E-commerce catalog integration

It all started when, to the consternation of his professors, talented undergraduate student Eran Palmon woke up one fine morning and threw in the towel. In keeping with computer-kids, he had seen a white light during the night, and decided to desert his dream of becoming a doctor. He sat fervently at his keyboard and decided to turn the technological breakthrough he had discovered into another dream - that of an entrepreneur and his investors.

Palmon, characteristically for entrepreneurs with academic backgrounds, decided to give his new start-up the non-attractive name of ETL. He contacted acquaintance Efi Arazi, and invited him for coffee. Together, they mulled over what they should do with the technological solution for information retrieval and storage that Palmon had invented. Arazi opened his checkbook, and telephoned some friends from the (Silicon) Valley. Roger Sipple, a Valley legend responsible for successes such as Vantive and Informix, came forward.

This occurred in 1995. Palmon and Arazi recruited staff, who continued to develop the technology. Eighteen months later, data bases could be accessed intuitively and data retrieved even without using the right words (or using the right words, but incorrectly spelled). "We had an extremely talented team, but no business model or anything," says Cohen, who later became president and CEO. The young start-up needed an injection of fresh cash, and was ripe for sending out calls.

The Israel Seed Partners and Walden funds joined the bandwagon, after it was decided to appoint a new general manager and sharpen the business direction. Palmon invited Menachem Cohen, his former commanding officer back in the days of the elite Intelligence Corps. "I was offended," Cohen says, "the idea was so brilliant and so simple that I was dismayed that I hadn't thought of it."

"Globes": Information retrieval is not a new idea. Is the idea brilliant solution-wise?

Cohen: "Yes, solution-wise it is."

Cohen, 46, took the job, and was obliged to make a painful decision as to what to do with the technology, and an even more painful decision as to what not to do with the technology. "With a lot of butterflies in my stomach, and armed with Israeli chutzpa, we decided to focus the company on a product for building an intuitive catalog for e-commerce," Cohen says. "Remember that at the end of 1997, e-commerce was an entirely different story to what it is today. At the time, no-one talked about B2B or B2C. Complicated catalogs already existed, and we saw that it was impossible to find anything. We found that if you don't know how to spell 'Schwarzenegger' correctly, you'll never find anything on him."

The company's name was changed to Mercado. The company spent 1998 developing the product, which builds online catalogs containing customer or supplier information in an almost automatic process, and 'minces' it, Cohen explains.

Marketing time arrived. Arazi, chairman of the board of directors, called Cohen and asked him to pack his bags. "This company's headquarters need to be in Silicon Valley," he said. Cohen did not want to go, Arazi pressed him, and Cohen gave in. He now admits he was right in heeding the advice of someone more experienced than himself.

Cohen landed in San Francisco, set up an office and set off to hunt down big names to help build up the company by providing it with a reputable record. A combination of luck and good sense paved the way for his first conquest, Tower Records. Cohen: "I visited them personally and convinced them to try our product. They had a site with slight traffic and sales percentages. They were early adopters, and that was our good fortune. One has to have luck in life." Nine months after starting to use the product, Tower now boasts about the high percentage of buyers among visitors to the site (known in the industry as the 'conversion rate') of 7%, whereas the industry average is 3%. Cohen says that Tower relates the figure mainly to the Israel start-up's product.

More customers soon arrived. These included Caterpillar (the tractors giant), Blockbuster, Christies (Cohen: "which we won over, lost and finally re-won after we put four people on a plane together and adamantly persisted"), Bell South (which built a supplier catalog), and others. Overall, the company boasts more than sixty customers, some using the B2B catalog, like Caterpillar, and others using B2C, like Tower Records. Each of the faithful customers writes a check for $250,000, and the company anticipates $10 million in sales this year, and $30-40 million next year. Cohen says the market for his product is valued at several billion dollars.

In addition to the seed round, Mercado has held three financing rounds: In April 1998, $5 million from the Mofet and Polaris funds (the company's largest shareholders) at a company value of $12.5 million after money ; in September 1999, $12 million from the Eucalyptus and Hambrecht and Quist funds at a company value of $40 million; and two months ago, the company completed a financing round at a company value of $150 million from HarborWest, Star and existing investors. Cohen proudly says that this round took place during the Wall Street crisis. It will be the company's last private placement. Next time money flows into the company from a source other than sales, it will be from the Nasdaq public. When? "We're in no hurry," Cohen says.

Who are Mercado's competitors? Nasdaq-listed Verity competes in the B2C arena, and Requisite, which is on the verge of issuing, is its rival in the B2B field. Theoretically, Mercado faces another strong competitor, AltaVista. Cohen says that two months ago, AltaVista announced plans for developing "a catalog that will compete with us. We know they made the announcement in order to compete with us". Cohen believes Mercado has the best product on the market, and wants it to become the market maker.

With all these credentials, it is a little difficult to understand the modest dimensions of success that Cohen presents. "I define a start-up's success by negative indicators. If it doesn't fail, doesn't lose money or close down, it's a success. Personally, I would prefer success the size of Check Point or Nice, both of which have a worldwide reputation as a market leader providing employment for many people."

Published by Israel's Business Arena on 17 July, 2000