Fidelity Ventures is hunting for the next eBay.
The venture capital firm, investing funds raised from affiliates of mutual fund giant Fidelity Investments, has been carving out a niche bankrolling Internet start-ups that connect buyers and sellers of everything from loans to receivables to airplane parts.
Operating quietly from Boston's financial district, Fidelity Ventures recently backed a European version of StubHub. It led a $25 million funding round in February for Seatwave, a British company that sells tickets for sporting matches, concerts, and other entertainment events on the secondary market. But that was merely the firm's latest investment in emerging companies running online auctions.
"We're looking for very big markets that are very inefficient and have clear value to people on both sides of the transaction," said Larry Cheng, a Fidelity Ventures partner who has evangelized within the firm for building up an Internet marketplace specialty.
Back in September 2005, at a Fidelity Ventures gathering at the Harvard Club in downtown Boston, Cheng made a pitch for investing in a San Francisco start-up called Prosper that matches individual lenders and borrowers in a "people-to-people" marketplace.
In making his pitch, Cheng laid out the case for online marketplaces as a business model the venture firm could target. He called it a "disintermediation play" since the online companies thrive by eliminating middle men that control transactions in the offline world.
It wasn't a tough sell. The firm's sister unit, Fidelity Asia Ventures, already had success funding Alibaba, a Chinese site that's become one of Asia's leaders in business-to-business commerce.
Cheng, 32, a San Diego native who joined Fidelity Ventures in February 2005 after investing in start-ups for Battery Ventures and Bessemer Venture Partners, got the thumbs-up. Three years later, Internet marketplaces have become a sweet spot for Fidelity Ventures, representing about 15 percent of its active venture portfolio.
In addition to Seatwave and Prosper, in which the firm joined in a $20 million funding round, Fidelity Ventures co-led a $26 million investment in MFG.com of Atlanta, a company that links manufacturers and suppliers around the world, and took part in an unspecified investment in New Orleans Exchange, a start-up that lets businesses auction off their receivables in exchange for cash up front.
Fidelity Ventures is one of a family of Fidelity-affiliated companies that dabble in everything from telecommunications to biosciences investments. The companies are part of Devonshire Investors, the private-equity division of Fidelity Investments' parent company FMR LLC. Other companies in the group include BostonCoach limousine service and Pembroke Real Estate, which owns and manages commercial and residential property around the world.
The venture firm continues to scout for new investments in auction-style Internet businesses. Cheng has been visiting investment candidates in the Boston area and across the country. Finding the next eBay is the goal, but he has no illusions that will be easy. So the more immediate strategy is finding companies that apply the eBay model to niche markets, such as tickets or working capital for small businesses.
"I don't see much chance of taking on the brand giant unless you can reinvent the auction model the way Google did for search," said Gene Alvarez, a vice president at Stamford, Conn., research firm Gartner Inc. "EBay has reached critical mass. But companies can still build a brand around a niche. If you're looking for tickets, you go to StubHub. If you're looking for hotels, you go to Priceline."
Steve Hilton, vice president at the Yankee Group research firm in Boston, said the proliferation of online marketplaces is part of a broader trend toward Internet-enabled collaboration that also includes networking websites like MySpace and LinkedIn and video-sharing sites such as YouTube. Online collaboration is especially popular with young managers moving up the corporate ranks, he suggested.
Some of the businesses in which Fidelity Ventures is investing are creating financial and networking tools for suppliers, accounts receivable managers, and other cohorts, Hilton said.
"This is another piece of the collaboration puzzle," he said. "People in the business world want to take social networking to the next level of collaboration. In the end, Fidelity could roll these sites up themselves or sell them off to a collaboration company."
One other option would be selling shares to the public.
Alibaba.com, China's largest e-commerce company, raised an estimated $1.5 billion on the Hong Kong Stock Exchange last fall in the largest initial public offering ever for an Internet company from China.
Fidelity Asia Ventures has never disclosed the sum of its investments in Alibaba, which started in 1998 and were led by the firm's managing partner Daniel Auerbach. But they are believed to be among the most profitable deals in the history of the Fidelity venture funds. Fidelity Asia Ventures continues to own a stake in the Alibaba Group, the diversified corporate parent of Alibaba.com.
Alibaba.com's IPO also boosted Internet portal Yahoo Inc., which bought 10 percent of Alibaba.com shares in the offering and had previously owned 40 percent of parent Alibaba Group. Yahoo recorded a $401 million gain in its first-quarter earnings related to the Alibaba.com IPO - equal to 40 percent of its gross profits for the January-to-March period - helping shore up its financial position as it fended off an unwelcome takeover offer by Microsoft Corp.
Cheng said he likes the Internet marketplace model because Fidelity Ventures has been an early investor and it's proven to be a field where it's hard for latecomers to dislodge category leaders. "These are very defensible companies once they get to scale," he said.
Robert Weisman can be reached at email@example.com.