals #BluePallet #Startups

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Full Transcript:

Alex Moazed (00:00):
Hello. I’m Alex Moazed, and welcome to Winner Take All, where we talk about the constant battle against big tech monopolies and how to fight back against big tech and win. We’ve got a great show today, and we’re going to kick off with Scott Barrows, the CEO of recently, updated-named, BluePallet, a B2B marketplace in the chemical industry vertical, and also a recent inductee on our inaugural ranking of the top 50 B2B marketplace startups. Scott, welcome. Great to have you, really, back on the show.

Scott Barrows (00:39):
Yeah, great to be here with you guys, and as you know, we’re a big fan of Modern Monopolies and Applico, and you guys have kind of been our North Star for the last three to four years as we’ve been building this, so it’s great to be here.

Alex Moazed (00:51):
Awesome, appreciate that, Scott. I’ve got this fancy Yahoo Finance article, “BluePallet exits stealth mode to launch online marketplace backed by the chemical industry.” I mean, that sounds pretty cool. What does that mean?

Scott Barrows (01:07):
Well, we took it from Modern Monopolies, to be honest, I think in one of your guys’ chapters, you write about kind of how Facebook grew, and Facebook grew by starting with a quality network that’s already been built, a built in kind of a tool, and value for that as they did with Harvard and then moved on to different universities and building on existing networks instead of having to try to build your own. We knew that we wanted to set up a beachhead in North America. We knew that we wanted to set a beachhead with chemical distribution because we thought it was strategic to kind of be in between the producers and the manufacturers, then also with the end users, and so NACD has very stringent guidelines as far as being a member. They also make up about 92% of the overall commerce for North American distribution. It just made sense to work with their network and group and then kind of grow from there.

Alex Moazed (02:01):
Awesome. The NACD is a national association of chemical distributors. Are they an association or are they also a buying group or are they more of just an association?

Scott Barrows (02:12):
Strictly trade association, they’ll set up guidelines for compliance, guidelines for responsible distribution. We’ll send their participants through audits to make sure every three years they’re staying compliant and then same thing as trade shows and so forth.

Alex Moazed (02:28):
Getting an industry association to publicly anoint and join an official partnership with any startup, let alone a startup that has a new business model, marketplace business model, that can be a pretty tall order. What were the motivations behind the NACD wanting to really take that on and kind of formalize this relationship?

Scott Barrows (03:00):
It’s been about a three to four year process. When we first went down to try to explore the opportunity of working with the chemical industry, we went down to one of their national associations, and one of the say top three monopolistic marketplaces were down there at the same time hitching to be their strategic partner, and their board actually turned that marketplace down. We thought that was really interesting and potential learning lesson to see, just continue to ask, “Why would you not want to work with this massive marketplace if you guys are very eager as an industry yourselves to get into networks and platforms and E-commerce.” We kept asking question after question and started building our roadmap from there. It was kind of three main points that they laid out to us. They said, “You guys have to figure this out and until you do, then we’re going to continue to stay on the sideline, or someone needs to figure it out.”

Scott Barrows (03:53):
For these distributors, and we’ve seen a very common story along a lot of these industrial verticals is that, the majority of their contracts are regional. If I am, say, Univar, Brenntag, I may have a regional contract with Dow or BSF, and they’ll say, “You can sell my isopropanol, but you can only sell it in Washington, Oregon, and Idaho.”

Scott Barrows (04:14):
That immediately does not allow me to list that responsibly on Amazon, because Amazon or Alibaba, or the more open marketplaces for B2B, will not allow you to pick and choose which states, and regions, or countries, or companies see that product or not. We had to build in what we call a permission based marketplace, and it allows the users and the members to go in there either on a global level or all the way down granular to an individual product or drum and say, I only want these five states to see this product or not, or I want to mark this price up for these three customers, but down for these other two, or I want to broadcast it to these 12 branches, but not these other eight. They can do whatever system they want to, to build up these customized networks and build infinite networks depending on what their corporate strategy is, instead of just having one choice of saying, “I want to list isopropanol, I post it, now everybody on this marketplace can see it at the exact same price.”

