Tom Paine
SAP's $4.3 billion acquisition of SaaS business commerce exchange Ariba, announced this past Tuesday, brings back memories of one famous (perhaps infamous to some) Philly area startup, Verticalnet.
Founded in 1995 in Horsham as Water Online by Michael Hagan and Michael McNulty and later boosted by an investment from Internet Capital Group (which in turn had backing from Safeguard Scientifics), Verticalnet set out hoping to be what Ariba eventually became; a portal connecting buyers and sellers in different business to business vertical markets to streamline procurement and electronic transaction processesing between them. At the time, the idea of applying the Internet to B2B commerce was very new and exciting to investors, although few had more than the vaguest idea of what it actually might involve.
Verticalnet went public in February 1999 and its shares rose from $16 to over $45 in the first day of trading, giving it a market value of $738 milliion. At that time, I think Verticalnet had little more than a rough roadmap of where it was going; its website as I remember it from that period consisted of little more than a collection of online trade pubs aimed at various verticals. There were few tools that actually helped automate buying and selling. The company went out after the IPO and made several acquisitions, none of them huge, and even though it was still a rather tiny business its market value continued to soar, reaching over $12 billion at the height of the Tech Bubble in 2000, even though its revenue at the time was only slightly over $100 million with huge operating losses. But its share price, which briefly exceeded $130, was in the $1 range by 2001 after the bubble burst. The company lost its main currency, a high stock price, for acquiring other companies to build out its strategy, as well as its ability to raise significant capital. A deal with Microsoft help keep it above water for awhile, but Verticalnet was soon fighting for its survival.
Internet Capital Group (now ICG), which at one point during the bubble was valued at over $80 billion, also saw its share price collapse, as did its backer Safeguard Scientific and many other prominent investors, several with Philly area ties (this Fortune article from 2001 tells the story well.) While Verticalnet wasn't the sole reason for the collapse of those firms' value, it was, to me at the time, the epitome of the bubble: a startup with a $12 billion market cap with few real assets, a vague strategy, and limited technology.
To get an idea of what happened to Verticalnet after the crash, I turned to Jason Busch, Executive Editor of Spend Matters, probably the leading website covering the procurement and what is referred to as "spend management" spaces. A Philly native now based in Chicago who is putting his degrees from UPenn (undergrad and MA History) to good use, Busch knows the industry. He once worked for a competitor acquired by Ariba, and covers the business with a passion for detail that's reflected in his extensive analysis of the SAP/Ariba deal. He also writes about how Ariba came back almost from the dead (it was caught up, though not quite as severely, in the same market collapse that hit Verticalnet) to become the leader in cloud-based collaborative commerce applications.
Verticalnet, Busch said in a phone interview with Philly Tech News, did ultimately produce some solid technology, much of it gained through the acquisition at the end of 2001 of Atlas Commerce, a Malvern-based company backed by Safeguard Scientifics that made Verticalnet a competitive private e-marketplace software provider. Busch also said Verticalnet had some very talented people who contributed considerably to the "thought leadership" of the industry. But the constant lack of financial stability hindered its ability to win large enterprise deals.
Utlimately, while Verticalnet developed some credible offerings it was never able to gain the scale it needed to compete with Ariba and other larger, growing competitors. It was finally acquired in 2007 by spend analysis vendor BravoSolution SpA, a subsidiary of Italcementi, SpA, the world's fifth-largest cement make, for $15.2 million. Verticalnet gave BravoSolution an entry point into the North American market. BravoSoution, which has global revenue of about $80 million, has its US headquarters in Chicago now and still has an office in Malvern, although that is a relatively small part of its operations today, Busch tells me.
Verticalnet had many good and talented people; quite a few of them still contribute to the Philly Tech scene (see Verticalnet alumni page on Facebook). I am not trying to disparage the people who founded and funded Verticalnet, because obviously there was a market to go after there. Safeguard, which back then dominated the Philly venture capital scene through a keiretsu-like network, has recovered as a more focused firm with bright people making what appear to be intelligent, farsighted investment decisions. ICG is still around, although with a much smaller footprint. But back in the bubble days there was almost a "Masters of the Universe" atmosphere around Safeguard & ICG, a belief they could create enormous wealth out of almost nothing. And it took Philly's tech ecosystem years to recover from the aftermath of the bubble bursting.
If you are concerned about a new tech bubble forming today, that might be happening in some areas. But we are nowhere near the type of irrational exuberance that was reflected in Verticalnet's market capitalization.
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