Have VC Firms Left E-Commerce at the Altar?

On the surface, a red-hot first quarter for venture capital spending appears to be good news for the e-commerce industry. But while venture capital firms pumped a record amount of money into Internet start-up firms during the first three months of 2000, established e-commerce companies picked up a much smaller percentage of the pie than in the recent past.

The new trend is a reminder that deep-pocketed, institutional investors are always looking for the next bellwether. After riding high on the first wave of business-to-consumer (B2C) sites, venture capitalists were the first to shift to business-to-business (B2B) sites. And now they are on the move again, taking their money with them.

With so many firms already in the e-commerce marketplace, the move toward supporting a new crop of businesses could hasten the impending dot-com shakeout by convincing even more investors to put their money elsewhere.

Growing Pie, Shrinking Slice

The National Venture Capital Association (NVCA) said on Monday that a record $22.7 billion (US$) was invested in Internet start-ups during the first quarter of 2000 — a 266 percent increase over 1999. The group also said that 85.2 percent of all the funding went to companies in the earliest stages of growth, including many in the fields of broadband and Web application services.

Meanwhile, a report from VentureOne says that while 80 percent of the capital went to Internet ventures in Q1, only 20 percent was raised by established firms. VentureOne also said that only five percent of the capital went to traditional e-commerce firms.

A number of factors might explain the numbers. Some established companies have begun to see a steady revenue stream, reducing their reliance on investor capital. Others have already launched IPOs. And some of the new businesses have compelling business models and bright enough futures to lure some money their way.

Another factor is that smart investors spread their money out — some in companies close to going public, some in companies just getting their legs.

Romance, VC Style

Then there is what I call “the romantic take.” Venture capitalists have fallen out of love with the dot-coms who were the first objects of their affection. Perhaps they have not yet jilted them — but they are definitely feeling nervous.

After all, the market capitalization of many e-commerce firms has dropped dramatically, and the number of IPOs has plummeted in the wake of that turbulence. The NVCA says there were 75 venture-backed IPOs during the first quarter, down from 91 in the last quarter of 1999. Big names such as AltaVista are among those choosing to wait for calmer times.

An IPO is what all venture capitalists want, of course, but given the speed of the new economy, it is possible that by the time the stock market throws the IPO window wide open again, investors’ tastes will have changed. B2C and B2B stocks may no longer be the flavors of the month — they may not even be on the menu.

Whatever the underlying reasons, the ramifications of such a shift could be serious for e-commerce firms that have already raised and spent a good deal of their start-up money.

Last month, when Furniture.com announced it would delay its planned IPO, a spokesman said the company would be exploring private funding sources. A potential category leader such as Furniture.com might have a better shot than most at raising some capital — especially if the company can show it is close to turning a profit.

Faster Fall?

But for firms on less solid ground, stock offering dreams may be slipping away. Without private capital to fall back on, and with cash burn rates accelerating, shaky dot-coms will be forced to shut down or seek buyers. The final result has been predicted for months: Far fewer e-commerce companies.

The position of many venture capitalists is to sit tight. At a recent Boston, Massachusetts-area conference sponsored by PricewaterhouseCoopers, panelists banged the “stay-the-course” drum over and over.

“Good e-commerce business will continue to prosper,” said Todd Dagres, general partner at Battery Ventures, a Boston-area firm. “It’s just getting started.”

Still, the decision of some venture capitalists to shift their resources to a new crop of businesses has to reverberate across the e-commerce world. The question is: How loud will the echoes be?