The first wave of B2B Internet software and services providers — companies such as i2 Technologies (ITWO), Commerce One (CMRC) and Ariba (ARBA) — primarily focused on large corporations with large needs, Fortune 1000 companies trying to adapt Net technology to their global supply chains and sales efforts.
Now the B2B revolution is filtering down, with a growing number of companies targeting small businesses and entrepreneurs. And for good reason. Small businesses increasingly are recognizing that by leveraging the power of the Internet to reduce costs and extend their reach, they can better compete with the big boys. A study by International Data Corp. estimates that spending on e-commerce transactions by small businesses will skyrocket from $6.2 billion in 1998 to $106.8 billion in 2002.
One company attacking this small-business market is Chicago-based DigitalWork.com, which offers about 30 services through its Web site and those of more than 55 distribution partners, including America Online (AOL), Dell, IBM Small Business and Wells Fargo.
DigitalWorks.com is slated to go public this week, with 6.25 million shares expected to be offered between $11 and $13 each. Lead underwriter for the $75 million (down from the original $90 million) offering is Lehman Brothers, while the stock will trade under the Nasdaq ticker DWRK.
Through the DigitalWorks.com network, small businesses can utilize business-function services such as public relations, sales, advertising, market research, direct mail, recruiting and many others. DWRK doesn’t perform these services itself; it outsources the work to a number of other services providers. In essence, DigitalWorks.com acts as a middleman for B2B transactions (or, in the case of small businesses and service providers, b2b). According to the company’s S-1 filing, more than 100,000 small businesses had signed up for its e-services platform through last year, but only 4,200 had actually paid to use a service.
The company generates revenue from the e-services it offers small-business customers (about 80 percent of total revenue), as well as from fees charged business portals and service suppliers for accessing the DigitalWorks.com e-services platform.
Last year DigitalWorks.com had $1.9 million in revenue, against a net loss of $15.3 million. Since its inception in March 1998, DWRK has lost $16.9 million.
While DigitalWorks.com touts the strength of its B2B network approach — bringing together a group of buyers, services providers and business portals — it also represents a potential risk. In Q4, about 75 percent of the company’s users registered through a business portal partner, and DigitalWorks.com expects that number to increase.
The problem comes when the business portal decides to strike off on its own or find another partner. DigitalWorks.com recently signed an 18-month agreement with AOL, which promises to provide sales and marketing services on a customized co-branded site accessible from some AOL properties. The deal cost DWRK $6 million. What happens if AOL walks after 18 months?
DigitalWorks.com also faces competition from companies such as AllBusiness.com, an NBC Internet subsidiary, and potential competition from giants such as Microsoft and Yahoo (YHOO), should they expand their array of Internet services to include those geared toward small businesses.
Bottom line: DigitalWorks.com is targeting a promising market, but shows no signs of being the market leader itself. Early IPO investors might get some altitude from the B2B label — and the key word here is “might” — but the aftermarket ride could be a little scary.
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