#TBT: Whatever happened to… B2B Marketplaces

When the bubble began to really inflate in 1998-1999, an excess of venture capital and would-be entrepreneurs latched on to Business to Business (B2B) commerce as the next wave.  Until then, the web was mostly a consumer phenomenon.  A raft of money and energy poured in to every nook and cranny it could find.  The race was on.  Venture funds were built just to address this market segment (CMGI and ICG, to name two.)  Then, those venture funds went public — you heard me right, the VCs went public and got a revenue multiple on the revenue multiple they paid for the underlying companies.  The higher the price they paid, the more they were valued. The double-order-of-magnitude-idiot-arbitrage, I call it.

CMGI Field. Back when Venture firms bought the naming rights to NFL stadiums.

CMGI Field. Back when Venture firms bought the naming rights to NFL stadiums.

OK, I can’t resist this digression, but to those who think we are in a 1999-style bubble today, I say, “Ha!”.

This quote from the New York Times is one of many you could pull from the era:

A year ago, CMGI was the model incubator, a new corporate creature somewhere between a conglomerate and a venture capital fund. It started some companies, invested in others and kept operating control of many, hoping to take all of them public. Mr. Wetherell was hailed as the ”Warren Buffett of the Web,” by The Daily News of New York, and CMGI ended 1999 with a market value of $41 billion. It was the best-performing United States stock of the preceding five years, returning 4,921 percent.

In its fiscal year ended July 2000, CMGI lost $1.4 billion on revenue of $898 million.

Today, CMGI’s main companies, like Alta Vista and Engage Technologies, an Internet advertising business, are scaling back. The chief executives of both of those companies resigned recently. Smaller companies are being sold or merged. And CMGI’s shares are off 91 percent this year, to a value of about $3.8 billion, closing on Friday at $11.94.

Mr. Wetherell, whose 11.2 percent stake in CMGI is now worth just $430 million, still has defenders. They say he is a tough executive with an eye for financial detail, but he also understood that the early days of the Internet demanded growth, not profits.

I just don’t even know where to start.  The “Warren Buffett of the Web” was running a company that lost $1.4B on $898M in revenue?  What could be more Buffett-esque than that?

A venture fund was publicly traded and worth $41 billion? A fund whose best companies were apparently Alta Vista and Engage Technologies?

Yegads.  It ain’t 1999 yet.


I bring this up because a funding round in Kinnek, an online B2B purchasing marketplace, was just announced this week.  I am thrilled to be invested in this team tackling an ambitious problem and making great progress.  But for Throwback Thursday, I want to contrast this against the first generation of B2B marketplaces from the 1990s, and see if progress has been made.  Is this an idea whose time has finally come?

Kinnek solves a market need for small and medium sized businesses to conduct purchasing online.  One would assume that Google would meet this need by connecting them to the right seller, but surprisingly it doesn’t — try to search for an industrial bottle washer to purchase online, and you’ll end up with more questions than answers.  Kinnek will get you actionable quotes with real prices in a way Google does not.

This has resonated with business owners, and transaction volume has taken off.  Like most private companies, Kinnek doesn’t want me to disclose their operating data — but these guys are well into seven figures of GMV a month.  Here you see the trend:

Screenshot 2014-09-17 00.49.44

This great progress make Kinnek a very competitive Series A deal, and Matrix was please to lead this $10M Series A funding round.  This is large for a Series A, befitting the great market progress the team has made in the market, in addition to the strong team and big opportunity they have identified.

But this is Throwback Thursday, so we must ask: this has been tried before, correct?  How did others do in the past?

Two 1990s companies attacked this segment – Chemdex, which became Ventro, and VerticalNet.  Ariba started in this area but “pivoted” (before the word was used) to enterprise software.  In the 2000s, Business.com took a run at this space, too.  I am sure there are many others — my point is, this is not new.  How did these earlier companies do?

