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December 18/25, 2000 |
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Lessons Learned From Failure
Former E-marketplace CEO warns not to veer from your vision or give up power to VCs
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growing number of business-to-business ventures are running out of cash and hope. Many of the independent marketplaces that remain are concerned about what they can do to keep their ships afloat (see "B2Bs Go Bust," Dec. 11)
Ravi Kalakota, whose hopes were dashed in early November when he was forced to shut down the online marketplace for hotel supplies he founded, says he wishes he had done many things differently. Kalakota, who failed to raise a second round of venture funding for Hsupply.com, shared his convictions and frustrations about the fickle venture-capital community, chameleon business models, and the vexing technical challenges of building an E-marketplace at a business-to-business conference held by Net Market Makers earlier this month.
One of the former CEO's biggest regrets is not sticking to his personal vision for the company. Kalakota, who wrote the best-selling book E-Business: Roadmap For Success (Addison-Wesley, 1999), says his role in managing the company was derailed by venture capitalists who sat on the company's board and took control. Though they ignored many of his ideas, he felt pressure not to complain, especially because he needed the venture capitalists for the next round of funding. That was a mistake. "Don't let VCs hijack your vision," he says.
One of those venture capitalists was Buck Goldstein, a partner at Mellon Ventures, which invested $3.5 million in Hsupply. Goldstein now says that operating an independent E-marketplace is a very tough prospect. Hsupply didn't increase its client base fast enough, he says, and therefore lacked the buying power necessary to extract price concessions from suppliers.
And even if Hsupply had eventually grown large enough to compete with real distributors, the small margins in the hospitality supplies industry wouldn't justify the investment. "It was a good idea that deserved to be tested, but it didn't work out," Goldstein says. "We couldn't see that it would ever make money."
Another pitfall Kalakota wishes he'd avoided was the fast rate at which he burned through capital. He overspent on marketing and increased his staff too quickly, he says. When Hsupply closed, it had 90 employees and had spent $5 million on marketing activities. "We hired like crazy," Kalakota says. "Don't hire marketing people. The race is not to an IPO; it's to build a sustainable business model."
Ian Toll, an analyst at Credit Suisse First Boston, says Hsupply did what was expected according to the rules in place a year ago, when capital markets were flush with cash. "They were told, 'Don't worry about capital--burn it, hire as many people as you can, get as many customers signed, we'll take you public,'" Toll says. But now, it's a different world. "Last spring changed everything," he says. "Now the focus has to be, how do you generate revenue and create value for customers?"
But that's no easy task. Hsupply found customers and suppliers resistant to paying a 3% transaction fee to do business through its exchange, so the company instead began charging service fees for building custom E-procurement networks for clients. But that undertaking required integration with key suppliers, a complex and expensive undertaking.
"The problem is damn hard to solve," Kalakota says. "The process transformation that has to happen is extraordinary, and that takes time."
The final misstep that sealed Hsupply's demise was that it underestimated the speed at which hotel-industry giants such as Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. would move into the market. While Hsupply focused on smaller, perhaps more approachable hotel-management firms, Marriott and Hyatt Corp. formed a hospitality marketplace of their own, and Starwood, which owns the Westin, W, and Sheraton chains, joined a competing independent venture called Zoho. "We thought that they'd be slow to move," Kalakota says. "We got pigeon-holed as the low-end guys, which made it hard to raise more money."
Hsupply didn't aim for the low end in its supplier base. It signed Sealy Corp., the top mattress maker in North America, as a supplier a few months ago. While Sealy viewed the venture as a potential new distribution channel, it now says there are obstacles inherent to selling its products via an E-marketplace. Mattresses and bedding are considered a capital expenditure by most hotels, unlike operating supplies such as lightbulbs or stationery. Capital expenditures must be approved by a committee because they impact the design and style of a property. Because of that, Sealy says it's been difficult to provide a deep enough level of information via a Web environment for that type of sale.
Though Sealy never sold anything through Hsupply, the company is disappointed by its closure. "They were going to be a viable distribution channel," says Leo Vogel, a national sales manager in Sealy's contract division. "Unfortunately, the experience was short-lived because they never really got going."
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