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Uncorking Venture Capital for Wine

Internet wine e-tailers have recently harvested a record crop from the VC vineyards, uncorking close to $80 million in an increasingly hot race to be the Amazon.com of vino.

Startup WineShopper.com is the biggest winner, nailing down $46 million from a consortium lead by Menlo Park powerhouse Kleiner Perkins Caufield & Byers (KPCB). Also receiving funding are VirtualVineyards.com ($30 million), eVineyard ($2.2 million) a handful of also-rans that would not disclose investments.

The new entrants join a crowded field of small, mostly shoestring Web operations all scrambling for a piece of a $17 billion pie, of which direct shipments currently account for only $100 to $300 million.

The small size of direct shipping is due to a gnarly bramble of 50 different state laws, only 13 of which allow legal direct wine shipments. Some states, goaded by distributors and wholesalers eager to protect their businesses, have even made it a felony to ship wine directly to consumers.

Ted Schlein of KPCB says one reason he took the lead position in WineShopper.com's financing (a syndicated rumored to include Amazon.com) was because of its strategic alliance with the Wine and Spirits Wholesalers of America (WSWA). The WSWA has agreed to coordinate a master database of all wine available among its members and a legal shipping system coordinated to work within the laws of every state. While varying from state to state, this involves moving wine through three layers of state and federal-government licensed companies: producers (the wineries), wholesalers and retailers where the price is roughly doubled at each step.

Many wineries, as well as direct retailers, argue that this limits availability and keeps prices artificially high. Schlein disagrees.

"WineShopper is absolutely the only way to do this," Schlein told VC Watch. "You cannot win in this market without working within the three-tier system."

WineShopper.com plans to make money from licensing access to its database and shipping system to retailers -- bricks-and-mortar as well as Web-based. In addition, WineShopperDirect is planned as a mega wine e-tailer on the scale of Amazon.

Schlein thinks that having a totally legal order and shipping system will allow the direct shipping portion of the wine market expand.

WineShopper.com President Peter Sisson obviously agrees, which is why he ran up a $35,000 personal credit card bill, sold his house and borrowed $75,000 from his dad in order to completely analyze the problems and nail down an exclusive agreement with WSWA before he approached the VCs.

Sisson, a Cornell grad with a Masters in Computer Science from Stanford, says he got the idea for WineShopper.com in late 1997 while he was working as a securities analyst at Montgomery Securities. He quit that job in early 1998, spending the next year maxing out credit cards and building his plan.

"We were impressed," Schlein said of Sisson. "He had thought his way through the problems better than anyone else we had met with." Schlein emphasized that the WSWA deal and the way WineShopper.com addressed the shipping and legal compliance issues were vital for the funding, especially, he said, "Because this (wine) is the hardest e-commerce industry you can get into."

Hard, but something the VCs think is not impossible. Schlein put together a $46 million funding package, the first tranche of which -- $14 million -- closed on May 5. KPCB put up half of the first tranche with "other strategic investors" in for the remainder. Sisson is mum about the possible Amazon.com involvement, neither confirming nor denying it. The remaining $32 million "has been secured" Sisson says but no closing date has been set.

Next: Will another $30 million solidify Virtual Vineyards' market leadership and make their first-mover advantage finally pay off?