BUSINESSWEEK ONLINE : MARCH 22, 1999 ISSUE
BUSINESS WEEK E.BIZ

Follow the Money
Where is E-commerce poised to strike next? Keep an eye on the venture capitalists

So you're not a stockbroker, an auto dealer, or some other poor sap trying to fight off a dozen E-commerce startups. No need to worry, right? Wrong. Like objects in a rearview mirror, Internet rivals are closer than they appear. And there's only one sure way to know how soon they'll be riding your bumper.

Keep your eye on the money. Since 1995, venture capitalists have poured nearly $3.8 billion into some 530 electronic-commerce companies, according to VentureOne Corp., a San Francisco researcher. Checking out who's getting that dough is a little-known way of discovering what businesses might be next on the Internet hit list. Although many of these ventures are still fledglings, their backers say they're poised to infiltrate a wide swath of industries, from postal services to human-resource management.

It has happened before. In the past four years, venture capitalists have funneled $263 million into online news services and Web sites related to cars and travel. Already, a quarter of new-car buyers consult the Web before making their purchases, and nearly 4% of all airline tickets are bought over the Net. Now, venture capitalists are turning their attention--with a vengeance--to other markets. ''Everybody is potentially vulnerable,'' says Jean Yaremchuk, vice-president for research and technology at VentureOne. ''It's just a matter of timing.''

Batteries included. If you're in financial services, the time is now. More than $300 million has gone into 34 companies focused on everything from mortgages to insurance in 1998, up from $81 million in 22 companies a year earlier. One newcomer even hopes to shake up the staid credit-card industry: San Francisco's NextCard's Web site lets its customers apply for Visa cards, get online statements, and design their own cards with images of Elvis, Mom, or whomever.

There are plenty of other industries on the Web radar screen. Internet advertising and marketing outfits attracted $245 million in 1998 as 34 upstarts were launched. Palo Alto (Calif.)-based AdKnowledge Inc., which helps companies decide how and where to advertise on the Web, landed $14 million in February. Health-care upstarts, including online pharmacies and medical information sites, also are popular. In 1998, they took in $96 million, up 57% from the previous year. Even niche categories, such as battery retailing, now boast multiple venture-backed startups. Duracell, are you ready?

What makes these businesses so enticing is that they promise to eliminate inefficiencies in their markets. Businesses with multiple distribution channels, a slew of middlemen, or massive product selections are ripe for invasion. Art.com Inc. in Lake Forest, Ill., for example, sells more than 100,000 prints over the Net. The average brick-and-mortar shop carries 1,000. ''When you look at the efficiencies that the Web creates, they're too powerful to ignore,'' says Robert C. Kagle, a partner at Benchmark Capital, an Art.com investor.

Even established companies are backing the small fry. Intel Corp. (INTC) has invested in 50 E-commerce startups to fuel demand for personal computers that use Intel chips. And venture-capital firm Kleiner Perkins Caufield & Byers has built a grid of virtually every sector of the U.S. economy--from wine to steel--to pinpoint areas in need of Web treatment. ''It's an exploding universe of opportunities,'' says Kleiner Perkins partner L. John Doerr. Traditional businesses intent on outracing Web upstarts had better step on the gas pedal, while keeping their eye on the latest venture investments.

BY LINDA HIMELSTEIN

ONLINE LINK
An interview with venture capitalist L. John Doerr of Kleiner Perkins Caufield & Byers is available at ebiz.businessweek.com.


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