If you've got a terrific e-commerce idea, you may be too late. Venture capitalists are no longer dumping money blindly into these things.

SCOTT WEISS IS A VENTURE capitalist's dream.
He has an M.B.A. from Harvard, and has worked at EDS, McKinsey & Co., Hotmail and Microsoft.
He had what looked like a terrific idea: selling fruits and vegetables online directly from the farm to consumers. Produce sales, he calculated, account for 12% of grocery revenues, but up to 40% of profits. His margins, he thought, could be much better. Investing $100,000 of his own money, he hired four full-time employees, including the guy who first sold produce to Wal-Mart's Sam's Club.

But the idea rotted on the vine. None of the ten venture firms he met with in October and November would touch the deal. "They said if you have anything else we'll fund you," says Weiss, 34. "They wanted to know if I could turn it into a business-to-business play, even though the margins were much lower." Within a month Weiss pulled the plug. Now he's talking with several of those firms about becoming an entrepreneur-in-residence.

Similar stories abound. Two women with an idea for a Web boutique for hard-to-find items (example: crystal oil lamps with orchids) had no trouble raising their first round of funding last summer. Now they're getting a much chillier reception. "It's a very Darwinian process," says one of the entrepreneurs, who asked not to be identified. "You'll try anything."

When it comes to consumer e-commerce, the money tap is definitely tightening. In 1998, and for much of the past year, venture capitalists never met an e-tailer they didn't like, pouring hundreds of millions into online grocers, pet retailers, beauty sites and toy stores. Not anymore. "The euphoria of Anything.com is crashing," says Tod Francis, a general partner at Trinity Ventures.

"A year ago, we were interested," says Matthew Cowan, a general partner at later-stage firm Bowman Capital Management, "now we're not." Not when one of Bowman's babies--Pets.com, which went public Feb. 11--is trading 33% below its initial offering price. Bessemer Venture Partners, one of the leaders in consumer e-commerce investing (Etoys, BabyCenter and Furniture.com among them), put the brakes on investing in pure-play e-tailers last summer. It still gets dozens of plans, but won't even meet with entrepreneurs anymore. "One venture capitalist told me that his limited partners made him take a 'no e-tailing' pledge," says Ted R. Dintersmith, a partner at Charles River Ventures.

A punishing stock market has pushed venture capitalists further away.

Why the sudden mood swing?

"Every time there's a rush to fund companies, more are created than the market needs," reasons Michael Moritz, general partner at Sequoia Capital. Casualties are already piling up. Three-fourths of the $4 billion in Web retailing sales last year went to just five sites. Shares of at least 24 e-tailers are selling at 50% or more below their 52-week highs.

The online vendors that are saving a small fortune by not having to lease stores are discovering to their chagrin that they may have to spend a large fortune on advertising and promotional pricing.
To the surprise of some investors, multibillion-dollar real-world retailers such as the Gap and OfficeDepot are also proving to be formidable foes. They are leveraging their established brand names online without having to spend millions on marketing.

Then there's the VCs' latest obsession. Sometime in the fall they developed a big crush on business-to-business, and started chasing after every vertical niche that came their way.

A punishing stock market has pushed them further away from e-tailers. Since Jan.1 the shares of online retailers are down an average 13%.

Still, don't form too big an attachment to B2B, advises Sequoia's Moritz. Says he: "There will be a similar chill that surrounds business-to-business after a few emerge as the leaders."

Source: Luisa Kroll, Forbes, March 20, 2000