Change Of Focus
The new focus on Internet investing is around applications, not content. Venture capitalists are investing in ideas that exploit the various capabilities of the Internet. Seed money, for example, is going to such companies as CosmoCom, which is developing call-center systems that use the multimedia capabilities of the Internet, and Courion, which is creating Internet-based help-desk software.

Accel Partners' Breyer is investing in enterprise software for use with corporate intranets to cash in on the success of SAP and PeopleSoft. Enterprise software companies are logical targets for venture capitalists because they provide key solutions to corporate problems. Says Breyer: "The need is there, the budgets are there." For example, Accel is an investor in Agile Software, a San Jose, Calif., company that provides supply-chain management on an intranet. The company's founders, veterans of Sherpa, have already demonstrated success in product data management. "This is simply an extension of what they did before," says Breyer.

Other venture investors are targeting more vertical applications, products that serve a specific targeted community. They hope the software, once successfully used by one "community," can be transplanted elsewhere. One beneficiary of this thinking is Ariba Technologies, a Mountain View, Calif., company that has received nearly $13 million in expansion-round funding from Mayfield Fund, Benchmark, Crosspoint, and Technology Crossover Ventures. Ariba is developing procurement software that's now used by restaurant owners. Restaurants, like many other businesses, experience great waste in ordering and using resources. A software system that can be used online or on the Internet to create "just-in-time" ordering could help prevent such waste. Investors hope that if the tool can be shown to help restaurants, customers in other businesses would sign on, too.

Some venture capitalists are looking for business technology solutions that can be more efficiently conducted on the Internet. Venture firm Oak Investment Management is an investor in IET, an Israeli start-up that's now headquartered in Burlington, Mass. IET uses mathematical algorithms to schedule field-service personnel. The algorithms help optimize personnel use and, because they're designed to be used on an intranet, also provide easy-to-use interfaces. "We're finding applications that solve problems and improve business efficiency," says David Black, a principal at Oak Investment, in Westport, Conn.

Venture capitalists aren't abandoning past Internet investments, they're just finding ways to make them work. Take the example of Biztravel.com, a New York Internet travel provider that has taken in more than $20 million in financing from both corporate investors, including Rupert Murdoch's News Corp., and institutional investors, including Accel, New Enterprise Associates, and Hummer Winblad. Biztravel.com isn't trying to be all things to all people; it focuses on the business traveler at small and midsized businesses. "That's the market segment where the margins are highest," explains John Williams, the company's founder and CEO.

Williams is trying to expand the reach of Biztravel.com without spending the large sums of advertising dollars that competitors such as Preview Travel are paying simply to be listed with America Online. Instead, he's developing key relationships with such companies as CNN and cable provider Comcast. Moreover, he is concentrating on Web aesthetics, making sure that the site is easily and rapidly accessible and also easy to use. A number of magazines have already honored the startup for having the best travel site on the Internet.

Expect new Internet deals to be widely syndicated as a way of spreading the risk and widening their appeal from the very beginning. One of the specialized Internet funds, Flatiron Partners in New York, announced last month that it has completed an $8 million round of financing for Net Solutions, the developer of the Rights Exchange security software for E-commerce. But unlike in the past, Flatiron didn't venture alone. Its partners include Venrock Associates, Chase Capital Partners, and XDL Capital.

Still, some investors who were burned by Internet initial public offerings now plan to exercise caution. The success of the IPO market and the windfall profits generated by hot IPOs has meant "excessive spending," says Bill Marbach, editor of Venture Finance, a New York newsletter. As institutional investors flush with money poured more assets into venture capital funds, venture capitalists invested those sums in record amounts. "They spent money simply because they had it," Marbach adds. The results of the excesses showed up in higher valuations, me-too deals, and inexperienced management teams.

"Just because you've been a CEO somewhere doesn't mean you can run the kind of specialized technology startups we're seeing," says Esther Dyson, president of EdVentures in New York. "When the industry invests at this pace, it's difficult to find enough good management teams."

Dyson, among others, believes that many venture-backed businesses will continue to suffer because of the paucity of management and an overabundance of financing. "Engage new businesses cautiously," she says. "Don't be surprised if they fail."