Business Week e.biz -- Special Report
The Cash Hasn't Dried Up
Venture capitalists are putting money into innovative consumer dot-coms
This spring, executives at Dialpad.com Inc., a startup that lets consumers make free phone calls over the Web, were a tad nervous. While they were hunting for venture capital, the stocks of many Net companies had plunged more than 50%. Dialpad.com execs worried that the venture capitalists they were talking with, notably incubator CMGI Inc., would get cold feet. Perish the thought. On Apr. 19, Dialpad announced a $16.75 million investment from CMGI @Ventures and several other companies.
In the end, the fact that Dialpad had a red-hot service--attracting 1 million users in eight weeks--mattered a lot more than the fickle stock market. "Letting the market decide your business strategy is like letting a sail blow unchecked into the wind. It's moronic," says CMGI @Ventures general partner Brad Garlinghouse, who made the decision to invest in Dialpad and is now its CEO.
Forget conventional wisdom that consumer Web businesses are the last place investors want to put their money. Plenty of consumer Internet companies are hatching these days--and raising millions of dollars to boot. In May, venture capitalists poured $450 million into 30 such companies, according to the news service VentureWire. That's nearly twice the $250 million VCs put into the same kind of outfits in May 1999. "It's not like consumers are going to stop spending money online," says VentureWire managing editor Kenneth M. Andersen III. "It may be possible to swing the pendulum too far the other way."
To be sure, much of the moolah is going into companies that VCs have already invested in. And startups aimed at consumers are no longer the most popular investments. While B2C companies were the target of choice last May, this spring they ranked fourth: The leaders were B2B outfits, e-marketplaces, and online service companies, according to VentureWire.
So what kind of consumer-oriented Net businesses are getting the big bucks? For starters, international offshoots of successful U.S. Net businesses. Consider Keen Europe Inc., an overseas version of the San Francisco site that lets people get advice from experts on everything from surviving your son's circumcision to housetraining your beagle. On June 22, the company raised $15 million from Silicon Valley venture firm Benchmark Capital. General Partner Kevin Harvey says the investment is compelling because Keen Europe will be using proven technology to provide a service that's already a hit in the U.S. Keen.com is the second-most-popular advice site here, drawing 645,000 visitors a month, according to MediaMetrix Inc. Keen CEO Karl Jacob says the U.S. service is growing 100% month over month and is showing strong revenue potential, with some Keen experts grossing $1,000 a week. The company gets a cut of their take. "We'll fund every business that has those attributes," says Harvey.
Also gaining steam are hybrid companies that sell to consumers and businesses. One such example is the Consumer Financial Network (CFN), which raised $130.5 million on Mar. 23 from the Royal Bank of Canada, First Union Corp., and other investors. CFN gets 20% of its revenues from offering loans, insurance, and other financial services directly to consumers through its youdecide.com portal. The rest of its business comes from helping corporations automate their employee benefit and human resources services.
One business feeds off the other. CFN sells a customized version of the youdecide.com service to 350 corporate customers, including BellSouth Corp. and Coca-Cola Co. The service lets customers' employees go to the Net to enroll in health-care plans and 401(k) benefit programs. And CFN sells a software package to businesses, called iExpert, that helps human resource managers create personalized intranets. Caroline Vanderlip, CFN's executive vice-president, says if it were exclusively a consumer business, investors "would be skeptical of our ability to create a brand."
Perhaps the most promising development in B2C-land is the emerging crop of so-called click-and-mortar firms. Rather than investing in pure Net retailers, VCs are starting to place big bets on real-world stores that are moving online. One that just received its first round of VC money is decoratetoday.com, a spin-off of American Blind & Wallpaper Co. in Plymouth, Mich. The lineage is crucial: American Blind has $100 million in annual revenues, an established brand name, and the infrastructure necessary to complete orders and provide customer service. With its parent retaining an equity stake, decoratetoday.com will be able to use those real-world assets to separate itself from a pack of online competitors. "Those are things that don't crop up overnight," says Scott Harper, a general partner at Primus Ventures Partners, which led a $26.5 million first round investment on June 26.
He's not the only believer in click-and-mortar. Patricof & Co. Ventures Inc. General Partner Tom Hirschfeld has invested in four of these players in the past few months. One is performancebike.com. It's a spin-off of Performance Technologies Inc. in Chapel Hill, N.C., the largest U.S. retailer of bicycle parts. Another is Beenz.com Inc., which lets visitors earn digital coupons that can be used as currency at participating online merchants. The real-world hook is that Beenz coupons can be transferred to a Beenz MasterCard that can be used in offline stores. "We're going to see more and more blurring of the boundaries between offline and online," says Hirschfeld.
Clearly, B2C is not dead. While the consumer Net forges on, the hype has toned down considerably. No longer do you see online-only stores that go public with billion-dollar market caps after only a few months of business. Even VCs say the end of that wild speculation is a good thing. Now it's easier to cull through their stacks of business plans and find entrepreneurs with ideas that are more likely to make a buck delivering goods or services to online consumers.By Spencer E. AnteReturn to top