CAMBRIDGE, Mass. – As the red- hot market for e-commerce investments continues to sizzle, companies with innovative ideas about Internet retailing are finding themselves awash in cash from backers hungry to get in on the action.
One example is CommonPlaces, a developer of the CollegeBytes.com Internet hub designed to help marketers reach the highly sought-after college student demographic. The company secured a $6 million first round of financing in late February led by Warburg, Pincus Ventures Inc., Interequity Capital Partners and several other undisclosed investors – before the launch of its Web site.
“[E-commerce] is so about relationships, so about getting there first,” said Interequity Principal Stephen Raphael. “[The college market] is a great market, probably the most coveted market out there.”
CommonPlaces has been on common ground with a host of other recent e-commerce start-ups in that entrepreneurs hoping to change the face of online retailing appear to be leaving offices on Sand Hill Road with armfuls of cash, often well before proving their concepts.
Blue Martini Software, a developer of products that track inventory for e-retailers, in March secured a $5 million first round led by Matrix Partners, even before lining up its first client. That same month, FairMarket Inc., a provider of auction and e-commerce software solutions, netted a $10 million first round from Sierra Ventures.
Marc Johnson, a senior analyst at Internet research firm Jupiter Communications, conceded that the financing sums that many e-commerce start-ups are commanding these days seem “ridiculous and mind-boggling” when compared with traditional private equity plays. However, he added, “There is a whole class of princes and kings that have not yet hit the scene. It’s hard [for VCs] not to get in the game.”
Even more cautious, later-stage investors like Interequity are finding it harder to resist the allure of e-commerce deals. The firm, a Small Business Investment Company founded in 1990 and backed by several individual investors such as Mr. Raphael, traditionally has invested in mezzanine-type transactions in the health-care and technology industries.
“The landscape has changed,” said Mr. Raphael, who estimated Interequity has financed some 42 health-care and IT deals. “We’ve been doing more equity lately. We’re very flexible … we can pretty much roll with the punches.”
In addition to CommonPlaces’ e-commerce focus, investors also were enamored of the company’s strategy. Chief Executive Ben Bassi and Vice President of Sales and Marketing Bill Townsend founded CommonPlaces last fall after spending several months as consultants to emerging e-commerce companies. Once again bit by the entrepreneurial bug, the two former Lycos Inc. senior executives polled e-marketers to find the most hard-to-reach target audience. The resounding answer was college students, a group with plenty of disposable income, but whose members often are confined within the university campus, Mr. Bassi said.
The next step was to determine how to reach college students – who, according to Mr. Bassi, comprise 25% to 30% of all Web users – and to figure out how they use the Internet. The men’s findings revealed that Web banner advertisements have become increasingly unnoticed, and students indicated a desire for focused, aggregated content and services that were easy to find.
With that in mind, Messrs. Bassi and Townsend developed CollegeBytes.com, a Web site geared to providing universities and their students with a suite of free online services, including access to campus resources such as course listings and libraries, campus news and entertainment information and links to popular college retailers, such as J. Crew and The Gap.
As with other e-commerce-oriented sites, CollegeBytes’ founders realized that they would need to spend millions of dollars on advertising to establish a strong foothold in the marketplace and to tie into the best distribution channels. However, rather than raise an enormous first round of private equity financing for marketing purposes, the company went directly to the distribution channels and in November signed a four-year agreement with Network Event Theater, one of the nation’s largest campus marketing specialists. The deal provides CollegeBytes with $7.5 million in on-campus marketing each year in exchange for a 50% equity stake in the company.
“We have the best distribution deal we can possibly have,” Mr. Bassi said, noting that distribution deals have driven the success of dozens of other successful Internet start-ups, such as retailer Amazon.com’s link with America Online, sports information site Sportsline’s alliance with CBS and search engine Lycos’ arrangement with Netscape.
However, the Network Event deal also provides investors in CommonPlaces with another attractive component – because Net Event is traded publicly on NASDAQ, CommonPlaces could theoretically be spun-out, providing a third exit option to the routine sale or initial public offering.
“Investors love that,” Mr. Bassi said.
The CEO said he had commitments of at least $20 million for the company’s first round in February, six months before the official launch of CollegeBytes (a beta test site was up at press time), but he had to turn investors away. “The biggest problem we had was we literally had to give money back to people,” he explained. “I was pleasantly surprised.”
“E-commerce is the word du jour,” Jupiter’s Mr. Johnson said. “But it’s about capturing and preserving an audience. [CommonPlaces] is well-positioned to do that.”