NEW YORK - Business-to-business Internet companies, particularly electronic marketplaces, are as popular with investors these days as the mumps. But most analysts say there's still enormous potential for b-to-b startups. Following the venture capital might offer some clues about which marketplaces are likely to succeed.
Some VCs have abandoned startups that run marketplaces. They're turning instead to those that provide the software for building marketplaces, or companies that provide services such as logistics.
The Goldman Sachs Group (GS) and other firms recently ponied up $45 million for WebVision, a supply chain software vendor. Battery Ventures and Bessemer Venture Partners recently injected $10.6 million into ePit, which makes marketplace software.
Many early stage VCs, including Charles River Ventures and Rosewood Venture Group, say they haven't given up on Web marketplaces, but they are no longer backing startups in industries like aviation, energy and telecommunications, where powerful coalitions have announced plans for their own online exchanges. They're now focusing on more-fragmented industries where there are lots of inefficiencies and no dominant players, such as construction, food and plastics. And they're paying closer attention to the experience of the management team and whether the startups can build marketplace features for which buyers and sellers would be willing to pay.
Investors have been treating independent b-to-b marketplaces like unsavory distant relatives because they believe that the indies will never be able to compete with coalitions of powerful industry players, more than 60 of which have announced plans to launch their own marketplaces.
Investors perceive that startups have little chance against the likes of Alcoa (AA), Boeing, Chevron (CHV) and DuPont, yet fragmented industries have caught the eye of more than one VC because they allow marketplaces plenty of opportunity to make money by boosting efficiency. According to a new report from Credit Suisse First Boston (dossier), chemicals, construction, food production, metals and plastics are among the industries in which the top five companies account for less than 20 percent of sales.
"Industries that are very fragmented, while unlikely to give birth to a consortia, will see funding at a fairly aggressive rate," says Christopher Vroom, managing director of e-commerce equity research at Credit Suisse. "There's great potential for b-to-b marketplaces to streamline business processes."