Chemdex was really first to market, and very early in B2B.  They began as a marketplace for buying industrial chemicals, and with the name change to Ventro, expanded to a broad B2B marketplace (as I recall, in response to VerticalNet.)

Here’s what a B2B marketplace looked like in 1998:

Screenshot 2014-09-17 00.07.31

It makes sense to start in one vertical and branch out, and industrial chemicals seems like a reasonable place to start.  As a trailblazer of the era, how did Chemdex perform?  A CNET article of the era sums it up well:

While Chemdex competes in a large market–it estimates sales of life sciences research products totaled $9.4 billion last year–it has only a tiny share of that business. The company lost $6.8 million on revenue of $165,000 in the three months ended March 31, after a 1998 loss of $8.5 million.

Sales to Genentech, the world’s No. 2 biotechnology company, accounted for 82 percent of Chemdex’s revenue in the first quarter of this year. Another client is the University of Illinois.

The company said its gross margin–the ratio of gross profits to sales–was 5.8 percent at March 31 “and was trending downward.” 

Some cause for concern here, for sure — sales at well under $1M a year, much lower than Kinnek.  And the burn is concerning, many multiples of the $3M Kinnek had raised before this week.  Customer concentration, with 82% to their largest customer, is also troubling.

CNet reports, on the basis of these numbers, Chemdex had just gone public with a market capitalization of $750M, and soared to a peak of $4 billion valuation in less than a year. I can report that this was significantly in excess of the valuation of the recent Kinnek financing.

That is what a 1999-style bubble feels like:  IPO on trailing revenues of a few hundred thousand, losses of ten million, for a market cap of nearly a billion.

VerticalNet had a similar story:  it brought to market “Vertical trade communities combining product information, requests for proposals (“RFPs”), discussion forums, and e-commerce opportunities.” (per VerticalNet S-1).  This is pretty much exactly the need Kinnek is filling, over 15 years later.  VerticalNet had pro-forma revenues of $2.3M for 1998 when they filed to go public, losing over $9M in the process.  Post-IPO they stepped on the gas pedal, growing to $112M in revenue in 2000, but losing an eye-watering $311M.  This business, if you can call it that, traded at a market capitalization of $12 billion in 2000.

So SMB (and large business) online procurement is nothing new.  These two companies went public on smaller numbers than Kinnek, and within a year had traded to a combined $16 billion in market value.  What happened to them and why does this opportunity exist today?

By 2001, they were both gone.  Per Wikipedia, Ventro had shut down the Chemdex site, and VerticalNet had sold it’s “Small and Medium Business Group to Corry Publishing, now Jameson Publishing” — for $2.3M.

That is what a bursting bubble feels like.  Sixteen billion dollars in combined market cap, vanished in a year.

So, why do I think Kinnek is getting much more traction on much less money than companies who tried to crack this market in the past?

  • General capital efficiency of startups: cloud hosting, better development tools, a refined science of marketing/acquisition
  • Business owners have been woken up to the need to engage on the web by the large venture-paid-for sales forces of Groupon, LivingSocial, Yelp and others who have called on and educated them about the need to utilize the web for their business
  • Penetration of tablets and smartphones engages weary business owner/operators who won’t boot a PC at the end of a long day but will now engage on their mobile device
  • Higher expectations based on consumer purchasing experiences: they demand competitive prices, alternative quotes, reviews, structured data about the products. If they get it on Amazon for a digital camera, why not for a new $50,000 oven?

The time is right to engage this market.  Trying to grow a market before it’s ready eats cash like “corn through a chicken.” But if you get your timing right, it’s like pushing on an opening door – and it seems we have the timing right.

Unfortunately, it’s not 1999, and we’ll probably have to build an actual business here before we can IPO it and run up to a $12B market cap.  But the founders Rui and Karthik seem up to the task, and I’m thrilled to join the team and pitch in.

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Written by Josh Hannah
Josh Hannah joined Matrix Partners after a career as a serial entrepreneur (Betfair, eHow, wikiHow.) Read more about Josh.

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