Venture firms focus on business-to-business e-commerce

Venture capitalists are following the money, rushing to pump funds into the lucrative business-to-business market.

Just today, high-flying Internet venture firm CMGI said it was launching CMGI @Ventures B2B Fund, a new fund targeting business-to-business (B2B) Internet investments. Although CMGI is already invested heavily in this industry, the company is thought of mostly as an investor in Internet consumer companies, such as GeoCities and Lycos. Through the new fund, CMGI can redefine itself by highlighting its success in this burgeoning market.

Last week, a start-up venture fund based in Washington, D.C, Venturehouse Group, said it would focus exclusively on the B2B market. Many blue chip VC firms--including Kleiner Perkins Caufield Byers and Benchmark Capital--also continue to sow investments in consumer and business Net companies.

"You have to be attracted by the size and potential of this market," said Mark Ein, chief executive of Venturehouse Group.

Although not as flashy as the business-to-consumer (B2C) market--the world of well-known names such as Yahoo, Amazon.com, eBay and America Online--the B2B market is expected to garner a much larger share of revenue generated through e-commerce.

Forrester Research estimates that the B2B industry will explode to $1.52 trillion in 2003 from about $131 billion in 1999.

B2B companies that have already hit the public market have highlighted the potential windfall for investors. For example, shares of e-commerce software provider Ariba, priced at $23 per share, blasted on their first day of trading earlier this year, rising 67 to 90. Last week, the company announced it would split its stock 2 for 1 in December. The stock dropped 8.5 to 195.88 in afternoon trading.

Another example of a high-profile B2B company is Critical Path--a CMGI @Ventures company. Critical Path provides email services to Internet service providers and other businesses.

First mover advantage is vital in this sector, along with establishing critical mass online and developing a comprehensive range of products, said Mary Meeker, an analyst at Morgan Stanley Dean Witter, at the Net-markets@ground.zero2 conference in Berkeley last week.

Analysts and VC firms agree that although B2B companies may have a difficult time setting up their operation--often more so than consumer-based companies--once the business gets going, there is little room left for competitors to move in.

CMGI at a glance

HQ: Andover, Massachusetts   CEO, President: David S. Wetherell   Employees: 1,594   Annual sales: $175.7 million   Annual income: $476.2 million   Date of IPO: February 1994   Ticker: CMG   Exchange: Nasdaq More: CMGI quotes CMGI news Source: Bloomberg 11/22/99

"What you are really trying to do is to get the companies in the particular industries to redesign their business processes around you," said Ein, explaining why his firm is rushing to fund small B2B companies. "While that may take a little longer and be harder to do, you really will have created big barriers of entry for others."

Venture-backed funding has been surging to record levels, with Internet and technology funding winning the bulk of the capital. According to a study by PricewaterhouseCoopers, VC surged to a record $9.04 billion in the third quarter of 1999.

"As the venture capitalists are learning now, the B2B side is less capital intensive then the B2C side," said Kurt Walden, the national director of VC research for PricewaterhouseCoopers. He noted that B2B companies do not have to mount the now common $100 million advertising campaigns trumpeted by consumer companies because they aren't trying to reach a wide, mainstream audience.

Until the Internet and e-commerce exploded, venture firms felt more at home funding technology companies rather than consumer oriented-Web sites. Now with the rise of B2B, Walden said, VCs notice the similarities between business-to-business companies and tech firms.

"[B2B companies] have an opportunity to become more profitable more quickly--[whereas, the business-to-consumer] model is yet unproven," Walden said.

CMGI, based in Andover, Mass., has been a Wall Street darling because of its success at repeatedly finding and funding Internet firms that have eventually soared on the public markets or been acquired at a tidy sum. CMGI's track record includes several successful Internet initial public offerings, including Lycos, GeoCities (acquired by Yahoo), Silknet, Chemdex and Critical Path.

CMGI's new fund is expected to reach up to $1 billion in capital, the company said.

"This is a natural extension of our expertise and allows us the latitude of deeper investment into the B2B arena," David Wetherell, CMGI's chief executive, said in a statement.

The new fund plans to build on the B2B investments already in CMGI's stables. Nearly two-thirds of the companies in the current @Ventures portfolio operate in the B2B arena, including Chemdex, Silknet and Critical Path.

The fund will be managed by the current team of @Ventures partners, including managing partner Peter Mills and general partner Brad Garlinghouse.

"Although real money will be made in [business-to-consumer], we think that the B2B market in terms of investment opportunities will be larger than the consumer opportunities we have seen to date," said Garlinghouse.

CMGI has a network of more than 50 companies, owned and operated either by CMGI or with investments from CMGI.

Compaq, Intel, Microsoft and Sumitomo hold minority positions in CMGI.

Shares of CMGI jumped 16.81 to 141.69 in afternoon trading. The stock has traded as high as 165 and as low as 16.3 during the past 52 weeks.

News.com's Troy Wolverton contributed to this report.