Record levels of investment fire up ebusiness market

US venture capitalists poured a record $5.58 billion into Internet and ecommerce related startup businesses in the second quarter of 1999.

The $3.9 billion invested in Internet related businesses in the second quarter of 1999 was split between 393 companies in the technology area. Ecommerce and content startups got $1.68 billion.

"I've never seen anything like it," said Kirk Walden, director of venture capital research at Pricewaterhousecoopers, which has been tracking venture funding for five years.

He expects the growth rate of venture funding to decline in coming quarters, in part because many once hot IPOs are coming back to earth. "This is not a sustainable environment," Walden said.

According to Pricewaterhousecoopers, funding soared because many Internet companies completed lucrative IPOs earlier in the year which attracted venture capitalists to take more risks.

Starting point

But the venture money is not chasing every business plan with an 'e' in its title.

Favourites are business-to-business ecommerce startups. Many of these will get funding in the second half of the year, predicated Dabija Vlad, vice president at venture capitalist firm, CMEA Ventures.

"Every company has its own area of specialisation. We are looking at the Internet and any enabling technology for ecommerce and communications," said Vlad.

"One area that's a hot technology today is Business-to-Business (B2B) commerce. We're concentrating on that right now. In the chemical market we have a company involved in procurements and supply base. This is a very fresh area," he said.

A distinctly cold area, according to Vlad, is the application software licensing model. "The old licensing model doesn't hold any more. Companies such as the SAPs, Oracles and Baans of the world sold licences and saturated the market. Now it's hard to grow using the same paradigm. There isn't a new market for them," he said.

Where the money goes

Dabija pointed out that a lot of companies have trouble paying for an enterprise amount. "It's difficult, painful, and the results didn't match expectations. They're reluctant to pay a huge fee upfront, but much more willing to pay an ongoing fee," he said.

MR Rangaswami, managing director of the private investor group, Sand Hill Group, is also backing B2B and believes the Business-to-Consumer (B2C) market has petered out. He said the consumer business is valued in billions, but B2B is valued in trillions.

"The B2C market is, for the most part, saturated. But B2B is getting money from the entire venture community. "Over the next twelve months we'll see major investment in this space, and a lot of IPOs will then pour more money into it," Rangaswami said.

Linux overlooked

He also believes that investment-wise, the open source software market, like Linux and others, has been overlooked.

"We invested in Linuxcare about a year ago and that was our third investment in Linux. Red Hat and VA Linux were the other two. We expect to see a lot more venture invested in this arena," he said.

From an analyst's point of view, Rob Enderle at the Giga Information Group said investors are looking at companies having a more robust revenue.

"In the ebusiness space, the venture capitalists are moving off the generic dot.com," he said.

Enderle also said that portals, the concept of the generic search, looks like a saturated product area. "Generic products aren't capturing anyone's attention right now," he said.