E-Commerce Building Blocks

1. E-Commerce Building Blocks Rob Rochester

2. Creating companies • Turning ideas into successful companies required many resources: • Funding • Business strategy development • Human resources • Technology • Real estate • Finance • Accounting • Basic office supplies • Office supplies • space

3. IPO Market • Buoyant. • Supported the capitalization of companies that were: • Younger • Smaller • Less profitable • Than in the past • Investors realized. • The faster to IPO the faster the “ lock-up-period” would be over. • The post IPO time in which management and large shareholders had to hold their shares. • Entrepreneurs needed: • Solutions to their immediate needs without constraining the future development of their company

4. Building Block providers • E-Commerce building block providers could be broken into five categories: • Internet Holding companies • Venture Capitalists • Strategy consultants • Web professional service firms • Internet data services

5. Internet Holding Company • Ultimate goal was to realize the value from the companies in which they invested by building or developing them quickly. • Holding companies supplied • Customers • Partners • Technology platforms • Top executives • Helped to speed growth and time of exit for new ventures.

6. Internet Holding Company • Holding companies facilitated information exchange between their portfolio companies • Increased rapidity with which a company scaled the learning curve • Prevented a company from making costly or time-consuming mistakes. • Reduced search time for services • Real estate • Human resources / recruiting • Web hosting/ network infrastructure • Finance • Accounting • Legal • Business strategy and development • Sales • marketing

7. Internet Holding Company advantages • Key structural advantages: • Membership in a network. • Leverage size and power of their network during negotiations with suppliers and partners. • Increased power when negotiating or competing with competitors.

8. Cost to the Entrepreneur • Holding companies demanded • 20% - to a controlling stake in a company. • Many entrepreneurs worried they would lose control of their companies. • Many companies, with the rush to go public were forced to fit a model, making them a cookie cutter company.

9. Problem with holding companies • Lacked experience in the areas in which they invested, their always expanding and increasingly more complex networks could raise the potential for conflict of interest.

10. Internet Incubators • Incubators usually collocated all the companies in which they invest in one facility. • This increased the interactions among these portfolio companies and with the incubator itself. • It could diminish originality in the start-up firms business concepts and models. • Generally got a 50% stake in the company. • The problem with incubators • “its such a cookie cutter approach, and all ideas aren’t created equal.” – Jim Evans • Many people felt • “…, any entrepreneur that needs to be incubated is not an entrepreneur I’d like to back” – Peter Henig

11. CMGI • “CMGI is in the business of creating and managing the largest, most diverse network of internet companies in the world… CMGI’s business model… consists of network of diverse yet interconnected companies all holding leadership positions, or the promise of leadership, in Internet-related business.” – CMGI Web Site • Structured as two distinct business units. • CMGI’s operating group • @Ventures

12. CMGI • CMGI’s operating group • Consisted of majority or wholly- owned companies • Generally bought second-tier Internet properties and tried to turn them around quickly for a profit. • Took a controlling stake or acquired outright companies which fit its major areas of strategic thrust. • Summits brought together CEO’s, business development, technologies, and marketing people from across the various CMGI companies. • Corporate office provided: • Centralized services. • Human resources • Accounting • Legal • Strategic guidance

13. CMGI • Most profitable area for CMGI executives. • @Ventures • Venture capital arm • Made roughly 3 investments a month.

14. History of CMGI • Founded in 1968 as CMG • Glenn Matthews • Sold mailing lists of college professors to test book publishers. • David Wetherell was hired to run CMG in 1986. • Managed to keep the company from bankruptcy. • Changed to company to CMG information services. • Led the company to IPO in 1994 • Invested 2 million in BookLink Technologies early in 1994. • Later the same year sold to AOL for more than 70 million. • Renamed CMGI in 1998

15. CMGI Investments • Focused on building a network of Internet companies with “Critical Mass”. • Portfolio companies fell into four categories: • Advertising and marketing • Content and community • E-Commerce • Enabling technologies • Aggressive to acquire companies that could benefit its existing portfolios companies. • “were looking for synergies. If a company needs a capability and we don’t have it at CMGI, we’ll go out and buy it” - Wetherell

16. ICG • Hoped to apply similar learning and management techniques across a wide range of vertical industries. • Invested mainly in a specific type of B2B company (Market Makers) • Betting that as much as 70% of what made an exchange successful was common in all exchanges.

17. ICG approach to Investment • Top-Down • Identified 50 priority markets • Attempted to own at least 1/3 of the “number one player” in each of those markets. • First picking the right industry • Then choosing a promising company within that industry.

18. ICG • Structured as a single entity • Created eColony to create companies from scratch in 1999. • Had 65 partner firms • 20 Internet infrastructure firms • Three categories • Strategic consulting / system integrators • Software providers • Outsourced service providers • 45 Market Makers • Market Makers brought buyers and sellers together to transact online. • Vertical markets (a single industry) • Horizontal market (selling across many vertical industry groups) • Made about ¾ of its investments on B2B Market Makers.

