Like their brick-and-mortar brethren, venture capital-backed online exchanges are looking for ways to buck the economic downturn and keep cash in their coffers.
In addition to taking a variety of cost-cutting steps, component marketplaces like PartMiner Inc. are re-evaluating their strategies and shedding assets that don't fit their long-term plans. PartMiner, New York, last week said it has sold its collaborative sourcing and design (CSD) software business to software vendor Manugistics Group Inc. for an undisclosed amount.
One reason for the deal is to bolster PartMiner's balance sheet, said chief executive Dan Nissanoff. Although the company still has money from its $115 million in equity funding in the last few years, the proceeds from divesting the CSD software operation are expected to help PartMiner, which postponed its IPO in February, survive under current market conditions, he said.
"The deal provides us with significant assets to weather the storm and will allow us to invest in improving the sales and customer interface sides of the business, as well as fuel our excess-trade platform," Nissanoff said.
Analysts weren't surprised by the move and expect online component marketplaces to continue honing their business models during a trying year.
"These online models will continue to evolve. They look different today than they did a year ago, and they will look a lot different a year from now," said Matthew Sheerin, an analyst at Thomas Weisel Partners LLC in New York. "It's not unusual to see a company sell off parts of the business and focus on what they perceive as their core competencies. But I'm not sure everyone knows what those core competencies will be until they start getting traction."
Online marketplaces are experimenting with their services, gauging to see which of them their customers will pay for. Generally, marketplaces spend millions on infrastructure and software licensing agreements to provide a range of procurement, sourcing, design, and logistics services.
Holding the line
While those platforms may be basic requirements, pressure to hold the line is also a top priority. Layoffs and other cost-cutting measures are becoming as widespread among online marketplaces as they are in other high-tech segments.
In recent months, a number of marketplaces, including PartMiner, reduced staff. Last week, Converge Inc., an industry-led exchange headed by Compaq Computer Corp. and Hewlett-Packard Co., took the same route. Citing tough economic pressures, Peabody, Mass.-based Converge on Thursday cut a number of jobs from its recently acquired trading business, formerly known as NECX.
"Putting all that sourcing and design collaboration in place is extremely difficult. It's very expensive, and generating a viable business model from that is difficult," said Bob Moncrieff, a director at management consultant firm Pittiglio Rabin Todd & McGrath in Mountain View, Calif. "It's also quite a challenge to put in extra services when they're dealing with soft market conditions."Others in the online exchange space, though, believe pooling various services will put them on the path to profitability, and have kept expansion efforts in their financial plans.
"A lot of people thought there would be an open checkbook from the venture capitalists. We believe it will be another 12 months for the capital markets to open again, and we have always worked in that time frame," said Andrew Wilson, president and chief operating officer of Need2Buy Inc., a Westlake Village, Calif., exchange that has received $50 million in funding over the past two years.
"We believe that bundling services and offering that in aggregate will have long-term value," he added. "It would be short-sighted of us to carve pieces of that now and decide not to offer them."
Not worth it
In PartMiner's case, the expense and time required to develop design and sourcing software was not worth the effort, Nissanoff said.
PartMiner had bought the CSD tool in December 1999 as part of its acquisition of IQXpert from IHS Group Inc. The cornerstone of that deal was a database of electronic component information.
The CSD software was designed to improve collaboration within an organization's four walls rather than inter-
enterprise collaboration, according to Bill Barron, PartMiner's chief marketing officer. But to get full functionality from it, the company would have to dedicate considerable resources to develop the software further, or scrap it and sell it to a company that could embed the technology in a broader solution.
"We were looking at the market and our business model carefully and decided that CSD was not a strategic asset," Nissanoff said. "To fully exploit the business, we would have to turn ourselves into a software company. We don't want to be in the software sales business. We are in the business of facilitating procurement."