Trade Exchange Closes Virtual Doors

FRAMINGHAM (07/21/2000) - After less than six months in business, digital marketplace M-xchange.com Inc. closed its doors this week, citing a dearth of funding options and downward pressures in transaction fee-based business models.

And M-xchange.com has some company. Marketplaces IndustrialVortex.com Inc. and Fleetscape.com have both shut down in recent weeks. Analysts said they expect more closures and consolidations in the online exchange marketplace as start-ups face a funding crunch.

"[Venture capitalists] are just looking at the numbers of these exchanges, which are headed after the same set of suppliers and buyers, and they're deciding that there are too many in the market," said Barbara Reilly, an analyst at Gartner Group Inc. in Stamford, Conn.

Launched in mid-March, M-xchange.com styled itself as a horizontal exchange that would act as a liaison between large corporations and minority-owned suppliers. It received approximately $3.5 million from investors such as auto-parts maker Delphi Automotive Systems Corp. in Troy, Mich. It didn't yet have any clients.

Fees Exert Downward Pressure

The Detroit-based company hoped to make money by charging transaction-based fees to participating firms but soon found that it couldn't charge the rates it planned to.

"When we began this project, people were talking about 1% to 3% in transaction fees," said Gary Wasserman, president of M-xchange.com. "Now it's one quarter of a percent and there's still downward pressure, and that drastically altered our revenue model."

Anticipating more difficulties finding financing, Wasserman said he and co-founder Roy Roberts, a former executive at General Motors Corp. in Detroit, decided to lay off the firm's 20 employees and return the remainder of its cash - about half of the initial investment - to investors.

"The trade exchanges tend to make money on transaction fees, which means less margin than a typical software firm, so they need a broader market to make the same amount of revenue," said Lisa Williams, an analyst at The Yankee Group in Boston. Getting that volume requires spending money on marketing, she added.

Other digital marketplaces have also experienced funding woes.

IndustrialVortex.com, an industrial equipment marketplace that launched in May last year, recently closed its doors.

"We were unsuccessful in raising our second round of funding," wrote Chuck Steinberger, founder of IndustrialVortex.com, on a note posted on the Laguna Hills, Calif.-based company's now defunct Web site. Steinberger refused to comment on the business closure.

And FleetScape.com in Boston, billed as an electronic marketplace for commercial truck aftermarket parts and services, is ceasing operations after failing to secure additional funding, confirmed former CEO Sue Kampe.

AMR Research Inc. in Boston estimated that there are more than 2,000 online business-to-business exchanges in existence, but said it expects that number to drop to between 200 and 300 by 2002.

"Over half will never get beyond posting a Web site," said Kevin Prouty, an analyst at AMR. "Most had plenty of money for the technology infrastructure but not enough time to get a critical mass."

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