Everything Google Just Announced Pixel 7 Pro Phone Pixel 7 Phone Pixel Watch iPhone 14 Plus Review Audible Deal Prime Day 2 Next Week Pizza Deals
Want CNET to notify you of price drops and the latest stories?
No, thank you

VC firms target business marketplaces

Online retailers get all the glory--and most of the investor enthusiasm--but venture capitalists are increasingly putting their money into firms that serve vertical, business-to-business markets.

While most investor attention is focused on consumer shopping online, several venture firms are placing big bets on industry marketplaces, an emerging category in business-to-business trading.

These marketplaces have names like e-Steel, Shoe: The Network, Chemdex, and National Transportation Exchange. All take fragmented markets, draw together buyers and sellers in a specific industry, and help them do deals.

"Keeping your buyers in the dark is not a viable model anymore," said Kevin Jones, editor of newsletter Net Market Makers. "The online market makers bring power to the buyers by creating choices."

Chuck Shih, an e-commerce analyst at Gartner Group, estimates about 300 of these "vertical portals" exist today, though not all are up and running yet. By mid-2000, he predicts there will be 1,000, and 7,500 by 2002.

"There are so many different markets out there that are fragmented to begin with," Shih said. "These market makers take these markets and bring buyers and sellers together."

Venture firms like Philadelphia-based Internet Capital Group or ICG, Battery Ventures, Bessemer Venture Partners, Benchmark Capital, CMGI @Ventures have funded online sites that serve niche markets.

So far, few online business portals have caught the attention of Wall Street. The biggest success is VerticalNet, which runs 36 industry-specific Web sites. The company, of which ICG owns 38 percent, raised $64.4 million in a February IPO, going out at 16 and closing today at 109.75, off 3.75. It has traded as high as 149.

As in the consumer market, business buying has been plagued by inefficiencies that are being cleared away by new technologies. "The Internet provides the perfect place for all the buyers and the sellers to come to transact business," said Ollie Curme, general partner at Battery Ventures.

Battery backed into the specialty in late 1997 when it acquired Altra, which makes software for wholesale energy trading. It also runs an exchange where producers sell excess propane, butane, and natural gas.

"That has been highly successful, and the company is slated to go public later this year," Curme said. Now Altra is considering some futures and options trading, and is hoping to cooperate with the Chicago Board of Trade and the Mercantile Exchange, the chief commodity markets.

Battery has funded other business-to-business trading sites such as Pedestal, which runs a wholesale trading exchange for large real estate loans, and PetroChemNet, which trades petroleum-based plastics and petrochemicals. Both markets are now dominated by networks of telephone brokers.

"The Web reduces communications costs to zero, and it can disintermediate a lot of businesses where intermediaries thrive on [having] information," Curme said.

Ravi Mhatre, who leads Bessemer's business-to-business practice, sees the online clearinghouses as an extension of enterprise software packages like PeopleSoft, where much of the value is in the expertise behind it.

"In business-to-business commerce, you make something available as an outsourced software application that codifies business processes between enterprises," Mhatre said, like PeopleSoft does within a business.

A Bessemer venture, Collabria takes small print jobs of business cards or marketing collateral from big companies, puts them into print-ready formats, and delivers them to printers. And the National Transportation Exchange collects information about unused trucking capacity on routes throughout the United States.

Mahtre figures transportation is a $400 billion a year U.S. market, and market size is what venture capitalists covet.

"It become pretty apparent that if this model works and there's real value created, it doesn't take grabbing a big chunk of that market to be a very large company," said Mahtre.

For manufactured goods, online markets can reduce the need to stock up on inventory ahead of demand.

"There are huge costs in buffer inventory," Jones said. "At every point in the chain they stock up too much because they don't know when the next shipment comes in."

Some industry marketplaces perform other functions too, the Gartner Group's Shih said, like helping make price comparisons. Vendors often put features into their products so they can't be directly compared to competitors, but these services can help buyers cut through that marketing clutter.

One of the most famous industry sites is Chemdex, which has created a market for chemical and biological reagents. Its backers include Kleiner Perkins Caufield & Byers, E.M. Warburg, Pincus, CMG @Ventures, Bay City Capital, and K&E Management, a venture firm run by Robert Swanson, a founder of pioneering biotech firm Genentech.

Some marketplaces are more accessible. Shoe: The Network auctions off excess shoe inventory to large and small retailers. PaperExchange.com lets paper mills extend their geographic reach by selling in areas where they don't have a direct sales force.

"In a lot of ways, the Internet enables non-geographical gathering places for buyers and sellers," said the Gartner Group's Shih.

But simply creating a marketplace for an industry isn't enough, according to Shih. Making catalog items comparable and running auctions (especially for commodity goods) are also going to become more common on the Web.

"It's not just a lot for remainder goods; more and more it's for premium goods as well," he added.