1999s B2B Superstar Crashes and Burns

Could it be that the internet is turning out to be a bit of a swindle?

Could it be that the internet is turning out to be a bit of a swindle? OK, thats probably too strong, but the evidence shows it isnt the sweeping transformational engine we once thought it was. n From a business perspective, its really just a powerful distribution outlet for information, services and products. And much to everyones surprise, the Old Economy—companies with real franchises and assets—are back in favor, while the New Economy seems stricken by a fatal investor disinterest. In March 1999, I wrote glowingly about Chemdex, then one of the pre-eminent B2B sites. The headline was "Procurement sites are poised to revolutionize industries."

An analyst, whose name I will mercifully not disclose, said in the story that the 400 procurement sites at that time would grow to 100,000 within three years. A research firm declared that B2B would handle $1.3 trillion in transactions by 2003. What went wrong? Did Wall Street and the venture capital community turn their backs on their erstwhile infatuation? Were they simply bad ideas from the start?

Chemdex simplified the search, sale, distribution and customer support of the $7 billion life-science products arena. No longer would customers for these products have to spend an average of 5 to 7 hours a week thumbing through catalogs. You could buy from any main supplier from one easy-to-use Web site.

Today, Chemdex claims to offer 1.7 million products from 2,200 suppliers. The line "Chemdex offers researchers a one-stop shop for laboratory supplies" still sits squarely in the middle of its site, which will shut down Dec. 31. It sounded like such a great idea.

By March 1999, the company had already burned through $15 million and was seeking another $25 million in third-round financing. Even in those days of sky-high forecasts, Chemdex was only projecting $10 million in sales for the year. A 7-year-old can do that arithmetic.

Unless you have the staying power and financial backing of the big players in your industry, the chances of survival are remote. The lip-service endorsements so many have are not enough. The few B2B exchanges that will survive must have the big suppliers squarely in their camp. Who will control the supply exchanges in the auto industry? The big car companies will. The two major steel site exchanges are already controlled by the major steel producers.

A year ago, the idea of agnostic B2B exchanges with no loyalty to any big supplier was the norm. Now it sounds absurd. A few exchanges such as Ariba. com are doing well. It reported its first break-even quarter in October, and its stock price hovers around a healthy $75. But there arent many Aribas. The stock of archrival VerticalNet, which posted a $17.7 million loss, is mired in single digits. The good news is that VerticalNet, as of Sept. 30, had almost $145 million to burn through.

But no matter how hard you look for the silver lining, B2B, like our Page 1 story says, is in for the same rough sledding that has jounced around consumer sites all year.