The next big thing

Don't look now, but everyone is focused on the next big wave of Internet investing: business-to-business e-commerce.

4 min read
Taking care of business,
and working overtime.


Don't look now, but everyone is focused on the next big wave of Internet investing: business-to-business e-commerce (B2B).

The logic here is simple. To date, the majority of the value creation in the Internet has come from consumer-related deals: Yahoo, Amazon, eBay. If you recognize that real-world B2B commerce dwarfs real-world B2C (business-to-consumer) commerce, then it seems only logical that B2B Net companies should offer value creation alternatives many times larger than we have seen with the measly consumer.

The Internet will have an unquestionably large effect on business as we know it, and there will undoubtedly be new players that rise to success at the once-in-a-lifetime opportunity. In fact, B2B outfits such as Ariba, VerticalNet, and Chemdex have already soared to billion-dollar market capitalizations.

Most of the newer B2B Internet start-ups are attempting to build exchanges, or "vortexes," that link buyers and sellers in a given industry. They hope to become the trading hub for an industry and to take a few percentage points of each transaction. The sky would be the limit.

In reality, spinning up these networks is much easier said than done, and the lessons of the B2C world may be more harmful than good in terms of giving us a road map for success. The differences are quite significant. The good news: Those who get to the other side will have profitable and highly sustainable businesses.

Decisions, decisions
How much forethought goes into an individual's decision to replace driving to Barnes & Noble with shopping at Amazon.com? Despite the potential apprehension novice Web surfers may feel when entering their credit card numbers online for the first time, one must admit that the complexity of this decision-making process is minimal.

The opposite is true for a business considering whether to partner with a B2B Internet start-up. Business decisions require multiple people, multiple levels of approval, and, often, a return-on-investment analysis. Furthermore, actions are more permanent, and mistakes aren't easily forgiven. Don't expect adoption rates that you have come to love in the consumer world; they won't materialize. A world-class direct sales force with a strong understanding of the marketplace will be required to facilitate customer adoption.

Relationships, relationships
The old saying that "it's not what you know, but who you know" is quite relevant in the B2B space. Johnny buys his industrial parts from Fred, who has been calling on this account for 15 years. Johnny and Fred grew up together, and their sons play little league baseball together. They also have lunch once a month at the best steak house in town, courtesy of Fred's company.

You can run ads on America Online until you are blue in the face and have trouble winning this account. This is not about eyeballs and banners and conversion rates. You have to get in the trenches, and you have to court the accounts. Leave the banner ads at home--in this market, victories will be won one customer at a time.

Marginal impact
Geoff Moore, author of Crossing the Chasm, points out that the act of connecting individual consumers electronically is truly revolutionary. He also points out that businesses, especially large industrial ones, have been connected electronically for some time, through technologies such as electronic data interchange or frame relay.

Insurance, finance, banks, auto dealers, major retailers, and many more industries were "linked" prior to the Internet. New B2B start-ups need to seek out markets where previous generations of technology have not already exploited inefficiencies. Highly fragmented, widely distributed markets should be favored over large, consolidated industries.

Chicken and egg
To attract sellers, you need to aggregate buyers. To attract buyers, you need to aggregate sellers. This enigma occupies approximately 90 percent of the brainpower of top management at a B2B start-up. Many people say you need to attract either the buyer or the seller first. The trouble is that neither is right; you need both.

This difficult problem will cause many B2B start-ups to partner with real-world companies that hopefully can kick-start the network. Companies with true market momentum that are virally attracting both buyers and sellers should have valuations that are orders of magnitude above those that do not.

Location, location, location
When considering B2B opportunities, keep in mind that low price-weight ratios wreak havoc on the marketplace model. Low price-density items such as steel, textiles, and grain have significant shipping, handling, and storage costs. This diminishes the size of the tradable "marketplace" and lowers the value of the overall network.

In addition, it exponentially increases the number of buyers and sellers needed to kick-start the overall marketplace. High price-density items such as diamonds and financial products (no weight!) should be preferred, as the entire world can become a singular trading community.