Alex Moazed (05:11):
Now, when you say, “They,” you’re talking about the chemical distributors, right?

Scott Barrows (05:17):
Distributors and manufacturers. We’ve also decided to be a decentralized marketplace, and that’s come from doing a lot of study on the challenges of supply chain resiliency. You really feel that the model needs to change from the traditional, “Hey, we’re a B2B marketplace, or a B2C marketplace, or a C2C marketplace.” That may work when everything’s fine and dandy, but when you have all these problems going on in the world and challenges that keep coming up more and more with COVID, with Texas freezing over, Suez canal getting blocked, Mississippi getting shut down, there’s times where the distributors need to be able to sell back up to the manufacturers, or there’s times where the end customers have slow moving and dead stock inventory that can be used instead of getting sent to a landfill, and they could sell it back up to a distributor or to an end customer.

Scott Barrows (06:09):
There’s so many different ways, depending on what’s going on in that day in time of history where sometimes it’s C2C’s better, sometimes C2B’s better, sometimes B2B is better, but we want to give the members, a member is a member, is a member, regardless if they’re a supplier, a distributor, or a paint and coating company somewhere in Tulsa. That’s kind of a big differentiator, too, that we think is extremely important to whoever’s building one of these models out moving forward.

Alex Moazed (06:35):
Yeah, I think maybe one of the common sentiments there is, most of you are, whether it’s a large tech monopoly, or certainly some of the high flying unicorn B2B marketplaces which were featured in our ranking, their ultimate goal is to disintermediate the distributor in many circumstances, right? I mean, look at Amazon in B2C, Amazon Business on the B2B side, they very much so view the distributor as an ends to a means. The means is to just leapfrog the distributor and go, ultimately, to the manufacturer and connect the manufacturer direct to either a consumer or a business customer. That’s what I find really interesting, and I hear it coming through in different ways is saying, “How do we give more power and optionality to distributors? How do we help solve their needs with an eye towards genuinely helping the distributor?”

Alex Moazed (07:47):
Sure, a manufacturer could also get involved in the marketplace, but it doesn’t mean that, and as recognized by the NACD’s kind of stamp of approval, that really, to me is signaling is, “Hey, we’re not here to screw over all of the distributors in the industry. We’re actually here to try and help you run a better business, digitize your business, kind of embrace a new business model, but do that in a way which can be accretive” Ultimately, what the rub is that, for BluePallet’s business model, is that you are making, really, a business decision to say, “Well, there’s probably going to be a little bit less margin on the bone for us if we don’t plan on cutting out the distributor at the end of all of this,” right?

Alex Moazed (08:37):
When you’re pitching it to your investors and what the vision is, most of them, certainly, I know pretty much all the marketplaces, and certainly the tech monopolies like an Amazon, that is the goal. Sure, we will put up with this for a while, but ultimately we’ll have so much demand and we’ll have so much power over supply, we’ll just put our thumb down more and more on the supply and squeeze more and more margin out of that for ourselves, but that isn’t necessarily a part of your calculus, right? That’s at least kind of what I’m reading by what you’re saying and the NACD’s partnership here. Is that accurate?

Scott Barrows (09:14):
Yeah, no, you’re correct. Honestly, we made a big pivot on our revenue model after I watched your one video on supply side protections and about how that really negatively affects the sell side. The chemical industry, fortunately for them, they’re one of the last remaining large verticals that have not really gone full in to E-commerce and platforms and so forth. I’ve kind of tried to tell everybody, they’re nice enough to have me speak at their regional national conventions, and I’m like, “I’m not trying to be the person that runs in here and screams fire in the movie theater, but you don’t need a crystal ball to see how this ends. There’s other industrial verticals that have gone down this path already and completely become reliant on these two-sided marketplaces that will continue to put themselves in the middle of every single transaction.”

Scott Barrows (10:02):
That’s extremely dangerous is, as you become, and I’m copying your words in saying this but, as you become more and more reliant on that centralized marketplace, you lose your supply side protections and they’ll continue to go up from 5% to 6%, 7% until you have to tap out, especially for chemical distributors. Their particular industry probably has about a 10% gross margin. There’s not a lot of room there, and then all of a sudden it’s Amazon Basics isopropanol being sold in drums. So, we had to switch our business model.

