Walsh: VerticalNet May Consider Taking Properties IPO

Yesterday, I released Part I of a interview with the president and chief executive officer of VerticalNet (VERT),
Mark Walsh.

In Part II, Mark discusses VertcalNet’s progress to date, as
well as plans for the B2B “portal” going forward, as well as VerticalNet’s focus on creating more transaction oriented, e-commerce revenues. I also asked Mark if he planned to IPO
any of the company’s individual verticals.


Don’t let the name throw you off. Unlike the majority of
business-to-business commerce companies that attack a single vertical
industry, VerticalNet is actually a horizontal B2B “portal” for 53
individually branded vertical communities. The communities represent a broad
cross-section of vertical industries. DigitalBroadcasting.com,
DairyNetwork.com, and Pollution Online are examples, among the 50 others.


[email protected]: OK Mark, lets get to the juice

Walsh: Lets do it.

[email protected]: Investors, including myself, read the profiles of some of
these companies and I think we end up even more confused. There is just so
much commercial jargon. Can you tell us what VerticalNet is really about?

Walsh: Yeah, I’m with you on that. I think the terminology gets so thick, so
quick. It really slows down the appreciation of some of the cool things
going on.

[email protected]: So how cool is VerticalNet? (laughs)

Walsh: VerticalNet was founded 4-1/2 years ago, really as a media model
business bringing trade publishing to the Internet. Now we are a portfolio
play, serving multiple markets, targeting a distinct audience of industrial
buyers and suppliers, and in some cases, technology buyers and suppliers. We
wrap a series of information, contextual content and commerce services
around each of our 53 communities. Buyers and suppliers find a lot of value
in our audience, in our technology, and in our ability to sell their things.

[email protected]: And the selling?

Walsh: Selling to me is about new and used/excess. Picture four boxes with,
one-to-one new, one-to-one used, one-to-many new and one-to-many used. We have products
to service those four boxes for each of our communities, because that is how
we see buyers behaving.

[email protected]: Can you give us some examples?

Walsh: Sure. A 1-to-1 event occurs when a buyer of pinch valves comes to
our “Pollution Online” vertical. They want to browse through multiple
sellers, find one that has what they want, reach out to that vendor, leave a
sales lead, or actually buy on our “vert.” That is one-to-one.

One-to-many is
where a buyer comes to one of our verticals and says, “I’m looking for a
pinch valve that is made of aluminum, corrosive resistant, high capacity and
is available in a week.” Having multiple vendors searched and finding a
number of pinch valves that solve the parameters of that buyers’ search, the
options are presented to the buyer and they can then make a decision.

[email protected]: What about VerticalNet’s commerce expansion?

Walsh: What you’ll see from us in Q1:2000, through our purchase of Isadra
Software is much like you see in the Commerce Ones and Aribas of the
world. . .the ability for a buyer to source multiple vendors and buy, online, in
our vert, the products that make sense for them.

[email protected]: A lot of people point out the complexity and dificulty of
launching one B2B vertical, let alone 53. There has to be some
cross-networking leverage, or else such a strategy wouldn’t make sense.

Walsh

: Absolutely, By running a lot of these, we see the similarities of
purchasing behavior across a lot of different industrial
business-to-business markets. I mean literally how people leave leads in our
“Pollution Online” vertical vs. the “Food Processing” vertical. We see what
leads turn into sales across all of our verts. This allows us to see the
synergies between software, services and hosting, that we are now reaching
out to and buying, that we can deploy against individual verticals, or
groups of verticals. That power is unique to our company and one of the
reasons people like us.

[email protected]: So investors can be assured that there is no sacrifice of
depth for breadth?

Walsh: The verticals we are in, we’re 1,000 feet deep and 1,000 feet wide.
We’re a gorilla in each of our vertical industries.

[email protected]: Lets talk about the multi-offering strategy. I know you’re a
big proponent of portfolios rather than a single hit-or-miss approach.

