B-to-b VCs bullish despite markets' plunge

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Not only has the recent carnage on the stock market left many b-to-b companies with slaughtered share prices, it has caused some pundits to declare the boom officially dead.

Not so fast, said top venture capitalists, brokerage analysts and corporate brass. Though leading investors from Silicon Valley's Sand Hill Road to Wall Street emerged from last week spooked, a majority are confident the business-to-business segment still holds much promise. Among the common themes:

• Many top b-to-b venture capitalists intend to invest as much, if not more, than they did months ago, but they will be much more selective.

• Execs at a sampling of the biggest b-to-b companies expect their companies' stock prices to regain their 52-week highs.

• Leading brokerage analysts are comfortable about b-to-b as an investment target, but skeptical that top companieswill regain their stratospheric valuations and stock prices any time soon.

Several top analysts were agog at the speed with which b-to-b mania rose and fell.

"The meter of Internet sentiment only knows complete exuberance or complete bust," said Edward McCabe, senior b-to-b analyst at Merrill Lynch & Co., New York. "But b-to-b has moved from one end to the other faster than any Internet subsector, ever."

Venture capital Godfather Tim Draper's bittersweet view of the b-to-b market sums up that of his colleagues'.

"We'll look at things with a much sharper eye," said Draper, founder of Draper Fisher Jurvetson, Redwood City, Calif. But in the next breath he is unapologetically bullish. "Three years from now this will be looked at as one of the greatest [buying] opportunities," he said.

Draper Fisher Jurvetson, which has bankrolled 150 high-tech companies, intends to invest at the same aggressive clip it did months ago, Draper said, though he declined to specify what type of b-to-b companies his firm will target.

CMGI @Ventures, which gained prominence with the recent launch of its $1 billion B2B Fund, also has no plans to scale back b-to-b investments, said Brad Garlinghouse, general partner. Indeed, in the midst of last week's market turmoil, CMGI @Ventures announced it would lead a near $17 million investment in, a Santa Clara, Calif., b-to-b and business-to-consumer Internet phone service.

Nor, apparently, is the age of the big tech funds over. In the midst of the stock market meltdown on April 14, Bank of America Corp. VC unit BA Venture Partners, Foster City, Calif., announced the launch of a $500 million tech fund.

The same day, Cleveland-based Morgenthaler Partners announced a new, $570 million Internet communications fund. And, a $100 million Internet holding company for b-to-b Web security start-ups, was formed last week by VeriSign Inc. and HSBC Holdings plc, among others.

And last week, New York insurance company American International Group Inc., trumpeted a $1 billion investment in the Internet-heavy technology fund operated by Greenwich, Conn.-based technology VC General Atlantic Partners L.L.C.

Getting pickier

Even so, financiers said their b-to-b dollars will be allocated less frivolously than before. Specifically, they said a start-up's business model will become increasingly significant, and that newcomers expecting to impress investors simply by tagging themselves "b-to-b" will be sorely disappointed.

One venture capitalist said he would probably avoid the next new exchange--whatever it might be--and focus on companies that supply the infrastructures for those exchanges.

"We'll look at companies that facilitate buying and selling within a b-to-b supply chain," said John Fitzgerald, president of Katalyst, a Radnor, Pa.-based VC firm.

The rule of thumb at New York-based Flatiron Partners will be to find b-to-b companies with solid partnerships that can be translated into revenue.

"We're interested in companies that have an exclusive relationship," said managing partner Jerry Colonna.

Other analysts see an upside to e-procurement of products and services.

About 54% of businesses do some buying on the Internet, up from 46% six months ago, said Jamie Friedman, b-to-b analyst at Goldman Sachs & Co., New York, citing statistics from an impending Goldman e-procurement survey. Only 7% of 90 business polled said they would never do e-procurement, down from 12% six months ago. "The markets will recover," Friedman said.

But other analysts, while reverent of b-to-b's promised efficiencies, suggested that last week's northward-surging Nasdaq might be a "dead cat bouncing," when bargain hunters swarm into the markets and cause prices to rise temporarily.

"I doubt these stocks will regain their 52-week highs," said Tim Klein, senior b-to-b analyst at U.S. Bancorp/Piper Jaffray, Minneapolis. "The money, though, will come back into b-to-b, for one main reason: These companies are adding true value to the economy."

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