Special Report: Plum dot-coms plummet

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Todd Hewlin didn’t see the b-to-b crash coming.

Only a year ago, his company, Internet Capital Group Inc., lorded over a b-to-b dot-com empire that made it the envy of technologists and venture capitalists. Its portfolio start-ups were poised to change the way businesses bought and sold everything, from cattle to steel. Brokerage firm analysts soon made it their b-to-b darling, helping drive its stock price up as high as $212 a share.

But Wall Street giveth, and Wall Street taketh away. Today, the Wayne, Pa.-based b-to-b company’s stock is trading in the low single digits. And some industry experts are saying it’s a plum example of b-to-b’s rise and fall.

Fickle fortunes

Hewlin, a managing director, said that ICG’s model—investing in top-rate management teams that understand how technology will drive transformation in an industry—will eventually help it succeed. And he remains confident about ICG’s portfolio companies. But Hewlin admits that the Street’s fickleness toward b-to-b in general surprised him.

But Hewlin wasn’t the only one blindsided. The last few months have seen a bloodletting among b-to-b start-ups on the order of the Inquisition. What is most striking is that those hardest hit by the fallout were supposed to be among the surest bets—independent b-to-b e-marketplaces.

Expect the carnage to continue. Other smaller exchanges, and the software companies that sell to them, will surely go out of business as their venture capital coffers run dry. And while Wall Street’s pessimism is one reason for the fallout, it is certainly not the only one.

Falling short

Many b-to-b exchanges adopted "build it and they will come" models that fell short of what customers really wanted: end-to-end functionality. Some e-hubs were touted as revolutionary. But all they really offered were glorified matchmaking services short on good content and auxiliary services. Even worse, scant or slapdash marketing did little to drive users to them in the first place.

Specifically, some back-end services such as e-payment were often regarded as an afterthought, when in fact they were critical.

This was as often a result of ignorance as negligence, said Neil Isford, CEO of Plural Inc. "A lot of companies and customers underestimated the complexity of implementing these e-based systems," he said.

But the b-to-b community is a quick read. Public exchanges and private marketplaces alike are busily integrating e-payment and funds transfer systems. And vendors are rushing to help them do it—witness the recent moves into the space by CyberCash Inc. and VeriSign Inc.

The dot-com fallout is leading to a short-term pullback in b-to-b advertising, though some leading investment banks are predicting a mid-2001 resurgence. In particular, performance-based online advertising is taking center stage, according to at least one b-to-b marketing executive.

"What we’ve seen since the shakeout is that dot-coms have shifted to performance-based models," said Jamie Crouthamel, CEO of Dynamic Trade Inc. "People are saying, ‘Oh God, I can’t spend money like crazy; I’ve got to meet our objectives.’ Before the dot-com fallout, no one did anything carefully." But with increased performance requirements comes complexity. "Performance-based deals, however, are not as easy to cut," Crouthamel said.

Another important result of the dot-com fallout: a wholesale change in how Fortune 500 companies view, and partner with, dot-coms. The fear that b-to-b dot-coms were taking their business has disappeared. So too has their desire to partner with dot-coms in co-marketing deals, largely because they don’t want their venerable brands watered down. "As soon as you partner with a dot-com, your brand is diluted," said David Ceolin, CEO of Digital Cement Inc., a marketing portal builder. "It’s like answering your call center with two different names. It makes no sense."

Much good, however, has come from the fallout. Big companies have been jolted by b-to-b start-ups and the result has been billions of dollars in Internet spending that shows little sign of abating.

"What the dot-coms have done is raise the bar in terms of user expectations," Ceolin said. What remains to be seen is if they can use their own competitiveness to save themselves.

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