Chemdex Falls--Is Ventro Next?

It was a rare occasion of the child displacing the parent. Ventro repositioned itself this year as an e-marketplace services provider, and while four other e-marketplaces under the company are still running, Ventro committed itself to building online exchanges for customers rather than itself.

But like Chemdex, Ventro has now found itself in dangerous territory. In February, the company reported a net loss of $451.6 million for the fourth quarter of 2000, while the total loss for 2000 was $618.1 million. Just before Chemdex shut down, Nasdaq announced that it had begun a review of Ventro's eligibility for its continued listing on the market because its stock price was lagging under $1. And last week, Ventro was hit by a lawsuit from shareholders that charged the company with securities fraud for allegedly issuing "false and misleading statements concerning the company's business and financial condition."

Chemdex was launched in 1997 as an online exchange for the life sciences industry and became the first vertical e-marketplace to receive venture capital support. It achieved early success, spawning additional e-marketplaces and Ventro, which would eventually become the umbrella over Chemdex and its sister sites. Ventro was formed in 1999 by Chemdex co-founder David Perry, now president and CEO of Ventro.

The costs of running Chemdex and Promedix became too high, however, and although Ventro had offers to sell the e-marketplaces, the company's board of directors decided the best move was to shut them down.

"We made an enormous investment in infrastructure and we weren't going to get that back in Chemdex," says Tom Hammer, senior vice president of marketplace development at Ventro. "We didn't shut down Chemdex and Promedix because they weren't good marketplaces--quite the opposite. It was about getting liquidity."

On the positive side, $382.5 million of the fourth quarter loss was attributed to discontinuing Chemdex and Promedix, and the termination of 235 employees for the two companies, which was less that Ventro first anticipated. But for Ventro, the challenge now is sparking enough interest in e-marketplaces and attracting brick-and-mortar customers.

Hammer says Ventro realized that private e-marketplaces were going to struggle without major brick and mortar partners. Even with the company's other online exchanges--Broadlane, Industria Solutions, Amphire Solutions and MarketMile--which did have support from brick-and-mortar companies, turning a visible profit was an imposing obstacle.

"Our business model was a real hard one for the street to appreciate," Hammer adds. "We were getting our compensation from building out marketplaces in the form of equity in the marketplaces and in privately held companies, so the increase in the value was never demonstrated and our stock price reflected that problem--they didn't see an income stream."

After shutting down Chemdex and Promedix, Ventro's stock continued to slide, and is trading today at approximately 50 cents. Ventro's 52-week high is $54.88. In February of 2000, shares of the company were trading at $243.50. The company, however, says it has the knowledge and experience to build efficient and profitable e-marketplaces and is convinced the business model shift will pay off in the long run.

"We decided to focus on what we do best, which is building and hosting e-marketplaces," Hammer says. "We transformed ourselves from a platform developer who partners with brick-and-mortar companies to a service provider who builds marketplaces for its customers and takes compensation in cash."

Ventro says there's still a huge opportunity in building e-marketplaces and helping brick-and-mortar companies cut costs through e-procurement, and many analysts agree. A recent Aberdeen Group report claimed e-procurement could help save businesses more than half their total purchasing costs. The question is whether Ventro can stay afloat long enough for the payoff.