Commerce One forms VC arm

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The leading e-commerce exchange builder is looking to parlay its success and connections into another equally hot b-to-b sector, venture capital.

Commerce One Inc. has teamed with an elite group of traditional venture capital firms, including Canaan Partners, to launch its first financing arm, Commerce One Ventures. The unit will invest some $100 million in start-ups that use Commerce One platforms, and help them incubate and work with other companies within the company's Global Trading Web b-to-b network.

The move highlights the growing interdependence between b-to-b companies and venture capitalists. And it underscores a yen among exchange execs to take their technical smarts and apply them to VC, in the hopes of a bigger payday than they would ever get selling software.

To date, only one other exchange builder, Oracle Corp., has a VC arm. (The Oracle Venture Fund started in early 1999 and has invested in 26 start-ups that run on Oracle software.) They will, however, proliferate, said Nathaniel Palmer, an analyst at The Delphi Group Inc. "We're going to see this everywhere. Services are already being exchanged for equity all over. This was an inevitability,'' he said.

Indeed, Commerce One invested in five start-ups before launching its VC unit earlier this month, including the exchanges and eScout. All previous investments now fall under Commerce One Ventures' domain.

Commerce One Ventures was formed so that its parent's financing efforts would become more organized and thus more effective, said Katie Nittler, senior director of the VC unit. "Commerce One wanted to streamline its investing, put a process around it,'' she said.

Multiple advantages

Commerce One's VC group not only allows it to build the e-hub of the next, say, Covisint, but become a part owner of it. Moreover, Commerce One can leverage its broad network of business connections to help the start-ups it invests in get introductions they otherwise couldn't. Also, Commerce One Ventures can match up the start-ups' execs with employees throughout Commerce One for free advice. CEO Chris Hemmeter said Commerce One Ventures' value to his company extends well beyond the kick-start cash it provided. "What we do requires expertise. Commerce One brings a powerful understanding of our technology,'' said Hemmeter, whose company matches food service buyers and sellers. "Also, in Commerce One's swimming pool there are a lot of complementary companies we can deal with.''

A cutthroat business

The buzz among some financiers and consultants is that Commerce One may be overextending itself. After all, VC is a cutthroat, all-consuming business, and Commerce One is a small company, with only 1,100 employees. Presumably, few of them have the blue-chip investment banking pedigrees and connections of execs at top traditional VCs. And it's a fact of life that many of the start-ups that any VC invests in will flop. "Commerce One Ventures could backfire if these exchanges don't work,'' said Delphi's Palmer.

"I would agree that we're [overextended] if we hadn't been smart enough to recruit from outside,'' Nittler said. The division has so far recruited six technologists and financiers and will hire up to 24 more by year-end, she said.

Commerce One Ventures will also look to its veteran venture capital partners for day-to-day guidance, she said. These VCs are: Andersen Consulting Ventures, Canaan Partners, Foundation Capital, Morgan Stanley Dean Witter Private Equity and The Entrepreneur Growth Fund. Each firm contributed $16.6 million toward the fund, which will bankroll up to 40 start-ups over the next year.

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