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There's Still Fire at VirtualVineyards.com

At a time when DotCom startups start writing their IPO prospectuses while the ink is still wet on their first checks from the first round of funding, Los Altos, Calif.-based VirtualVineyards.com is an old timer -- founded in 1994 -- and a target for critics who say it's getting too long in the tooth to be a real Web player.

But a new $30 million round of venture capital announced late last month and a beefed-up management team announced today are warnings that this venerable wine e-tailer is still a contender.

"The potential market is huge which means there is room for more than one player" said Chuck Chan, partner with Alpine Technology Ventures in Cupertino, one of the first VCs to invest in VirtualVineyards.com along with Applied Technology and Inroads Capital Partners. The entry of WineShopper.com and its new $46 million VC war chest doesn't faze Chan at all. Their entry, he says, "validates the market space." This is Virtual Vineyard's fourth round of financing totalling almost $50 million.

That may be so, but it's no coincidence that VirtualVineyards.Com's newest and biggest $30 million round of financing -- led by New Millennium Partners, GE Equity and MediaOne Ventures -- comes right on the heels of WineShopper's own announcement.

So will the new financing solidify Virtual Vineyards' market leadership and make their first-mover advantage finally pay off?

"Absolutely, yes" says president and CEO Bill Newlands, who left the top wine management job at beverage giant Canandaigua Brands on June 30. Newlands is also the former CEO of Domaine Chandon and Simi Winery and is the most visible member of a top management shuffle announced today and in the past week which includes seasoned wine and Web veterans at the CFO, business development and top marketing positions.

Clearly the new cash infusion is paying for an arms build-up as they prepare to defend their leadership position. While industry analysts say they have no specific data -- and Virtual Vineyards will not release revenue figures -- the current wine e-tailing market consists of Virtual Vineyards and everybody else comprised of several score bootstrap and other poorly financed operations, mostly offshoots of bricks-and-mortar stores. There was no real competition in the market until WineShopper.com burst on the scene late last year and announced they would have a nationwide shipping system for tens of thousands of wine operational by the end of 1999.

In response, Newlands says that VirtualVineyards.com will quadruple the number of wines it sells -- to about 2,000 by then end of this year.

"And don't forget that we've tasted every wine we sell and we stand behind all of them," Newlands emphasized. Indeed, Virtual Vineyards has emphasized quality over quantity since it opened selling only those wines that founder and head "Wine Geek" Peter Granoff has personally evaluated as both good wines and good buys. Granoff, who holds the prestigious Master Sommelier (MS) designation, was appointed senior vice president and chief merchant in the recent management re-organization.

Granoff tops off a tasting staff of three other Master Sommeliers, by far the largest concentration of any wine e-tailer. But not to be outdone, WineShopper.Com has been busy shopping for its own MS designates and is reportedly upping the ante by recruiting holders of the rarer and even-more-prestigious Master of Wine designation.

Because WineShopper.com has not yet launched, it is unclear whether they will stick to their "every wine in America to every person in America" profit model or try to emulate Virtual Vineyards' quality model as well.

In addition to beefing up management and wine inventory, Newlands told VC Watch that a substantial part of the new $30 million will go to "off-Net" marketing including radio and television advertising.

He said they will also be expanding their legal direct shipping system, which now covers more than 80 percent of the wine-consuming market in more than 40 states. Ironically, WineShopper.com was founded in large part to provide a legal method of shipping directly to consumers, something Newlands said was a "non-issue" in light of the network of wholesalers and retailers Virtual Vineyards has constructed for its sales.

VV's system was a response to wholesaler-initiated lawsuits and regulatory threats leveled against Virtual Vineyards and other direct shippers in the past two years by ambitious state politicians and spin doctors trying to cast them as unregulated "cyberbootleggers" eager to sell to under-aged drinkers.

WineShopper.com's supporters have been up front about their desire to "Amazon" the wine e-tailing market, but the new firepower at VirtualVineyards.com clearly indicates it is gearing up to defend its market leader position. Regardless of the outcome, this will be a vintage battle to remember, one that is certain to ferment the e-wine market for some time to come.

In the mean time, Newlands says they "aren't even thinking about an IPO."

Oh sure.


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