B2B Ventures Losing Their Allure

When a leading Web incubator announced earlier this week that it would stop investing in business-to-business (B2B) companies, it reinforced concern that the dot-com shakeout in the business-to-consumer arena may be spreading to the realm of B2B.

According to published reports, Safeguard Scientifics, Inc., which has funded a number of such B2B firms as Internet Capital Group, Inc., is shifting its focus to companies that provide Web software, services and communication services. By doing so, Safeguard feels it will be in an ideal position to cash in on the “next big thing” — Internet infrastructure companies.

B2B Cooling Off

This cooling toward B2Bs should come as no surprise, since investor nervousness about unrealistic Internet stock valuations is fueling wide swings in equity markets.

Still, until recently, any kind of company facilitating online sales between businesses was touted as a great investment opportunity. In fact, Venture capitalist firms such as Safeguard and CMGI, Inc. funded myriad B2B startups in industries ranging from auto parts to solid waste.

Time To Discount Hype

What seems like a sudden about face was actually expected by some industry analysts.

“In general, valuation and the projected size of the B2B market have gotten so big they have become hard to fathom,” Geoffrey Bock, an analyst with Boston, Massachusetts-based Patricia Seybold Group told the E-Commerce Times. “It’s beginning to sound like the federal budget.”

In Bock’s view, it is important to focus on what a company can actually bring to the B2B table to avoid being swept away by exaggerated perceptions of marketplace potential.

“Again, it’s not so much the market cap of an entire sector one should be concerned about — but instead, a company’s strategic advantage in the market,” Bock explains.

Exploding Infrastructure Market

Bock points out that such companies as Oracle, Ariba and IBM are already cashing in on the burgeoning Internet infrastructure market by selling generic B2B software packages.

However, he also believes that a handful of smaller companies that specialize in the nuts and bolts of the buy or sell transaction will be the real high fliers. These are exactly the kind of companies that are now drawing Safeguard’s attention.

“By specializing, such companies can cut the time to market for their customers,” Bock says.

The potential for these firms is staggering. International Data Corp. estimates that the Internet infrastructure market — which hit $366 billion last year — will soar to $1.5 trillion in 2003.

Just A Question Of Time

Still, more and more industry analysts are predicting a B2B shakeout. George Reilly, research director for GartnerGroup, told the E-Commerce Times that while the proliferation of B2B marketplaces is being fueled by the desire to improve business processes, it is also being driven by hype.

Reilly also feels that there will be major consolidation among many of the B2B marketplaces that are still being launched daily. The industry will not require “half dozen or a dozen marketplaces in vertical markets such as chemicals or printing,” Reilly said, adding, “There will be a consolidation, and the winners will be those that can execute transactions with value added.”

Real Value

While the diminished enthusiasm of venture firms may be the first sign of cracks along the B2B fault line, I do not believe there is any reason for investors to panic — though they would be well advised to take a closer look.

After all the dust settles, the B2B firms that are based on sound business models — that focus on profits and value-added offerings rather than revenues and discounted transactions — will most probably prosper despite any shakeout.