GK...here is what you are looking for....
More background on VerticalNet from SmartMoney:
The Web's Next Big Thing?
By Gerri Willis
IF YOU THOUGHT the Internet was only about sex and
shopping -- and why wouldn't you after Wednesday's
VictoriasSecret.com network-stopping online fashion show --
we have some news for you. The real money may be in such
sleep-inducing URLs as plantautomation.com,
testandmeasurement.com and solidwaste.com.
That's the hope anyway of VerticalNet, a tiny company that
builds and aggregates these hard-core business sites and
which plans to launch its initial public offering next week.
VerticalNet is looking to make its mark in the expanding market
for business-to-business e-commerce. Think consumer Web
buying is big? It pales in comparison with corporate America's
spending. Businesses will spend $300 billion over the Internet
next year, compared to just $30 billion by consumers. "It's a
10-to-one proposition,'' says Paul Cook, manager of Munder
NetNet (MNNAX), an Internet fund that returned 98% last year.
"But investors haven't yet completely embraced it."
The segment won't be overlooked for long. Formed
three-and-a-half years ago, VerticalNet took dead aim at this
market by developing online communities for 31 industries from
water engineering (wateronline.com) to medical design
(medicaldesignonline.com). Visitors get detailed information
such as product reviews, job listings, information on industry
developments and chat boards where they can talk to experts.
Because of its focus, VerticalNet advertising reps can brag that
15% to 20% of its visitors are employed as buyers. Competitors
are mostly fledgling operations, none of which are public.
For the nine months ended Sept. 30, 1998, VerticalNet's
strategy yielded just $2.3 million in revenue on losses of $9.8 million. With its public offering under the symbol VERT, the
company hopes to raise $40.25 million to pay back its initial investors and fund the development and acquisition of more
Web sites. But the big payoff for investors will come as the company expands its role as an intermediary to take fees on
e-commerce business. Of course, there's no guarantee that the company will be able to make its strategy pay off. Just
reading the company's S-1 filing with the Securities and Exchange Commission is enough to make any investor blanche.
"To date, we have not generated any material revenues from e-commerce," it states. "We do not anticipate generating
significant revenues from e-commerce until, at the earliest, 2000, if ever."
And certainly, others have tried and failed in this category. Not even former Lotus chairman Jim Manzi could resurrect the
ambitious Industry.net, a sort of Nasdaq-like trading system for industrial vendors and buyers. After six years of struggle,
that company filed for bankruptcy-court protection 18 months ago.
But Cook and others believe that VerticalNet may have cracked problems that hamstrung Industry. First off, the
company's founders, Michael J. Hagan and Michael P. McNulty, two former college chums, aren't trying to provide the
world's biggest catalog of industrial goods. Instead, they've narrowed their focus to industries that could benefit from a
centralized location for trading information and tips. For the individual sites to work, says Steven Bell, an analyst at
Forrester Research, VerticalNet must focus on industries where competitive barriers are low, information sharing is high
and players tend to relate to each other as professionals rather than employees of specific companies. "They're very
sophisticated about picking a market to go after," says Bell.
Second, the company has some pretty impressive backers. Internet Capital Group, a Wayne, Pa., firm that invests in
start-up companies in the Internet business-to-business arena, owns 49% of VerticalNet (and some 39% after the IPO).
In turn, ICG's investors include Compaq Computer (CPQ), GE Capital (a unit of General Electric (GE)), Comcast (CSCK)
and Safeguard Scientifics (SFE), a public venture fund that backed companies like Novell (NOVL) and Cambridge
Technology Partners (CATP). Internet Capital has helped the company land some marquee partners and executives.
VerticalNet has a three-year agreement with both Excite (XCIT) and AltaVista, a division of Compaq, to develop an
industrial channel for the search engines, and its CEO of 18 months, Mark Walsh, is the former America Online (AOL)
senior vice president who founded that company's business-to-business channel called AOL Enterprise.
Cook cites another advantage to VerticalNet's business model: It has the potential to become profitable far faster than its
rivals, which target consumers. Remember AOL? It is generating earnings now, but AOL was in the red on and off from its
founding in 1985 until 1997 because it was spending roughly a third of its revenue carpet-bombing the country with
diskettes. It's the same kind of marketing spending that keeps companies like Amazon.com (AMZN) from being profitable.
But Cook says that companies targeting businesses will have to spend far less to get the attention of users. "Businesses
are less interested in brand names," he says. "You provide them with a value proposition and they will come."
VerticalNet isn't achieving those advantages yet. Sales and marketing costs of nearly $5 million accounted for the biggest
piece of the company's expenses. And how long it will take to become profitable is anybody's guess. The good news is
that revenue is growing at an average of 48% a quarter from advertising. And the potential in the business-to-business
segment is pretty awesome. |
