Net firms consider trade instead of cash

Outfits that let companies barter goods and services with each other or with consumers already exist offline, but the e-commerce wave appears poised to lift the barter industry.

Paul Festa Staff Writer, CNET News.com
Paul Festa
covers browser development and Web standards.
Paul Festa
4 min read
The new thing in e-commerce may be to let firms do business the old-fashioned way--by trading without money.

Outfits that let companies barter goods and services with each other or with consumers already exist offline. But the e-commerce wave appears poised to lift the barter industry, with some of the Internet's major venture capital firms putting their money behind players in this nascent market.

Kleiner Perkins Caufield & Byers, which has funded such Internet successes as @Home, Excite, America Online and Healtheon, is nurturing a business-to-business barter firm, code-named Doublebill, according to sources familiar with the company. Doublebill and Kleiner Perkins did not return calls about the start-up.

Another investor in Doublebill is Sanford Robertson, founder of Robertson Stephens. Other Kleiner Perkins venture capitalists on the Doublebill board are Vinod Khosla, former founding chief executive of Sun Microsystems, and Will Hearst III, former chief executive of @Home Network and editor and publisher of the San Francisco Examiner.

Investors and executives are hoping that the Internet will provide the perfect platform to trade goods and services. Traditional bartering can be limited to certain geographical areas, but online exchanges connect users on a global scale.

While Kleiner Perkins incubates Doublebill in secret, another barter firm is just starting to take the wraps off its plans. BarterTrust.com, funded by Vector Capital, El Dorado and Draper Richards, has acquired a trio of brick-and-mortar barter houses in an effort to launch a virtual bartering community with a critical mass of traders.

"Bartering is a market that is ideally suited for what the Internet is really good at," said BarterTrust chief executive Mike Edelhart, former president and a founder of Third Age Media, vice president of Softbank and 13-year Ziff-Davis veteran. "It's an existing business that already serves hundreds of thousands of companies, large and small, and produces significant revenue."

The brick-and-mortar barter firms have inherent problems that the Web is good at solving, Edelhart said.

"The typical exchange allows you to interact with a few thousand businesses, typically constrained by a geographical area," Edelhart said. "With the Internet we can create a large-scale, strongly backed, worldwide exchange for these types of transactions."

Part of the challenge for the new online barter sites will be to assemble a critical mass of traders so that there are goods and services to trade. To that end, Edelhart says his brick-and-mortar acquisitions--barter exchanges on both coasts and in the Midwest--have amassed a user base of 10,000 trading customers, with $65 million worth of trades in 1999 and $10 million of revenue for BarterTrust.

In BarterTrust's model, users assign a price to their goods in virtual "BarterTrust dollars" to establish their value in bartering. A lawyer, for example, could list services at $100 per hour, and an office supplier could list surplus desks at $100 apiece. If the lawyer and office supplier decide to barter goods for services, each pays a commission to BarterTrust, which Edelhart says will be less than the typical commission of 15 percent per participant in the barter.

BarterTrust plans to launch its Internet trading exchange later this month, with an official launch to follow in the new year.

Despite venture capitalists' enthusiasm for bartering, one company has gotten a frigid reception on Wall Street since taking its barter operation to the Web.

Ubarter.com began in 1996 as International Barter Corporation, which merged with Seattle-based Cascade Trade Association. The combined company went public in February 1998, subsequently acquired Barter Business Exchange, and changed its name to prepare for its reincarnation as an Internet company.

The stock has languished in the single digits, however, as the company has posted steep losses and faced an acute cash shortfall. At the end of September, Ubarter had a deficit of $2 million with less than $400,000 of working capital, according to Securities and Exchange Commission filings.

Ubarter chief operating officer Bob Bagga acknowledged the company's finances were less than optimal, but said its future was bright nonetheless.

"Sure, we'd like to have $50 million to spend, but we're continually raising money, and we're in the process of closing some financing," said Bagga, who declined to discuss that financing.

Ubarter has more than 4,000 clients and last month facilitated more than $2 million worth of trade, according to Bagga.

"We're very pleased at how this market is shaping up," Bagga said. "When you've got Kleiner Perkins and BarterTrust getting involved, it certainly validates what you're doing."

However, analysts caution that bartering presents unique challenges and is unproven on the Web.

"The whole idea of exchanging goods and services between businesses is fairly new and not easy at all," said Albert Pang, analyst with International Data Corp. "It's much more difficult than exchanging something for money, and the potential is more limited than in an open trading system."

Trading community open exchanges let buyers and sellers, typically within a vertical industry like steel or other commodities, post their goods and services, but buyers pay cash rather than exchange their wares. Pang said there were at least 200 of these trading communities for various vertical sectors, and estimated there would be at least 1,000 a year from now.