Softbank bullish on b-to-b
May 05, 2001 12:00 AM ET
by John F. Ince
From the May 2001 issue of UPSIDE
magazine
Scott Russell, an engineer by training, is a
general partner at Softbank Venture
Capital Group.
He spent 16 years working in the MIS departments of large
investment banks, including Goldman Sachs, J.P. Morgan and
Swiss Bank. He joined Softbank Venture Capital in 1996,
specializing in enterprise software, e-commerce and service
companies.
UPSIDE selected Russell to join us in the b-to-b close-up interviews
because, with $2.5 billion under management, Softbank has been
one of the most active VC funds in the b-to-b space.
Softbank's portfolio contains 150 leading technology companies,
including: Art Technology Group (ARTG), Buy.com (BUYX),
E-Trade (ET), Interliant (INIT), Investmart, IPrint.com (IPRT),
Net2Phone (NTOP), PeoplePC (PEOP), Preview Systems
(PRVW), Support.com (SPRT) and TeraBeam. In this interview,
Russell gives us an inside look at how Softbank is making tough
decisions in the wake of the recent market corrections.
Upside: B-to-b has been on a pretty wild ride. A year ago, it
was the darling of the investment community. What made
b-to-b so attractive?
Russell: Initially, everyone got excited about the realization that
business customers have three to four times as much money to
spend on technology compared with what aggregate consumers
spend. With that macro view, we explored ways in which the
Internet could be exploited for business markets.
U: What has changed about the underlying reality of b-to-b in
the last year?
R: Nothing has changed in the underlying reality. The underlying
reality continues to be that corporations still have lots of money to
spend on Internet technology and Internet processes.
U: Does that mean you're still bullish on b-to-b?
R: Absolutely.
U: Are you actively looking for new investments in b-to-b? If
so, what are you specifically looking for?
R: We are. This is what's changed from some of the more visible
b-to-b companies. One example of how things haven't worked out
well is the exchange model, whether they are a consortium of
existing players or brand-new Internet companies.
For exchanges to be successful, participants have to dramatically
change the way they currently work; and, despite the theoretical
benefits, corporations haven't been willing to make the necessary
changes. It takes a lot more process change than the Internet
naturally provides. That was a hard lesson to learn.
These marketplaces haven't been the exciting new venue people
thought they would be. On the other hand, enterprise-software
companies that are focused on the supply chain hold a lot of
promise. We've got a lot of investments in this area, and we see
further opportunity.
U: What are the key factors for a successful b-to-b enterprise?
R: A key success factor is first identifying the major problems.
Second is identifying a management team that actually
understands the domain. Third is focusing on customers that are
early adopters. For example, one of Ariba's (ARBA) first customers
was Cisco Systems (CSCO), and they talked to Cisco and said, "If
you want to get closer to our customers, you can use our software
to do that."
U: Shifting gears, several of the Internet companies that were
flying high a year ago have seen their stock prices plummet.
What do you make of all this? Have we seen the bottom yet?
R: Yes and no. It's time to get back to basics and study each
company's fundamentals. In the go-go years, investors bought
anything with a dotcom after its name. The March market
correction pushed all technology stocks downward. Companies
with faulty business models will continue to decline and will
eventually go out of business.
On the other hand, we believe some very promising companies
were swept under the rug, and bargains can now be found by
investors who are willing to do their homework. My partners and I
have started to look for the pearls.
U: Between the transaction-based revenue model and the
licensing model, which do you think is more viable in the
long run?
R: Right now, we're definitely much more focused on the licensing
revenue and the subscription/ASP model. I'm personally very bullish
on the subscription model. For example, Support.com was one of
the pioneers in this area, and they've found that corporations like
the flexibility to "rent" the software over a three-year period.
We like that better than the transaction model, because the Global
2000 companies -- the ones with the deeper pockets -- are a lot
more familiar with the licensing model. They've been using it for over
30 years. Because they understand that model, the
decision-making process isn't very difficult. Asking for a split of
transaction revenue is more of a challenge. It's not impossible, but
it's conceptually more novel to most people, and, therefore, you get
more resistance.
Also, from the entrepreneur's point of view, it's more difficult to
project how much revenue you will have. Over time, you might
make a lot more money with the transaction model, but you also
might make a lot less. Because it's less predictable, we've been
avoiding it for now.
U: Will the downturn of the stock market cause a slowdown
in the pace of capital flows through the VC process?
R: Yes. We're already beginning to see some of that now. But the
first-class venture capital firms will continue to see quality deal
flows, and they'll continue to invest, albeit at a slower pace.
U: Can we infer that we will start to see some of the
lower-tier firms struggling a bit?
R: Absolutely. There will be a shakeout in the venture capital world.
Many new firms joined [the VC community] quite recently, when
capital was more plentiful and there were a lot of entrepreneurs out
there.
All of that is beginning to slow down. There are fewer good-quality
deals out there, and the good ones will gravitate toward the
higher-quality investment firms. These are definitely sobering times.
People are being a lot more thoughtful about the challenges that
are facing entrepreneurs.
John F. Ince is a freelance writer based in Sausalito, Calif. |
