Paul Allen's Mercata.com to close

Even Microsoft's co-founder couldn't rescue the ambitious e-commerce sitein the midst of a brutal investing market.

Mercata launched with great fanfare in May 1998, armed with a new retail sales concept the firm called "We-commerce." Like-minded consumers could lump their purchases together to get bulk buying discounts from manufacturers--an Internet version of co-op buying. Although Microsoft co-founder Paul Allen has some 60-odd investments in his "Wired World" portfolio of technology companies, Mercata was special--Allen's Vulcan Ventures owned 100 percent of the firm.

While CEO Tom Van Horn said the concept proved itself during the past 18 months (he said Mercata.com met sales expectations and even had a surprisingly positive fourth quarter) it didn't prove to be profitable. The firm has burned through most of the $89 million it raised during the peak of the Internet stock mania last year.

Van Horn said Mercata currently has a little over 100 employees. Most will be retained until the end of the month, and all will receive 60 days severance pay, as required by law.

"We've been working very hard at trying to find more funding for the company," he said. "Until very recently I was hopeful we might be successful." But acquisition talks fell through, and the company's board decided yesterday to call it quits. Wednesday, it withdrew its application for initial public offering; when it filed to go public in March, Mercata had hoped to raise $100 million.

Ironically, Mercata's board made its decision a few moments before the Federal Reserve lowered interest rates. The Nasdaq composite gained some 14 percent in response to the Fed's move, and some market watchers see that as a turning point for capital markets. Van Horn called the board back after the Fed's announcement, but the group decided not to change its mind.

"Our intent is to have an orderly shutdown," he said. "But that doesn't mean it still won't be difficult and painful."

Back in 1998, the Mercata group buying model was touted as an idea that could turn retail commerce on its head, and Van Horn said Mercata.com was to be the main retail store across Paul Allen's "Wired World" Vulcan Venture properties, like Ticketmaster, Go2Net.com and Charter Communications cable company.

Mercata.com CEO Van Horn said Allen's investing arm, did participate in all three rounds of Mercata funding, but it wasn't willing to dip any deeper into Allen's pockets to rescue the firm. "Private investors and public investors tend to follow the same trends because they want the same returns," Van Horn said. "When a sector falls out of favor, they don't want to invest in it."

Allen, like all Internet investors, has taken a beating this year. For example, until recently he held a sizable chunk of Priceline.com, which has plummeted from $104 1/4 to a little over $1. He still holds a controlling stake in Infospace, formerly Go2Net.com, which has crumpled to a little over $9 per share, down from a high of 138 1/2.

When consumer e-commerce started getting beaten up in equity markets, Mercata scrambled with experiments to alternate fresh revenue streams. In July it began auctioning pricey Sun Microsystems servers. It opened a business-to-business group-buying marketplace for manufacturers, retailers and wholesalers. It even experimented with a new group-buy rebate program with car maker Buick; consumers put up $50 for a rebate that started at $200 and grew as more car buyers piled on.

Van Horn says all these ventures were successful, but not enough to stem the flow of red ink.

"You hate to blame the whole thing on the market," he said. "But small businesses have always needed funding to get started, and when that funding is not there ... we've had fantastic execution. That's necessary to succeed but it turns out it's not sufficient. There's something to be said for timing."