Changing the money rules in the b-to-b game
May 16, 2000
by Adam Feuerstein
It can be a confusing time for business-to-business ventures seeking
money. The window for initial public offerings is closed, yet investment
bankers believe tremendous market opportunities abound. The pockets of
venture capitalists are overflowing with cash, yet many have stopped
returning phone calls, or are squeezing entrepreneurs with stingy
valuations.
What's a poor b-to-b company to do?
Hunker down and work harder at solving strategic e-business problems.
Think about self-funding, or at least vastly reduced outlays from VCs.
Get to profitability fast, if not sooner. And bolster your revenue streams
by adding a menu of value-added services, instead of just relying on
ever-diminishing transaction fees.
But despite all your best efforts, many b-to-b companies will fail.
Bankruptcies will happen; and the phone call you take from your friendly
investment bank may not come from the IPO department, but from some
M&A guy seeking a buyout or a merger.
Time to get real
It may not be fair, say venture capitalists and bankers attending this
week's Ground Zero b-to-b e-commerce conference, but it is reality, so
make the best of it.
"The market correction can be a good thing," says Gautam Prakash, a
general partner with Bessemer Venture Partners. "It gives the best
companies time they need to make mistakes and build a long-term value
business before they go public. And when they do, the IPO will be
backed with real sales and a path of profitability."
Bessemer is an early stage investor in b-to-b companies, so he's not as
obsessed with quick exit strategies. Nevertheless, Prakash says his firm
has changed its investment focus somewhat to reflect the changing
market conditions.
The firm is less interested in funding new Net markets, mainly because
the field has become very crowded. B-to-b infrastructure companies --
those that build or provide services to Net markets -- are much more
compelling, he says.
Betting on infrastructure
Eric Upin, a b-to-b analyst with Robertson Stephens, agrees.
"The best play today is b-to-b infrastructure because at the end of the
day, a Net marketplace is just a website, and websites are not very
defensible," he says.
"But the b-to-b market is very complicated and will take 10-15 years to
fully build out. That's a lot of trenches to be dug and pipe to be laid, so I
would focus on companies building and laying the pipes."
Specifically, Upin believes there is a lot of room for growth in companies
providing value-added services to Net markets. For instance, as small
suppliers are brought into trading networks, buyers are going to demand
credit and escrow services to guarantee payment.
There are also opportunities in logistics, security and what Upin calls
"reconciliation services," which help buyers and sellers process the
inevitable blizzard of documents and paper that arises from e-commerce.
Izhar Armony, a general partner at Charles River Ventures, another
early stage VC firm, warns against shifting a company's focus to fit into
the hot trend of the moment.
"We've seen b-to-c companies transform into b-to-b companies or
b-to-b-to-c companies -- it's dangerous," he says. "Instead of favoring
specific categories, we look for strong management teams that are
solving problems in a unique way."
Alas, the b-to-b market is ripe for consolidation. By some estimates,
there are four to five new Net markets being formed each week.
Broadview Associates, a high-tech M&A firm, estimates there are
more than 400 Net markets in operation or announced, with as many as
20 in each vertical industry competing for the same buyers and sellers.
Expect consolidation
"We're going to see a lot of consolidation and a lot of bankruptcies," says
Paul Crisci, a managing director at Broadview. The M&A game in the
b-to-b market will play out this way, he believes. Net markets that lack
transactional liquidity and cash to survive -- most of them, he says -- will
go out of business or merge with other similar Net markets so that soon
there will only be three or four Net markets per vertical industry.
The larger, publicly held b-to-b companies, especially the existing
software and infrastructure firms such as Ariba (ARBA), i2
Technologies (ITWO) and Commerce One (CMRC), will cherry-pick
the cream of the crop for acquisitions.
"But it's a buyer's, not a seller's market these days, so these companies
are going to be much more selective," Crisci says. "They are going to
look for companies with strong business models and they won't be paying
exorbitant sums, they'll be very cost conscious."
But Bessemer's Prakash warns against Net markets rushing to merge.
"One weak exchange merging with another weak exchange just makes a
larger, weaker exchange," he says.
And while the IPO window is shuttered for the moment, the equity
drought won't last forever, believes Robertson Stephens' Upin.
"The earliest we'll see the IPO window open up again is the fall," he
says, depending, of course, on interest rates and whether investors put
their faith and money back into the Nasdaq. |
