VerticalNet and Neoforma.com Announce Exclusive Multi-year E-commerce Agreement
VerticalNet, Inc. the Internet’s premier portfolio of business-to-business vertical trading communities and First Mover in the space, today announced a strategic alliance with Neoforma.com, Inc., a leading provider of B2B e-commerce services in the market for medical products, supplies and equipment . . .
Neoforma Press Release, November 22, 1999
In our early days, Jeff and I had been approached by all sorts of people who liked what we were doing for healthcare and wanted us to do the same sort of thing for their industry. This was very tempting. Creating fundamental change in healthcare was huge. The idea of replicating that change in multiple large industries was mesmerizing. We could be the Microsoft of business processes.
However, each time we looked at the specifics of another industry, we came to the reluctant conclusion that, while there were certainly many similarities between each industry’s inefficiencies, the differences were too large to ignore and too massive to address.
That didn’t keep us from watching VerticalNet try though. Our own insecurity over our decision to limit Neoforma’s scope had fueled our criticism of VerticalNet over the years. VerticalNet had made a different choice. They’d gone a mile wide and an inch deep, but that just didn’t seem to cut it. Their most innovative feature, a fairly recent function that broadcast email from a single visitor to multiple manufacturers, seemed to be a nearly exact copy of the system we had deployed years earlier.
We watched them add one vertical industry after another, knowing that someday they would add healthcare to their portfolio. We hadn’t been particularly nervous about this, since we knew how difficult it would be for anyone to quickly develop the kind of depth that we had achieved in healthcare.
Their successful IPO in early 1999 had set the stage for B2B companies like Neoforma. By September, VerticalNet had become a nearly $5 billion company. They had recently received a $100 million cash infusion from Microsoft, as part of a strategic partnership. And one of their most recent acquisitions had been of a direct competitor to our medical auction business. We were now officially competitors.
While we knew that VerticalNet could not develop a marketplace to compete with us, they now had deep enough pockets to buy our most significant competitor.
We knew that Medibuy was four to six months behind us on the IPO track and at least a year behind us in technology, so an acquisition by a cash-rich, equity-rich company would be very appealing to them.
I didn’t want to see that happen. Not only because it could change some people’s view of Neoforma as the clear B2B leader in healthcare, but because—well, because it would be wrong.
Medibuy was an also-ran, a copycat—the product of financial opportunism. Whatever I thought about the flaws in their business model, VerticalNet was the real thing. The founders had started the company with the sincere and primary objective of making a difference. They had started early, personally gone deeply into debt and struggled against the odds to their lofty perch.
So I tried to contact one of the founders of VerticalNet. Like me, Mike was still an executive in, but not the leader of, the company he had founded. The founders of VerticalNet had recruited a well-known CEO too. I knew that Mike had already been able to sell enough stock to pay off his debts and ensure his future comfort. In a few months, I would be there. At least, I thought I might be.
Mike didn’t respond to my first query. Or my second. I was quite frustrated. I knew how busy he was. I was too, but I always responded to everyone — if not on the first day, then at least within a couple of days.
After my third message I received a call from a business development guy. “I understand that you want to talk to us about possibly working together. What did you have in mind?”
I told him that I had some ideas to discuss with Mike. He tried to dissuade me from pursuing direct communication with Mike: “He’s a very busy man. I’m sure that I can help you with whatever you need to discuss.”
I was upset. “Look, I’m very busy too and I don’t want to waste my time or yours. The things I need to discuss will eventually end up on Mike’s desk. When can I speak with Mike?”
We scheduled a phone appointment in late September. During our call, Mike was polite and attentive. After a brief conversation, Mike agreed that it might make sense for us to talk in person. I already had a trip to the East Coast planned, so I suggested that I stop by his office. Besides, I was curious.
VerticalNet was in the process of consolidating its operations at a huge new headquarters. There were no signs up yet. I had to wander around the building until I found some construction personnel who could tell me where to get in. From there, I wandered through dusty corridors lined with taped drywall. Eventually I arrived at an empty counter in what looked like would eventually become a reception area. I peaked into nearby cubicles, trying to get someone’s attention.
When the receptionist was found, she told me that Mike was tied up on an important phone call. After I’d waited long enough to contemplate leaving, I was shown into Mike’s office.
A few minutes later he finished his call and greeted me formally. He was a tall man with simultaneously intense and vacant eyes. I could tell that he was trying to “be here and now,” but that his mind was somewhere else entirely. I knew the feeling and didn’t like being on the receiving end of it.
He immediately notified me that he had to cover a press interview for the CEO who had been called into a crucial meeting at the last minute. We only had about fifteen minutes to talk.
He got right to the point. “So what are you guys up to? Are you filing for the IPO soon?”
I told him that I couldn’t discuss specifics, but that a filing seemed likely. I did tell him that we were finalizing a large strategic funding round. I dropped a few names of the companies participating, then I went into my spiel about how we had been watching VerticalNet for some time now, knowing that we would eventually bump into each other.
He told me that he had been watching us too. “You have a nice website. Whenever I get fed up with our user interface group I tell them to visit Neoforma for ideas.”
I told him that I had noticed some similarities. We shared a millisecond of mutual appreciation, then I went on, “As I see it, we have a mutual enemy in Chemdex. While they started out in laboratory products, they are now trying to expand into other verticals . . . including medical. They seem to be using their Kleiner Perkins connections to compete against you.”
Mike’s negative reaction to the mention of Chemdex told me all that I had come here to find out. VerticalNet was not likely to buy our Kleiner-funded competitor, Medibuy. Mike hinted that Chemdex and VerticalNet had spoken often in the past, but that something had happened that left a very bad taste in his mouth.
Mike said, “David Perry wasn’t satisfied to stick with what he knew. Now he’s going after us. Believe me, we don’t ever see ourselves competing with a Neoforma. We wouldn’t likely be able to . . . we can’t go that deeply into healthcare. We want to leverage our ability to deliver common solutions to multiple industries, not solve unique problems in each one.”
Mike dropped the Microsoft name many times during our conversation. We spoke exclusively about healthcare’s unique problems and didn’t expand our conversation to other industries. We both knew that we weren’t being entirely truthful.
VerticalNet would be very happy if they could be very deep into every industry they targeted. Neoforma would be very happy if we could gradually expand into adjacent vertical industries. But, for the moment, we had a mutual enemy: Chemdex—or, for us, the KP keiretsu that supported Chemdex and Medibuy.
I proposed that we take advantage of each other’s strengths and try to create a powerful node at the intersection of their horizontal and our vertical strategies. He agreed. Simple as that.
This entire conversation had lasted about ten minutes. He said, “Hey, I am confident that our two business development groups can work out the details. And to make sure that they do, why don’t we put a couple million dollars into your current funding round?”
I told him that I would certainly take that idea to our Board, but I thought it made a lot of sense.
And, on that note, our meeting was over. We shook hands, and never met again. In spite of what had been accomplished, I left the meeting feeling very empty. There had been no personal spark between us. We hadn’t reminisced about the tough old days. None of the isolation that I felt within Neoforma was going to be abated by this man with whom I thought I had so much in common.
VerticalNet did invest in Neoforma’s October funding round and the two companies did enter into a very friendly business partnership in November. However their miniscule website traffic and shallow supplier relationships proved unable to add quality—with the exception of the PR value of working with the current dotcom darling.