Scott Barrows (10:32):
We thought we could come in and be smart by just saying, “Okay, for raw materials and chemicals, Amazon charges six to 12%, so we’re just going to come in at 1% across the board, and then people will appreciate that,” but we learned from studying some of the other marketplaces that had failed in the past, and reading some of the comments by the participants, the feeling was pretty strong saying, “Hey, we’re okay on like new sales that maybe we didn’t have opportunities to, but we really don’t appreciate a technology, or a software, or a platform getting in the middle of the business that I’ve already earned. If I have a major contract with DASF, or I have all these customers that I’m already doing business with, I’m not just going to hand you 3% of my profit when I’m only making 10% because you’ve somehow made my life a little bit easier, you know?”

Scott Barrows (11:19):
They’re just automatically saying no, and so we’re like, “How do we charge somehow and make money off of this, but still provide value and not upset them on those transactions they already have.” That’s where the market network structure came in. We’re like, “Okay, if they’re okay with us making money on the new transactions, we’ll put a markup on that,” and so there’s two major distinctions on that. That’s how we make our main transactional revenues, only on new sales that they would not have had access to, and the second part is that we purposely mark that up.

Scott Barrows (11:49):
You don’t say, “Okay, BSF or Brenntag, you want $100 for that drum. We’re going to sell it for a hundred and then give you back 90,” because all of a sudden, now if that customer looks at Amazon and they look at their own little site, they’re going to choose Amazon every time because Amazon has a better mouse trap, but now we say, “Okay, we have a marketplace tool. You can use it if you want, you don’t have to, but anytime you feel like it’s fit, you can broadcast from our marketplace. We’ll mark it up, say 5% or so,” and then if you end up meeting that customer at a trade show or your sales rep calls them up and you find out they’re on BluePallet and they’ve got a trade pass, they’re like, “Oh, great, let’s exchange straight pass IDs.”

Scott Barrows (12:28):
Now we get a free trade zone. Now we can utilize that technology, that Bleutrade and BluePallet built for us. Now we think it’s even better than what we could utilize on Amazon. Now we have our own tool. I think that’s really what started to resonate, and it was probably the best moment I had was speaking to the board, and there’s about 40 of the main presidents and CEOs out in DC, and they’re like, “Oh, can you give us an update of where you guys are at?” I spoke about the product, and then as the presidents and CEOs were going around, they started speaking about it. It was like, “Well, now that we have our platform. Well, now that our platform does this,” and so that was probably one of the best validating moments of what we had tried to do.

Scott Barrows (13:09):
One of your articles that we read at the very beginning was that the only way you’re going to protect yourself the way these industries are from these monopolistic marketplaces is, you got to build your own solution, and it’s too hard to expect, and it’s not fair to expect, a chemical company to build a platform that could compete with Amazon. People have tried building their websites and maybe connecting with a couple of other people, but you’ve really tried to come in to this industry and say, “We’re going to listen to you.” We actually sponsored their trade association for two years before we even had a product. We’re like, “Just tell us what you need to feel safe and secure to be able to sell online and feel like you’re actually getting value and it’s building and empowering your business instead of reducing it.”

Scott Barrows (13:48):
With these two-sided marketplaces, the two main things we’ve seen over, and over, and over is commoditization of prices, but also commoditization of services for the distributors. At the end, you can look at other industries that it’s affected this, and I’ve come from some of them, and I’ve seen it and it’s not fair to the distributor. Then it ends up not being fair to the customer because you think you’re getting more and more value by being able to buy something for one penny less or $1 less, then everybody is just battling to build the cheapest product and every other value that a distributor can bring that is true value is not representative in the offerings.

Scott Barrows (14:21):
We’re really, really trying to build a new model that protects the integrity in the value of what a distributor does, and also a supplier, and allow them to build out one-to-one relationships through a network and no marketplace can take that away from them. Then they can just utilize the marketplace on the side when they feel like that benefits them as well, but they’re not stuck to just that marketplace or stuck remaining a linear business model. They’re literally sitting at the end of this dock saying, “Do I have to jump off?” Kind of like the Nokia CEO debated that.

