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Frontier -- Keeping Score

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With so many B2B services stumbling, it's time for small biz to take protective measures

In March, 1999, when Brad Sobel was preparing to launch eHobbies.com, timing was everything. The Santa Monica (Calif.)-based e-commerce site for hobbyists needed to be up and running in just 90 days. So Sobel hired an application-service provider (ASP). Pandesic LLC seemed to have it all: servers to host the Web site and software to process customer orders, ship products, and manage inventory. What's more, as a joint venture of Intel Corp. and the U.S. arm of German software giant SAP, Pandesic actually seemed to have legs.

Some legs. In late July, Pandesic announced it was closing shop. It seems its backers couldn't see a "timely road to profitability." Pandesic offered to help clients make the transition to SAP's mySAP.com, but many were left scrambling. "No matter how careful you are, the rug can be pulled out from under you," says Sobel.

The Internet has spawned hundreds of startups aimed at entrepreneurs--small-business portals, industry-specific marketplaces, sites that specialize in everything from buying insurance to scoring government contracts to conducting direct-mail campaigns. But they have one thing in common: Most are burning through cash like so much high-octane fuel. With no profits in sight, and with venture capitalists and public investors shunning the genre, many startups are running out of money. "There are too many players in the same space," says Steve Kafka, an e-business analyst with Forrester Research Inc. in Cambridge, Mass. "There will be a bloodbath."

Talk to the B2B execs, and they'll tell you it's the other guy who is headed for trouble. But the cocky faade masks a panic not to become the next Pandesic. In the past few months alone, two of the sector's leading players--Chicago-based DigitalWork.com, a marketing and advertising services provider, and San Francisco-based SmartAge.com, a provider of e-commerce services--abandoned plans to go public. DigitalWork subsequently dismissed 25% of its workforce. And they're not the only ones (table).

Who cares if a few dot-com darlings fall back to earth? You might. As Pandesic illustrates, the online service you choose today might not be around tomorrow. "Consolidation will become increasingly important," says Lawrence Calcano, an investment banker at Goldman, Sachs & Co. Consider San Francisco-based Driveway.com. The data storage service, which pulled its $75 million IPO in June, has more than 40 competitors. "I suspect less than half a dozen will emerge," says Larry Jones, vice-president of product marketing.

How can you protect yourself? First, look at who's backing your B2B. If it has the support of a major player with expertise in the field, it's probably a safer choice than a garage-based startup. If you're uploading data to the Web, hedge your bet by storing backups locally. And if you depend on ASPs, regularly review your options. Todd Hewlin, managing director of Internet Capital Group, a holding company for dozens of B2Bs, says survivors will be easy to spot. They'll be the ones who can boost your business right now, not later. If instead they just hand out promises as if there's no tomorrow, maybe there isn't. For more tips on managing your technology, click Online Extras at frontier.businessweek.comBy Christopher WoodardReturn to top

TABLE

Dot-Bombs

Times are getting tougher for Web startups aimed at small businesses

COMPANY/LOCATION WHAT IT DOES WHAT HAPPENED

Pandesic/Sunnyvale, Calif. E-commerce ASP Went out of business in

July

DigitalWork.com/Chicago Marketing and Withdrew IPO in June;

advertising laid off 25% of workers

services in July

Infinium/Hyannis, Mass. Business and Dismissed 18% of work-

financial manage- force in August

ment services

SmartAge.com/San Francisco Internet marketing Postponed IPO in June

services

Onvia.com/Seattle Online procurement Stock has fallen from

site $78 to about $5

Oralis.com/Seattle B2B hub for dental Laid off 30% of workers

industry in June

DATA: BUSINESS WEEK

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