E-Commerce Building BlocksE-Commerce Building BlocksRob RochesterRob Rochester

Creating companiesCreating 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

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

IPO MarketIPO 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

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

Building Block providersBuilding Block providers

E-Commerce building block providers could be broken into five categories:Internet Holding companiesVenture CapitalistsStrategy consultantsWeb professional service firmsInternet data services

E-Commerce building block providers could be broken into five categories:Internet Holding companiesVenture CapitalistsStrategy consultantsWeb professional service firmsInternet data services

Internet Holding CompanyInternet 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.

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.

Internet Holding CompanyInternet 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

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

Internet Holding Company advantages

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.

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.

Cost to the EntrepreneurCost to the Entrepreneur

Holding companies demanded20% - 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.

Holding companies demanded20% - 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.

Problem with holding companies

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.

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.

Internet IncubatorsInternet 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

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

CMGICMGI

“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

“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

CMGICMGI

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

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

CMGICMGI

Most profitable area for CMGI executives.

@VenturesVenture capital arm

Made roughly 3 investments a month.

Most profitable area for CMGI executives.

@VenturesVenture capital arm

Made roughly 3 investments a month.

History of CMGIHistory 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

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

CMGI InvestmentsCMGI 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

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

ICGICG

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.

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.

ICG approach to Investment

ICG approach to Investment

Top-DownIdentified 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.

Top-DownIdentified 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.

ICGICG

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.

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.

ICG head officeICG head office

Provided extensive resourcesStrategic partnersAdvisory 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.

Provided extensive resourcesStrategic partnersAdvisory 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.

Venture CapitalistsVenture 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.

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.

VC’sVC’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.

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.

VC’s InvestmentsVC’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.

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.

Benefits of a VCBenefits 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

Relationships and credibility“what’s really important is not the

money, but what’s attached to it, like brainpower and contacts” – Soon-Chart Yu

Evolution of VC’sEvolution 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.

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.

Corporate InvestorsCorporate 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.

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.

VC problemsVC 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.

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.

Strategy ConsultantsStrategy 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.

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.

Web professional service firms

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.

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.

The InternetThe 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.

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.

Web professional servicesWeb 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.

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.

The Front-EndThe 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.

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.

Back-End providersBack-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.

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.

Internet Data ServiceInternet 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 IT systems with

the Internet. IDS industry included

Network connectivity Content distribution Data center facilities Management Application services.

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 IT systems with

the Internet. IDS industry included

Network connectivity Content distribution Data center facilities Management Application services.

IDS most prominent areaIDS 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.

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.

The OptionsThe 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.

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.