Alex Moazed (14:52):
I love the thinking there, and I think it is, particularly for some of these B2B distribution verticals, where you got just heavy stuff, much more hyper localized networks. You have a very different model of level of supply chain fragmentation. I think you can only go against the grain so much when market conditions are what they are, and ultimately, they’re not as fragmented compared to B2B distribution verticals where you’ve got pack and ship is 60, 80% of the stuff. That really changes the game for how you can solve that chicken and egg problem. I really like this approach and love it, see that you got 37 distributors here kind of in the beta that are members of the NACD. You also have a $4 million fundraise, which kind of went along with merging in the FinTech company, kind of rebranding here as BluePalett, and kind of formalizing all of this stuff here.

Alex Moazed (16:19):
The next topic I’m going to talk about on the show is about rising VC valuations and the state of the private tech company industry, and what’s going on with the multiples there, but this round, I actually don’t know if there was a VC or if this, it looks like you got a lot of industry veterans that were involved in this. Is this something that was driving this, like saying, were you looking at the traction that Echo System already had going into this and what Valachi had also, and you say, “Hey, we were doing this much volume,” and that was a way that you kind of built into the $4 million number, and obviously projecting out what you need the money for going forward? What was it like navigating the valuation environment and the deal structuring environment for this deal that you just did, kind of given all the other stuff that you had in motion?

Scott Barrows (17:30):
It sucks. It’s been an interesting path. I mean, the four million that, we had three million raised through three separate seeds when we were just Echo System, and the majority of that money came from industry veterans, like you were talking about. We had Terry Hill, the former president of Univar, they were the largest distributor in the world when he was at the helm, and then two of the former chairman of the board of NACD, Matt Brainerd and Bruce Schechinger, pitched in as well.

Scott Barrows (17:59):
You wanted to find high integrity individuals within the industry that could get behind us, and they straight up said to, they’re like, “Listen, integrity and also our name, we built it up for 30 years each of us, and so we’re not going to come in and be a part of something that’s going to actually be detrimental to distribution in our fellow companies and partners. So, if we get behind this, you have to give us your word that this is going to help distributors out, not hurt them.” So, we’re like, “Yes, absolutely. Here’s the plan.” We laid it out to them and they’re like, “Oh, we get it. We see why this is different.”

Alex Moazed (18:33):
They wanted some board seats or some more control usually, right? It’s not just give me your word, Scott, it usually comes with a little bit more teeth.

Scott Barrows (18:40):
I don’t want to give the full details, because then all of a sudden, everyone else is going to be like, “Oh, well, he only gave that and he got this.” Then after the three million, we actually, so COVID-19 hit, obviously, and we had run about a quarter million of just test transactions through the system with our beta group, and then when we received a letter from the White House via our trade association saying, “Hey, we’re having issues trying to source COVID related chemicals, raw materials, and finished goods. If you have any in stock, please let us know,” and then we were seeing all the challenges that states were having bidding against each other for products, and all of a sudden the products were raising up, and price gouging, and all this stuff. I went to our investors and I’m like, “I know this is crazy, but you know, I believe that our platform with our permission based marketplace controls would be perfect to help out the country with distributing this PPE product. Would you allow us to just give it for free to the government and we just run with it?”

Scott Barrows (19:43):
They said, yes, they’d throw in an extra 750K. That ended up, finished off the three million, and then we brought on like 150 companies, some from all different verticals, like the Distiller’s Association, they were using ethanol to create hand sanitizer, and all these other people that were trying to pitch in. We learned a lot like one, don’t pivot to another vertical immediately until you absolutely understand what you’re doing. Number two was, we were getting in the middle of these multimillion dollar transactions between health care providers in the United States that had their traditional supply chains had broken down, and all of a sudden, now they’re having to go source product out of APEC and China.

