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Fatal Flaw Dooms an Internet Venture

Commerce: The collapse of 'B2B' trading firm Ventro illustrates the folly of getting between suppliers and buyers.


SAN FRANCISCO — In 1997, David Perry, a mid-level oil refinery manager who had just completed his MBA at Harvard Business School, had a big idea.

Perry envisioned a technology to let businesses buy or sell products or raw materials anywhere in the world over an online system managed by a neutral provider. His business plan won second place in Harvard's annual competition. Soon after, he drove his decade-old Nissan Maxima west to Silicon Valley in search of venture-fund gold.

The money boys found Perry's idea irresistible. They showered $45 million on him to start a business-to-business, or "B2B," trading system to serve the chemical industry. The legendary venture capital firm Kleiner Perkins Caufield & Byers became a lead investor. Within two years, Perry was widely viewed as a key creative force behind the next wave of Internet-based business efficiency. Analysts quickly projected revenues for the nascent online-exchange industry in the trillions of dollars annually, and Perry's idea helped spawn hundreds of copycats.

Today most of the B2B industry has been decimated. A stock index of B2B companies, compiled by U.S. Bancorp Piper Jaffray Inc., has plunged 80% since a year ago.

Meanwhile, Perry's company, Ventro Corp., has seen its shares fall from a high of $243.50 last year to 39 cents Friday. Ventro, which has no operating revenue, has slashed staff by 80% and faces a shareholder lawsuit filed in federal court in San Francisco that alleges securities fraud by Ventro executives.

Analysts said Perry's B2B dreams have collapsed largely because of a flaw in his business plan. Ventro "attempted to get between the suppliers and buyers of mainstream products," said John Bermudez, analyst with AMR Research, which studies online business markets. "Suppliers don't really want anyone between them and their customers."

This marks a sharp turnaround from early last year, when Ventro's market capitalization was a stunning $11 billion. Former refinery worker Perry even traveled to the world's most prestigious business conclave, in Davos, Switzerland, to lecture top oil executives about how to transform their businesses in cyberspace.

The 33-year-old Perry, who declined interview requests, was born and raised in Magnolia, Ark., near the Texas and Louisiana borders. Like fellow Arkansan Bill Clinton, who hails from nearby Hope, Perry has a soft Southern accent and a magnetic charm that hide ambitions that are anything but small town.

Perry's plan for his first online marketplace seemed tantalizingly simple: Chemical sellers would pay his firm modest transaction fees of 1% to 2% to find new markets. Perry called the firm Chemdex. The idea was that competition would drive prices down and Chemdex would profit by hosting the online exchange as the service grew.

The company launched its service in October 1998. And Chemdex attracted large bioscience companies, such as Genentech Inc. and Becton, Dickinson & Co., which agreed to buy some goods online through Chemdex's registry of suppliers. By July 1999, Chemdex had gone public and Perry used its soaring stock to buy Promedix, an online marketplace for specialty medical supplies.

For a while, Chemdex could do no wrong. Perry recruited highly regarded executives, including Robin Abrams, president of handheld-computer pioneer Palm Inc., as his chief operating officer. Perry also began to collect industry awards as a top entrepreneur. "As soon as we went public, we were getting 50 to 60 phone calls a month from major companies, who said, 'Come here and sprinkle some of your magic dust,' " said Andrew Carragher, former vice president for business development, who left Ventro in December.

"You could not help but to be swept away," said Matt Trerotola, a former Ventro business-development executive who left in October. "There was a kind of electricity that made me more excited about what they were doing than any job in my life."

The early interest in online exchanges inspired Perry to create four marketplaces: for medical supplies (Broadlane), fluid-processing equipment (Industria Solutions), business services (MarketMile) and food services (Amphire Solutions). Chemdex provided its partners, including American Express Co. and IBM Corp., with technology to operate the online-exchange systems, while the partners would find the buyers and sellers. Chemdex received ownership stakes ranging from 19% to 49%. To reflect the diversified approach, Chemdex changed its name to Ventro.

To celebrate the name change, Ventro hosted a party in February last year at its Mountain View, Calif., headquarters, featuring a rock video starring a lip-syncing Perry. Within days, the company's stock skyrocketed to its all-time high. A few weeks later, Ventro sold $250 million in bonds to expand its business. Around this time, Perry borrowed against his stock to buy a jet for his personal and business use.

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