Allen-Backed Mercata Bows Out

Mercata.com, the buy-by-group e-tail site that enjoyed the early backing of Microsoft (Nasdaq: MSFT) co-founder Paul Allen, said Thursday it will cease operations.

The announcement came one day after Bellevue, Washington-based Mercata withdrew a US$100 million initial public offering (IPO), citing market conditions.

Mercata founder and president Tom Van Horn blamed "rejection" of e-commerce by both private and public investors for the shutdown.

"Mercata has performed extremely well as a company despite the difficult economic environment," Van Horn said. "We have consistently met or exceeded the goals that we have set for ourselves and against which investors measure our performance."

The company plans to close its doors on January 31st, continuing to accept orders until then. Although it did not say how many workers would lose their jobs, Mercata employed 104 people as of last year, according to Hoovers.com.

Caught in Market Turn

Mercata filed for its offering on March 9th, just weeks before the Nasdaq went into its months-long decline. Dan McCarthy, an analyst with IPO.com, said Mercata had "no chance" of going public in the current market.

"In fact, the chances for a successful IPO had been slim since the Internet bubble burst in April, 2000," McCarthy said.

Mercata becomes one of the first high-profile dot-com shutdowns of the new year, continuing a trend that accelerated in the fourth quarter of 2000. According to a recent report from WebMergers.com, 210 Internet companies, including 109 e-commerce firms, closed their doors during 2000.

High Hopes

Mercata functioned by driving down retail costs based on the number of buyers it could attract to buy the same item at once. The company thought it would benefit from word of mouth as customers encouraged others to join buying groups.

Mercata ran an extensive TV advertising campaign during most of 1999. However, after struggling to gain a share of the consumer market, Mercata tried to enter the business-to-business (B2B) market, selling such products as high-end computer systems.

Nonetheless, the company's sales remained tepid while losses mounted. In 1999, the company lost $36 million on just over $6 million in sales , according to the SEC filing.

Bad Luck for Allen

Allen helped found Mercata, and his Vulcan Ventures became the main investor in the company, which debuted to much fanfare in April 1999.

Vulcan currently owns about 55 percent of Mercata, according to the company's IPO filing with the U.S. Securities and Exchange Commission (SEC).

Vulcan itself has had its share of dot-com woes. The VC firm bought into Reel.com, which folded its e-commerce operations last year; Stamps.com, which has had executive shakeups and has acknowledged its own funding problems; and struggling name-your-price e-tailer Priceline.com.