Scott Barrows (20:23):
They traditionally had a five to seven day onboarding process to vet a new seller, make sure that their credit was good, make sure they had insurance, make sure they had referrals, and they couldn’t do that during COVID because they’re like, “Oh, we need these Cranberry gloves are N95 masks,” and they would be gone in 10 seconds if you found the supply. You just had to give a 50% deposit or 100% deposit via escrow immediately. We’re like, “Man, we can’t get in the middle of these transactions. We don’t have the right technology.” Then some of these companies were going offline and then those are the transactions that you would see about or read about in the paper where it’s like, “Healthcare company buys $5 million in N95 gloves, truck shows up to warehouse in Shanghai, nothing there.”

Scott Barrows (21:06):
This was happening all over the place and we’re like, “We have to find a better, if we didn’t solve it now, but we’re going to find a way to solve it moving forward.” That’s one of the main reasons why we had merged with that FinTech company, is because it allowed us to be able to create this core transaction that did all the payment systems, the escrow, the ACH, the booking of freight, everything online or in our platform and not offline. The second part is, it allowed us to build that trade pass technology, where someone signs up in 15 minutes, and then we check 2000 different data points about that company, about credit insurance, are they on a watch list, anything like that. Completely verify them, all their locations, their certificates, then they have this dynamic 24/7, 365 passport, that allows them to do business with anybody that they want to.

Scott Barrows (21:53):
Then that trading partner, when they exchange straight pass IDs, they can instantly see who they’re going to be deciding to do business with, and all the information is verified. Reducing that friction and also that risk was a huge, huge thing. It’s going to help build our network out and make it a much more safer way and faster way to do commerce. That was one of the biggest things we learned from doing that COVID-19 pivot. Like I said, I wish we would’ve done more. We tried really hard to make a huge impact, but we do feel very confident that when the next huge thing happens, that we’re going to be a big help to it.

Alex Moazed (22:27):
Awesome. No, that’s helpful. If some of this money was coming in, it sounds like this was somewhat over a period of time. You raised a couple of million dollars earlier, then you end up with a little bit more put in over COVID. Were you raising it at the same valuation that you got at the two million, or did you also increase the valuation when you put in some of the, and that could be hard if you’re going to increase the valuation and it’s during COVID and there’s just chaos going on?

Scott Barrows (23:00):
Right. We increased the three seeds each time, and then when they pitched in for COVID, we just did a note and we just locked it in at the value before for a cap, and that was it. We wanted to throw our investors a bone a little bit on that one. I think you’re asking about valuations as far as us moving forward, I think we’ve talked that we’re in the middle of our series A right now. We’re in an interesting spot where it took us about three to four months to merge the two technologies between the FinTech technology in our marketplace technology and then also finish off the trade pass 1.0. We launched that, I think last Monday we came out with that, and so we’re getting the 37 companies on. It’s actually a mix of distributors, manufacturers, and end users.

Scott Barrows (23:46):
I mean, we’ve got about 50,000 transactions that have just kind of trickled through real quick, but everyone’s just kind of getting their product catalogs uploaded and all their users up, which only takes about a week or so. In the next month, we’ll really see what we’re starting to push through. On the valuation, we’ve kind of positioned ourselves as post-product pre-revenue. We’re in a kind of pilot phase right now, and that tough with VCs and PEs, they’ve got their metrics they look at and their KPIs and we completely understand that, and so probably talked to 45 VCs so far over the last six months. We’re looking for somebody that understands that we are addressing an extremely large $5 trillion market, and we built something completely new in a different model, not a traditional two-sided B2B marketplace.

Scott Barrows (24:37):
We’re a market network, and we really feel that this is going to be the most beneficial thing to all participants, this new model that we are building, that we have built, and are looking for the right investor, investors, to come in and get behind us to continue to allow us to build out these tools that the industry is asking us to create for them. I think we’ve got kind of a limited down, we got it pretty narrowed down to probably the final five or 10, and I think it’s going to be a mix of strategics within the industry, and then also from a couple of VCs.

Scott Barrows (25:06):
The key with the strategics, that’s been hard with some of them is that, some of the larger guys that have come in that have looked at this opportunity, they want to take it all, and we’re like, “You’ve got to understand what we’re building and respect what we’re building, we’re building a network. We don’t root for any particular company. We don’t have any horse in the race. We are just trying to provide everybody with a tool and a weapon that they can go to battle against these monopolies. Just because you are the main investor in our company, you’re not going to get any special access to data. You’re not going to get any different tool that someone else is.”

