May 29, 2009, 12:00 AM

Cold Cash

(Page 3 of 3)

In addition, under the pressure to close deals, Miller says, some vendors promise enhancements to gain new customers-and then delay work on features they had previously promised other clients. “If venture capitalists say the tech vendors have to hit 20 deals a year, they’re making it work,” Miller says. “What suffers is that product roadmap.”

Retailers are increasingly questioning vendors closely on their success and financial status before making buying decisions, Miller says. “The financial viability of a vendor is certainly a top five decision factor,” he says.

And inevitably some companies, vendors as well as online retailers, fail to attract the capital they need and go under or put themselves up for sale. Several sources pointed to the example of Mercado, a provider of site search technology that raised more than $65 million in venture capital and then was sold last fall for $6.5 million and the assumption of debt to web analytics firm Omniture Inc. Venture-backed retailer Home Décor Products Inc., operator of nine e-commerce sites, ceased operations in March.

More are in jeopardy, as cash-strapped venture capital firms decide which of the firms they’ve invested in they can continue to fund. “If you have 10 companies, you might have a few you guarantee you’ll back and a few you don’t, and a bunch in the middle that are harder decisions,” says Larry Bohn, managing director of venture capital firm General Catalyst Partners, an investor in e-commerce platform provider Demandware.

Investors Jani and Bohn are advising their portfolio companies to budget their cash on hand so they can last at least 18 to 24 months without raising additional capital. That may well slow product development at technology companies, Bohn says. “You won’t hire the next five engineers to do a new product release, you’ll schedule it out a few months,” he says.

That conservative approach may not be sexy, but it’s likely to be the way many e-retailers and technology vendors manage their businesses in the next year or so. Only the strong will survive, and strength these days is measured in large part by how much money a company has in the bank.

don@verticalwebmedia.com

Wall Street is showing e-commerce some love in 2009

One sign of how differently investors view Internet retailing today than they did when the tech stock price bubble burst in 2000-2001 is how quickly e-commerce stocks have rebounded this year from last fall’s steep decline. The Internet Retailer Online Retail Index of 25 e-commerce stocks was up 35% for 2009 as of early May, bouncing back much more quickly than the broader stock market.

“The Internet sector has rallied not only because 2009 is showing some stability, but also because a number of companies are showing some strength in market share and growth trends in an otherwise dismal economy,” says Colin Sebastian, senior vice president of equity research at Lazard Capital Markets, who covers e-commerce stocks.

Besides strong growth at Amazon.com Inc. and signs of improvement at eBay Inc., Sebastian points to e-commerce technology vendors like GSI Commerce Inc. and Digital River Inc. that “are benefiting from traditional offline companies investing more to build out the online channel.”

“Going forward,” he says, “the key will be for these companies to show ongoing stability, if not improving growth trends, particularly as we move closer to the next holiday period.”

As of May 8, the Online Retail Index had easily outperformed the Dow Jones Industrial Average, which was down 2.3% for the year, the Standard & Poor’s Industrial Average, up 2.9%, and the tech-heavy NASDAQ, which was ahead 10.3%. It’s true the 25 stocks in the Online Retail Index had fallen a bit faster than the broader market in 2008, losing 39% of their value. But that was not much more than the Dow, which was down 34%, or the S&P; and NASDAQ, both down 37% for 2008.

Among the e-commerce stocks, three online retailers led the way in year-to-date stock price improvement through early May. Shares in VistaPrint Ltd. were up 96.8% for the year, Blue Nile Inc. up 92.3% and Shutterfly Inc. ahead 77.8%.

The 25 companies in the Internet Retailer Online Retail Index are: 1-800-Flowers.com Inc., Akamai Technologies, Amazon.com, American Greetings Corp., Art Technology Group Inc., Bidz.com Inc., Blue Nile, CyberSource Corp., DemandTec Inc., Digital River, Drugstore.com Inc., eBay, GSI Commerce, Keynote Systems Inc., LivePerson Inc., Netflix Inc., NutriSystem Inc., Omniture Inc., Overstock.com Inc., PetMed Express Inc., RealNetworks Inc., Shutterfly, Systemax Inc., United Online Inc. (owner of FTD.com) and VistaPrint.

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