Is there a critical mass?
A Net market won't work without enough participating buyers and sellers. While there's no magic number, You must have multiple suppliers in every product category you're buying, says Laurie Windham, CEO of Cognitiative, a research and consulting firm in San Francisco specializing in the e-business field. That's the only way to have competitive pricing and motivate suppliers to behave the same way they'd behave in an open market economy. Your task is to pinpoint the products you need and then investigate whether their suppliers are on the site. Before Elan Pharmaceuticals' Silber signed on with Chemdex, for example, he determined which of his existing suppliers were participating and how much inventory he bought from each one. When he figured out that it came to at least 20 percent of his total volume with the potential to grow to 40 percent in a year or two, he decided the move was worth it. At the same time, however, while it's important that core suppliers are signed on, other potential suppliers should be there as well. It's all about seeing what opportunities exist for better prices from suppliers I don't know anything about, says Yockelson.
Quantity is only part of the equation. Find out whether the participants are reputable, well-known players. One benchmark is whether or not companies known as trendsetters in the industry have signed on. It's also important, says Laurie Orlov, research director for e-business applications for Forrester Research in Cambridge, Massachusetts, to make sure they have a screening process so they're not letting just anyone onto the site. That means getting specifics about their process for qualifying suppliersfor example, whether they send out field reps to suppliers' facilities to make sure they really provide the services and products they claim to sell. They need to look, see, touch what's out there, says Gregory Avsharian, president of Century Plastics, a custom-injection molder in Romeo, Michigan, that participates as both a buyer and seller on Net market sites.
How savvy is management?
It's imperative that those running the operation possess the skills, knowledge and resources to do the job right. The management team must really understand the market, the intricacies of the industry, says David Tabors, a principal with Battery Ventures, a venture capital firm in Wellesley, Massachusetts. Finding the answer may require a lot of time on your part. Silber, for example, met perhaps six times with company personnel, from local sales reps to the president, before making his decision. In the process, he says, I discovered that they weren't rookies. If the founders don't have the required expertise, you should expect them to fill the gap with other managers. A case in point is Pedestal.com, started by two former Merrill Lynch traders to streamline the process of buying and selling home loans. They gave their management team more depth by bringing in a seasoned industry executive to be CEO, plus a team of five others with industry experience in everything from sales to training.
How solid is their financial strength?
There's no point in hooking your business up to a Net market if it's not going to last. But a company needs deep pockets to launch and run a siteanywhere from $5 million to $15 million for the first 12 to 18 months and the same amount per year after that, according to Tabors. Protect yourself by checking into the company's finances. That's a tricky move, of course, if the operator is private. Still, there's a lot you can do. Start by finding out who the backers are, how much they invested and whether it's likely that they'll invest in future rounds. Find out who sits on the board of directors and how well-connected they are to potential funding. Ask the company for a discussion of their business plan. While they won't disclose confidential information, they should let you know something about their business model and financing plans.
How easy is it to use?
The system needs to work the way you work. That means it's easy and straightforward to search for items or place an order. If you get in on the act early enough, you should also expect, like Jamesbury's Paquet, to work with network designers on the screen design. On his suggestion, for example, the Net market operator revised their drop-down menus to make them more detailed and reorganized the way buyers posted requests for parts.