Scott Barrows (25:37):
Some of the larger companies are having a hard time grasping that. They’re used to being the big behemoth and just taking it all. Its taken a little while to find the right partners that understand that there’s going to be a network, there’s no way that some company’s going to survive and win by just having a digital linear business model, just having a website where someone comes on and buys their products, and then they have to go log into 27 other websites for different products. They need to be able to be a part of a network and have that type of buying experience. We’re starting to get to the right people.

Alex Moazed (26:09):
Makes sense. My last question there is NACD, do they get warrants or any kind of upside for helping to bring more distributors, “Hey, if we can get 50 distributors on here, give us some share in all the value that’s going to create for the company,” or is there any kind of long-term alignment there for all the value that they’re bringing in these early days to BluePalett?

Scott Barrows (26:36):
Yeah. I mean, they have very strict guidelines and so they’re a 501(c)(3), because of that, they can’t openly promote a particular product, but we do offer a model that we will be replicating with other trade associations where we do want to give back if they’re people in their industry or their trade association or doing transactions, we want to be able to share that with the trade associations, because the stronger the trade associations get the better it is for us, and because they are able to do a certain type of vetting that we’re unable to do. The more we’re able to work with people that are in these trade associations that go through the two or three year audits, and the more that we can funnel people into that situation, the better for us.

Scott Barrows (27:23):
They also do a lot of stuff as far as regulatory, and they work with, this last week we were meeting with congressmen and senators and talking about important things that have to do with transportation and logistics and tariffs. That’s stuff that we all want to support. It just makes sense, and it’s kind of a win-win situation. We just say, “Listen, we want to build this for you. We’re not taking this square peg and trying to cram it in a round hole. You just tell us what you want us to build. We’ll build it.

Scott Barrows (27:51):
We also want to support all your guys’ efforts as well.” The president of NACD, the first time I met him, he’s like, “You can’t fake this. You can’t come in here and say you’re going to be a part of this and that you actually care about the distributors and then walk off, and then we’ll have to make some money off it. You have to be here and you’ve got to do the grind. You’ve been to every conference, we’ve gone to Mineral Wells, Texas, and Tuttle, Oklahoma, and got with everybody everywhere else that you can imagine to talk with everybody. We’re bought in.” These are our partners.

Alex Moazed (28:17):
That’s great, man. Well, Scott, we wish you the best. Thanks for coming on the show and sharing some of the BluePalett story. I think it’s off to a great start here and off to a great start, which means you’re a few years into it, but you know, lots of exciting stuff in the future that I think it’ll hold for you and the team. Great to have you on, great hear some of the updates, and definitely stay in touch.

Scott Barrows (28:43):
All right. Thanks for all you guys do for us too. We appreciate it. Keep all the great content coming.

Alex Moazed (28:47):
Thanks, Scott. That was really great to have him on from CEO of BluePalett, and lots of interesting activity going on with B2B marketplaces. I really think that over the next few years, we’re already starting to see some B2B marketplace unicorns, but over the next few years, we’re just going to see more and more of what we’ve been seeing in B2C for the past 20, 25 years. Really, the next battleground is B2B distribution, and B2B distribution dwarfs the size of the B2C market. It is easily the largest single industry if you add up all the different verticals of B2B distribution, the largest single industry in the United States. Some estimates between six to eight trillion dollars in size when you look at all the different verticals, chemical being one, there are a myriad of others. Lots of great activity there.

Alex Moazed (29:42):
Check out our top 50 B2B marketplace ranking, which came out recently, and that I mentioned BluePallet is a part of.

Alex Moazed (29:50):
Hi, I’m Alex, thanks for watching the show. Make sure to hit that subscribe button, but even better, make sure to follow us on Odysee, follow us on Rumble, and text us, 203-646-5159. Text the word monopoly. You’ll be subscribed, you’ll get updates about when we’re going live, our latest videos, and we’ll send you even a little goodie bag. In the event that we all get banned from big tech, we’ll still be connected.

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