Smoothing Out E-Tailing's Kinks

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E-commerce has come a long way since the Pets.com debacle. Stand-alone companies like Amazon.com (AMZN) and eBay (EBAY) are bona fide successes, and most brick-and-mortar retailers have long since seen the value of e-stores.
The bad news? Web shoppers are savvier and competition is fiercer. It's not enough to be online -- the race is to grab market share, and just slapping up a Web site won't cut it anymore. Sure, tools like paid-search advertising and comparison-shopping sites such as Shopzilla.com and Shopping.com (SHOP) have put more arrows in an e-tailers' quivers. But the more tools to use and sites to link to, the bigger the management headache.
At least that's what Eric Best is hoping. He's CEO and founder of Mercent, a Seattle-based startup with about 15 employees. Mercent's software helps both brick-and-mortar and Web retailers build and maintain virtual stores on Amazon.com. Its software also simplifies being listed on about a dozen Internet malls such as Yahoo! Shopping (YHOO), or so-called comparison-shopping sites, where shoppers can enter terms like "Prada handbag" and see a listing of Web sites carrying them.
BIG-NAME CLIENTS.. Sites like Amazon, Google's Froogle (GOOG) shopping site, and Shopping.com have bent over backwards to make it easy for companies to sell on their sites, or be part of their comparison-shopping engine. After all, the more retailers they have in their fold, the more traffic they draw.
But managing relationships with these sites is time-consuming -- and there's an art to it. Mercent offers expertise in that art. It already has more than 30 paying customers. These include big names like Guess (GES) and Lucky Jeans, which are using Mercent to simplify sharing data such as prices, what's in stock, and product descriptions with these bigger Web sites.
The link with Amazon is arguably Mercent's biggest selling point. Before starting the company about 18 months ago, Best worked at Amazon in business development, putting together Amazon's first major brick-and-mortar partnership with Toys R Us (TOY). He intimately knows the tricks to making such deals work. Before Amazon, he was CEO of MindCorps, which made software to help companies sell over the Web, including crafting their own e-stores. Amazon acquired it in 1999, and Best came along with it.
HORDES OF RETAILERS. Within a year, he got the entrepreneurial itch and left Amazon. But he didn't know exactly what to do, so he started a consulting company called Morse Beat, which, among other things, got an Amazon contract in 2002 for crafting guides to help third-party retailers develop Amazon stores.
The timing couldn't have been better. In Morse Beat's first year, some 70 third-party retailers were selling on Amazon. In 2003, that grew to 350, Best says. Last year, the total topped 4,000, surprising even Best. That consulting effort eventually grew into Mercent, which is being formally spun out of Morse Beat this month.
To keep up with demand, Mercent announced on Jan. 19 that it had landed its first round of venture-capital funding. Execs won't disclose the exact amount, but they say it's under $10 million. The money will allow Mercent to double employee ranks and speed up the launch of the next version of its product. It will also use some of the funding to build its fifth software version and expand its marketing team.
THINKING APP? The leading investor was Seattle venture-capital firm Madrona Venture Group. Not by coincidence, Madrona Managing Director Tom Alberg was an early Amazon investor. Until then, Mercent had been funded by Best and revenues from the consulting company.
Mercent is considerably further along than most companies getting their first venture-capital millions. Plenty of work remains, however. First, the company needs to beef up its product. It's good at taking the hassle out of coordinating with larger Web sites and Internet malls. But Best wants to make it more analytical, able to flag a better way for e-tailers to, say, organize their site or hawk products. Currently, a lot of that expertise is coming from the management team, not the software.
Despite having filled out Mercent's offering with tools to drive traffic from dozens of sites, the real selling point is still automating the linkup with Amazon. When retailers set up Amazon storefronts, transactions are processed on Amazon.com, which then need to be reconciled with the retailer's inventory and shipping. Mercent is one of five Amazon-sanctioned vendors to do that basic work, along with consulting projects on how to increase Amazon store sales.

"MISSING PARK AVENUE." In contrast, comparison-shopping sites just feed back to e-tailers shoppers who are hungry to buy a given product for a preset. Mercent's software is taking away hassle -- but it's hardly necessary for users of these sites.
Mercent customer Crabtree & Evelyn, for instance, uses the company solely for its Amazon store, says Tom Angelo, director of business development for the Woodstock (Conn.) maker of high-end bath products. "We chose Mercent not because of their overall Web strategy," he says. "We were doing business with Amazon and wanted to move forward with building an online store." He adds Mercent was the cheapest of five Amazon-sanctioned software companies, costing between $25,000 and $100,000 a year, depending on how many features customers want.
Building a sustainable business will take more than just making selling on Amazon easier. A good next step might be striking up a deal to manage eBay's e-stores, says Tim Clark, partner at technology-research firm The FactPoint Group in Los Altos, Calif. eBay is fast becoming more than just an auction site, and it's hard to ignore. "Having Amazon as a venue gives them a storefront on Rodeo Drive and all these other shopping centers in Yahoo, Froogle, and others," Clark says. "But if they don't have eBay, they are still missing Park Avenue."
ALL IN THE TIMING. That said, Mercent could have a jump on this market. Several small companies, such as Channel Advisor, are trying to solve the headaches that come with using bigger Web sites for more sales. But many, Alberg says, are focused on eBay instead of Amazon.
But Mercent could face a limited market or -- potentially more maddening for investors -- discover it's too early to the game. Alberg jokes he has made the mistake before of funding something before its time. "But [Mercent has got] real customers, and there seems to be a lot of activity. As retail sales have stagnated, he adds, "brick-and-mortar companies are hungry to do more on the Internet."
The limitations of brick-and-mortar retail? Sounds like an argument Alberg could have made when he first invested in Amazon.