Walsh: You can do the math. Just look at how much money verticals like
e-Steel and PlasticsNet need to launch one vertical! These companies are
raising a lot of dough, chasing one market, and my contention is, if the
vertical they’re chasing doesn’t adopt the Internet as rapidly as they think
it will. . .What is plan B?!?!

David Perry (CEO, Chemdex) is now on record as saying that he is going to
launch four to five more verticals because he thinks the portfolio play is
the right way to go. We’re flattered that single vertical companies are
coming around to our way of thinking. David has also said that he spent $50
million to launch his first vertical, and it’s going to cost him $5 million
to launch the second. So you’re seeing a nice cost curve.

[email protected]: An incredible cost curve, I would assume, if you own 53
verticals like VerticalNet.

Walsh: Exactly. After 53, if you and I decided to launch a vertical today,
give me three weeks and $500,000 and I’ll have it up and running, completely
functional, with all the content, directories, and commerce ready to go.

[email protected]: As you know, in my “B2B Ladder Approach” analysis, I pegged
VerticalNet as an operational holding company, as well as a portal for
vertical B2B communities.

Walsh: I would definitely agree.

[email protected]: I see some of your individual verticals are already
profitable.

Walsh: I think 6-10 are currently profitable. We’ve seen some that have
broken out of the gate like a great race horse. Most of those are our
technology verticals.

[email protected]: You’re obviously excited about the NECX Exchange purchase (a
physical B2B marketplace for the electronics industry). You mentioned its
warehouse and trading floor, so just like in the business-to-consumer (B2C)
arena, we seem to always return to the offline world.

Walsh: Dell says that its Web site does $20 million in sales each day, but
about 1/3 of those sales are from people who use the site to configure their
PC, then they call a sales rep and buy it. Dell calls that e-commerce
because the sale was accelerated and facilitated by the Internet, it just
wasn’t transacted online. NECX is a super Dell. We’ll “Webify” its offline
revenues.

[email protected]: So a lot of these B2B “e-commerce” transactions are actually
occurring offline?

Walsh: Absolutely! And I’m not sure they’re ever going to move online.
E-commerce is just a digital sales channel and it’s a little bit better than
the guys playing golf and making relationships. Right?

[email protected]: Definitely. I talked about that in a piece I did comparing
Wal-Mart and Amazon.com.

Walsh: So if you say it’s a digital sales channel, and you embrace it, you
wi

ll kick the ass of most of the guys who think it’s more than that. The
Internet is not this tectonic shift. It’s just a better sales channel.

[email protected]: Three-thousand storefronts at a fee of $6,000 per each year is
impressive. So are the average $25,000 transactions taking place on
VerticalNet, but you’re not getting a piece of those transactions yet.

Walsh: What I say is don’t get out of the Trojan Horse until you’re inside
the castle. So we’ve built verticals where we have extended the hand of
friendship to buyers and suppliers, but I’m not demanding a piece yet. The
reason, I don’t want to be short-term greedy and long-term sorry.

[email protected]: The “network effect” has to be a concern though, as
companies like Commerce One integrate its software into customers’
networks.

Walsh: We really think that the network effect is going to be diminished as
the software becomes less proprietary and the openess kicks in. The network
effect will be audience driven, not software driven.

[email protected]: OK, I want to get back to your individual verticals. Do any
of these have the potential of going public?

Walsh: Yes. If any show significant revenue growth, have tremendous
partnerships, a couple of key suppliers in that market pledging a lot of
saleson that vert and I could create a way for VerticalNet to service that
vertical as a stand-alone company. . .I’d be crazy not to.

[email protected]: That’s where I think investors might be missing a huge
opportunity with VerticalNet.

Walsh: Stay tuned on that (after a deep breath).

[email protected]: Mark, thank you for taking the time to sit down and speak
with us. I enjoyed it.

Walsh: Hey, it was great talking with you Luke.


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