Failed Marketplaces Keep Piling Up

Just when you thought it couldn't get any worse, it looks like the bottom is falling out of the business-to-business E-commerce market. Four online marketplaces have closed since the start of June.

Zoho Corp.'s online marketplace for hotel supplies shut down after Starwood Hotels & Resorts Worldwide Inc. reneged on an agreement to furnish $30 million in funding. The 2-year-old startup laid off its remaining 30 employees on June 1, having consumed the last of $63 million in funding from Ariba, Dell Computer, Harrah's Entertainment, and several venture-capital firms.

In Zoho's prime, more than 50 hotels, including several Sheratons, Harrah's, and a Hilton, purchased supplies through the site, generating millions of dollars in electronic transactions. But as the B-to-B market soured last year, the value of an equity stake in Zoho quickly diminished. When the cash ran out, it was Zoho executive Toby Redshaw's job to break the news to Thistle Hotels in Britain, just two weeks after the company rolled out the system. "That was very difficult," he says.

Meanwhile, three online marketplaces courting the metals industry, Aluminium.com, MetalSite, and MetalSpectrum, all went under within days of each other. The startups cited difficulty getting customers and high operating costs as causes of their downfall, despite the backing of industry heavyweights such as Alcoa Inc. and Bethlehem Steel Corp.

The marketplaces' fate was linked to that of metal producers, which are struggling this year with a glut of production capacity that's pounded down prices and led to bankruptcy for some producers, including LTV Corp., former MetalSite CEO Patrick Stewart says.

The rate of E-marketplace failures seems to be reaching a fever pitch. Marketplaces underestimated the strength of existing buyer-seller relationships, says Jon Gibs, an analyst at Jupiter Media Metrix. "Buyers look for some level of trust and reliability from their relationships. The world of marketplaces didn't work that way," he says.

Some marketplaces are staying on course despite obstacles. Aerospace exchange Exostar LLC just lost its CEO of six months, Andy Plyler, a 15-year veteran of the aerospace, defense, and airline industries. However, it recently gained Rolls-Royce as a founding member and investor, joining existing founders BEA Systems, Boeing, Lockheed Martin, and Raytheon.

While Exostar's board seeks a replacement for Plyler, CFO Ken Possenriede, who joined in February, has assumed the job of interim CEO.