Group-buying site Mercata to shut its doors

Mercata, a group-buying site backed by the venture capital firm of Microsoft co-founder Paul Allen, said Thursday it will cease operations at the end of the month.

The Bellevue, Wash.-based company, which withdrew a $100 million initial public offering Wednesday, said in a statement Thursday that it was closing its doors after a private investment could not be raised.

The financial woes of Mercata, which lets shoppers band together to get discounts on items by purchasing them in bulk, are just another sign of how cash-strapped Internet companies are having a hard time getting investors to come back to the trough. It also marks another investment by Allen's venture firm, Vulcan Ventures, that has folded its doors.

"The difficulty that Mercata faced was that it wasn't able to capture great discounts and, in fact, the search bots like Ask Jeeves turned up better prices than Mercata," said Andrew Bartles, senior e-commerce analyst with Giga Information Group. "So for all the effort to be part of the pool, the reality was you didn't get as good of prices as other sites."

He added that Mercata was hurt by its small selection in various categories and by the threat that sites like Yahoo and America Online could start up similar businesses but with a greater number of participants. Its competitors included ActBig, Zwirl.com and C-Tribe.com.

Vulcan Ventures holds nearly a 55 percent stake in Mercata and was one of several investors that poured $90 million into the company. Other investors included Europ@web, Amerindo, Global Retail Partners, Highland Capital Partners and Thomas Weisel Partners.

Representatives from Vulcan Ventures and Global Retail Partners declined to comment.

Although its investors pumped money into the company as early as February, the downturn in consumer e-commerce stocks and investments took their toll, said Tom Van Horn, Mercata chief executive.

"Investors have seen their interest in e-commerce decline, even in those companies that do well and are recognized as groundbreaking and innovative like we are," Van Horn said. "This funding environment is the toughest I've ever experienced."

He noted that although the company was not profitable, it had been meeting all the milestones its investors had set. Van Horn declined to comment on when the company had expected to be profitable.

After delaying its IPO plans last year, the company began seeking additional funding in the second half of the year and tried to find a buyer. Van Horn added that several large public and private companies expressed interest, but as the markets tanked and investor interest in e-commerce declined, so did prospective buyers.

Van Horn disputed Bartles' characterization of Mercata's selection, noting that the company had greatly expanded its product offerings and received few complaints from customers relating to selection.

One high-profile albatross for Allen was retailer Value America, which filed for Chapter 11 bankruptcy last year. The company filed for bankruptcy just three months after Vulcan and other investors plowed $30 million into it. Allen and other investors had originally invested $60 million in the e-commerce company.

Another disappointment was Vulcan's stake in Drugstore.com. The Bellevue, Wash.-based firm invested $40 million to buy nearly 2.3 million shares, or a 4.3 percent stake, according to Drugstore.com's proxy statement last year. That investment today is worth about $3.2 million.

Vulcan also spent $14 million for a 9.9 percent stake in 800.com, a privately held consumer electronics e-commerce company, according to 800.com's prospectus. The company filed for an initial public offering in March last year but withdrew those plans three months later, citing the drop in the stock market.

Mercata, which launched in May 1999, will accept orders until Jan 31.

"I think it was a good idea and they deserved a lot credit for trying to pull it off. But like many ideas that have been tried, execution turned out to be a problem," Bartles said. "I don't think the category is necessarily dead, but may resurface in different clothing."