E-commerce software, services draw VC attention

By Chris Nerney
Network World Fusion, 08/27/98

BigBook, Inc. of San Francisco runs an online equivalent of the Yellow Pages. CrossRoute Software of Redwood Shores, Calif., makes supply-chain management software. Online Monitoring Services of Alexandria, Va., offers business-to-business intellectual property protection services on the Internet.

These companies are in entirely different markets, but they have two things in common:

They are among the more than 200 network companies that received a record total of $1.14 billion in venture capital in the second quarter, according to the latest PricewaterhouseCoopers/Network World Venture Capital Survey.

They are part of a huge wave of electronic commerce software and services companies that are building the infrastructure for the Internet economy.

In particular, start-ups targeting business markets are attracting heavy backing from venture capitalists and other investors.

"Unequivocally, the Internet action is in the business-to-business side," says Kirk Walden, director of the quarterly survey.

CrossRoute, for example, received $8 million in third-round funding from a half dozen venture firms. The company's flagship product is server-based software that supports functions such as supply-chain integration, distributor ordering, logistics coordination and inventory replenishment.

Online Monitoring Services was given $3.15 million in first-round funding from Piper & Marbury LLP, a Baltimore business law firm. Founded in 1997, Online Monitoring Services sells a product called WebSentry, a search engine that continuously monitors the World Wide Web for pages that misuse a client's intellectual property.

Two of the five largest network venture deals in the second quarter involved ISPs that cater to business customers. International service provider VIA Internet of Denver grabbed $51.5 million in second-round funding from 10 different venture firms, and Epoch Networks of Irvine, Calif., landed $25 million in funding from HarbourVest Partners.

The $1.14 billion in second-quarter network investments topped the previous mark of $1.03 billion set in the fourth quarter of 1997.

With $2.06 billion invested in 377 network companies through the first half of the year, the 1997 record of $3.64 billion in venture capital invested in 711 companies appears to be in jeopardy.

As has been the case in the past three quarters, start-ups developing wireless communications products and services represented the most popular high-tech investment category in the second quarter. During the past quarter, 22 wireless firms received funding.

But overall, the Internet continues to dominate network investing. Sixty percent of the 209 network companies that received venture backing in the second quarter are Internet-oriented.

Some of these, such as BigBook ($400,000 in bridge financing, which is a supplemental influx of cash between rounds) and online retailer Garden Escape, Inc. of Austin, Texas ($20 million in fourth-round funding), have built business models around their Web sites.

However, Walden says many venture capitalists are no longer as eager to make big bets on start-ups whose main source of revenue is derived from drawing large audiences for advertisers.

"Not a lot of those mass providers are making money," he says. "Sure, you have a Yahoo, but there are always exceptions to the rule."

Niche investing

Increasingly, the survey indicates that venture capitalists are financing companies that are targeting narrow customer bases. Among the start-ups aiming at specific audiences are:

QuestLink Technologies, Inc., of Austin, Texas, which offers Web-based information and products for electronic design engineers.

The company received $200,000 in bridge funding from Trellis Partners. Founded in 1995, QuestLink runs a Web site (www.questlink.com) from which anyone in the "worldwide design engineering community" can find and order just the right bipolar transistor or microcontroller.

New York-based Comet Systems, Inc., which was given $2.5 million in first-round funding from Prospect Street Ventures. Founded early last year, Comet licenses the Comet Cursor, a development tool that enables Web site designers to customize users' cursors once they visit the site.

Premier Appraisals, Inc. of Atlanta, which scored $9 million in second-round funding from Chrysalis Ventures, Moore Capital Management and several others.

Premier is an electronic commerce company targeting mortgage and home equity lenders. The company offers appraisals, title searches and flood zone information in the Southeast.

Digital IQ Corp., based in Saratoga, Calif., which received a $2.5 million first round of funding from Brentwood Venture Partners. Digital IQ sells software to companies that want to run Internet promotions and coupons.

Plansoft Corp., which sells Internet-based application software to the convention and meeting planning industry.

The company received $4.7 million in its second round of financing from Patricof & Co. Ventures, Primus Venture Partners and Wasserstein Adelson Ventures. Founded in 1991, Plansoft is based in Twinsburg, Ohio. The company's Web site offers search engines for meeting facilities, supplies and organizations.

Neoforma, Inc. of Mountain View, Calif., which runs a business-to-business Web site for the medical industry.

The company landed a $5 million round of seed financing from Venrock Associates. Neoforma's site (www.neoforma.com) provides customers with information on medical products and services from more than 12,000 companies ranging from makers of cardiology equipment to bathroom supply vendors.