NEW YORK – For a group of investment professionals who pride themselves on their traditional ability to identify long-term market trends and emerging industries, venture capitalists have sure been a bandwagon bunch in 2000.
When the fiscal fortunes of business-to-consumer e-commerce firms began heading south earlier this year, investors virtually hijacked the industry by refusing secondary financings and turning their attentions toward the marketplace-dominated business-to-business sector. As one Silicon Valley venture capitalist said back in April, “I couldn’t imagine investing in anything but B-to-B right now…the market is huge and practically untapped.”
Now, however, with the marketplace model often proving to be just as fiscally unsound as advertising-driven online content sites, investors have begun backing off the same B-to-B e-commerce plays that represented salvation just three months ago.
Indeed, domestic B-to-B e-commerce venture companies only raked in about $1.62 billion during the second quarter, which represents a 31.6% decline from the record-high first quarter figures.
“There is a lot of caution out there right now,” said Storm Boswick, managing director with J&W Seligman & Co. “You’ve heard public announcements from firms like Safeguard Scientifics saying that now they’re just focusing on infrastructure, and I think that it’s taken some of the larger and more aggressive players out of the market.”
Among those who were fortunate enough to receive funding in the second quarter, the vast majority were information technology businesses. In fact, of the 103 firms that raised venture capital during that period, only three could be considered non-high-technology interests and just one within the medical, health and life sciences category.
“It’s easy to conceptualize that you can make a market more efficient by putting it online or improving the supply chain,” said Anne Gordon, chief executive of eSociety Inc. “When you get into the actual details of doing that, however, you realize how very complex it is.”
And if anyone should understand every detail of those difficulties, it’s Gordon. Her firm partners with businesses to build and manage online B-to-B markets and has recently had to tweak its own business strategy to fit the industry’s changing demands. Among the changes are a broader customer base focus and a significant round of layoffs earlier this month, despite completing a $15.5 million Series B venture deal back in May from Technology Crossover Ventures and Comdisco Ventures.
“Like most people in this market, we have an evolving business model,” Martin said.
It is important to note that Martin said both TCV and Comdisco were aware of the upcoming layoffs when agreeing to the Series B deal, even though the press release announcing the funding highlighted eSociety’s recent staffing increases.
If there’s any bright side for this market, it may be that all of the infrastructure investment could eventually spark a B-to-B e-commerce rebirth. After all, what good are all of the platforms without actual content flowing through them? In addition, the average investment size for a firm receiving venture capital in the second quarter was actually higher than in the first quarter, rising from $12.99 million per deal to $15.79 million.
“People raised a red flag, questioned the exchange model and said we should wait and see,” Boswick said. “But that doesn’t mean that we should all throw the baby out with the bathwater.”