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Web software aggregator Jamcracker scores $100 million

The funding round marks a significant endorsement for a young company in the emerging application service provider market.

Jamcracker will announce a $100 million round of funding Wednesday, a significant endorsement for a young Web company in an emerging market.

The massive funding round comes to Jamcracker, an aggregator of Web-based software applications for businesses, as many investors are scrutinizing potential investments more carefully. Many analysts believe venture firms are selectively investing larger amounts of money in a more limited number of companies that backers believe have the best chance at success.

Recent examples of communications and Internet companies receiving large rounds of funding include Yipes Communications, which netted $139 million, and Intira, which garnered $140 million.

Sunnyvale, Calif.-based Jamcracker, founded in 1999 by former Exodus Communications executives, is part of a growing market segment known as application service providers (ASPs). These companies, such as Corio, FutureLink, USinternetworking and Agillion, among many others, rent software applications to business customers for a monthly fee, freeing small and midsized companies of handling the server computers, software licenses and other infrastructure and management aspects.

Analysts say that because the ASP market is new, the various business models will be validated or disproved over time. Most ASPs are scrambling for customers and lining up partnerships.

"There are few, if any, ASPs that are showing positive cash flow at this point," said Greg Blatnik, vice president at Internet research firm Zona Research. "So that obviously raises some questions about what's in the future. And the market is still embryonic."

Soros Private Equity Partners affiliates led an $85 million Jamcracker round of preferred financing. Investors included investment banks Morgan Stanley Dean Witter, Goldman Sachs, Credit Suisse First Boston and Internet Capital Group, among others.

Jamcracker also secured $15 million in equipment financing from several investors to buy Internet infrastructure gear. Soros partner Neal Moszkowski will join Jamcracker's board of directors as part of the funding.

According to executives, Jamcracker, which has about 50 customers and 250 employees, will use the funding to expand and purchase additional software licenses necessary for its business.

"We need to have the people, the real estate and the resources in place as we grow," said Jamcracker chief financial officer Herald Chen.

Blatnik believes companies such as Jamcracker may have difficulty convincing businesses to outsource their critical technology needs.

"I don't believe any ASPs have enough customers. An ASP has to have thousands of customers out there banging on similar implementations of an application in order to gain some efficiencies," Blatnik said. "There's several barriers to why organizations don't use ASPs, and one is that many businesses feel they can do this stuff themselves."

But a shortage of qualified technology workers has helped encourage many companies to outsource their software application needs, according to analysts. As a result, the ASP market is expected to thrive.

Market research group Gartner recently predicted the worldwide ASP market will reach more than $25.3 billion by 2004. In 1999, Gartner analysts said the ASP market was worth $1 billion and would reach $3.6 billion by the end of 2000.

Jamcracker's twist on the market includes offering a package of Web-based services from about 20 different partner ASPs. The company offers email, virtual private networking (VPNs), remote access, recruiting tools, human resources programs and other business-specific applications via a portal-like Web site called Jamcracker Central.

"They don't have time to evaluate all of these new technologies and integrate them," Chen said. "We want to make it easier for the customer to use these services."

Although there are challenges ahead for the industry, analysts admit the large rounds of funding--although they don't guarantee success--provide substantial support for companies such as Jamcracker.

"It's a huge amount of money. I still think it's an uphill battle for Jamcracker, though this funding will help them," Blatnik said. "At the end of the day you need customers, and lots of them."