19. ICG head office • Provided extensive resources • Strategic partners • Advisory board • A 29 person team of experts in areas from deal making to human resources, made up the ICG head office • In house 30 person executive search unit that partner companies could use to fill shortages.

20. Venture Capitalists • A form of private equity investing: • Generally described focused investment firms that took substantial or controlling stakes in private companies and assets. • Venture Capital firms were pools of capital, typically organized as limited partnerships that invest in companies that represented the opportunity for a risky yet high rate of return.

21. VC’s • Early Venture Capitalists • Done by individuals with much smaller investment pools. • Died out until the late 90’s • “Angel investors” • Mentored companies • Provided both capital and expertise. • Mainly invested in early-stage start-up ventures. • Modern Venture Capitalists • Firms emerged as the dominant venture investment vehicle.

22. VC’s Investments • Seed investing • Investing before there was a real product or company • Early-stage investing • Investments of capital to start up a company in its first or second stages of development. • Expansion stage financing • Provided needed financing to help the company grow beyond “critical mass” to become more successful. • Later stage investing • Provided financing to help a company bridge to stock offerings or merger with another company. • VC’s generally took significant or controlling stake of their portfolio firms as well as significant ownership rights.

23. Benefits of a VC • Relationships and credibility • “what’s really important is not the money, but what’s attached to it, like brainpower and contacts” – Soon-Chart Yu

24. Evolution of VC’s • VC’s in the late 90’s • Huge financial returns • Started a rush of investments in both established VC firms and a large number of new competitors • VC’s by 2000 • Some of the largest venture capital investors were not traditional VC’s • Many established technology companies saw an opportunity • Intel • Cisco Systems • Oracle • Anderson Consulting • In 1999 there was a 35 fold increase in investment over 1995 • 7.8 billion was invested into start-up companies in 1999.

25. Corporate Investors • Corporate investors brought competitive assets that traditional VC’s lacked. • Operating insight into technology and markets • Proprietary access to: • Channels • Customers • Intellectual property for the start-up company • Large technology corporations view VC investments as a alternate form of R&D • Acquiring the technology they funded.

26. VC problems • Many VC’s were trend followers rather then trend setters. • Not a huge problem if the investment was in a “hot” sector of the market. • Many in the VC industry fell prey to the herd instinct.

27. Strategy Consultants • Offered start-up companies a straight forward value proposition. • Provided • Focus • Expertise • Credibility in building sustainable and effective business strategies. • Had extensive external network. • Deep industry expertise for their client relationships • Were flexible with payment. • Would take equity or cash for services.

28. Web professional service firms • Provided strategic, creative, and technical advise and also worked to integrate existing business and information systems with new, Internet-based technologies. • Quickly growing market. • Projected to grow from 10 billion in 1999 to 65 billion by 2003 • By 2000 the web professional services industry was in its 3rd stage of evolution. • Now combined business and strategic skills with these technical abilities and was attempting to provide both online and offline expertise.

29. The Internet • Changed traditional business processes as well as creating new ways for firms, suppliers, and customers to interact. • E-Commerce disrupted traditional ways of doing business in nearly all industrial and consumer markets. • Web professional service firms were trying to help their clients understand and react to these changes.

30. Web professional services • The web service market could be segmented along two main dimensions. • The first was whether the firm offered one or a combination of strategic, creative, or technical advice and implementations. • Second, was the focus on front-end or back-end operations.

31. The Front-End • Front-end providers helped clients create, design, and architect websites and associated user interactions. • Helped determine: • Website goals • Branding strategy • Target market • Transaction requirements • Other fundamental parts of site design. • Then design and create • The interface • Technical architecture • Navigation scheme • Create graphics • Write the copy • Code applications • Test and launch the site. • Helped with ongoing content management and site updates.

32. Back-End providers • Helped an E-Commerce company create the transaction systems and other tools to support E-Commerce activities and integrate these systems with: • Existing ERP • Ordering • Returns processing • Accounts receivable • Customer information systems • Helped develop middle-ware • Created custom application program interfaces to improve compatibility.

33. Internet Data Service • Provided a way for Internet-based enterprises to cost-effectively outsource • Internet access • Hosting • Network services • Also provided • Physical hardware • Software • Services that connected the firms mission-critical ITsystems with the Internet. • IDS industry included • Network connectivity • Content distribution • Data center facilities • Management • Application services.

34. IDS most prominent area • Web hosting • Data center facilities and managed services were key components. • Provided the platform that managed and gave reliable Internet access to the applications and systems developed either internally by the firm or by a professional service firm. • Out-sourced web operating cost were 70-80% less than websites maintained in-house. • Effective IDS providers focused on adapting to the speed of change of the Internet, constantly improving its service offerings to utilize “best-of-breed” technologies and keeping customers on the cutting edge.

35. The Options • Entrepreneurs had to choose from a wide array of: • Service providers • Investors • Consultants • Options ranged from joining an Internet holding company and being provided with a wide array of prepackaged services, to selectively using specialist providers allowing for a “do-it-yourself” approach.