VERT...took a shot today...............local outfit............
ARCHIVE
February 4, 1999
The Web's Next Big Thing?
By Gerri Willis
(Editor's note: We've heard from several readers who've noticed that the VERT symbol currently
belongs to a company called Vertica Software. That's a temporary condition. According to the equity
syndicate department at Lehman Brothers, one of the investment banking firms bringing VerticalNet
public, Vertica Software will be changing its ticker when VerticalNet issues shares to the public, which
could happen as early as Wednesday.)
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.
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