Seo I

1
Funding the B2B Revolution
April 2001
2
Summary
Section
Introduction
I
Funding Independent B2B Marketplaces
II
Seed Capital - Internet Incubators
A
Venture Capital Funds
B
The Way Out - Capital Markets
C
Case Studies
D
Funding B2B Consortia
III
Consortia - Benefits of B2B Adoption
A
Case Studies
B
3
Section I
Introduction
4
Introduction
Section I
Is it a Revolution after all? We believe it is
and that Latin American B2B commerce will
continue to grow at a rapid pace despite the
sharp deterioration in investor sentiment towards
the internet sector over the last year.

• According to our estimates global intra-business
  e-commerce is expected to total US30 trillion,
  with approximately US12 trillion being captured
  by third party market places.
• Of this transaction volume, e-marketplaces are
  expected to generate revenues in the neighborhood
  of US425 billion.
• Growth is expected to be especially pronounced in
  Latin America, where players will be able to
  learn from the evolution of more developed
  markets and leapfrog unsuccessful or obsolete
  concepts.

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Introduction
Section I

• To grow, however, Latin American companies will
  have to successfully fund their CapEx
  requirements. In this respect, we believe that
  the two main categories of B2B companies,
  Consortia and Independent B2Bs, will fare
  differently
• For Consortia growth should continue unabated
  since most of the funding will be provided by the
  consortia members, who have significant benefits
  to gain from the development of such platforms.
• The other main category, Independent B2Bs, will
  be more dependant on venture capital financing
  for their development. These investors are today
  far more thorough in their analysis and reluctant
  to take risks in this sector.
• Growth of the independent B2Bs segment is
  therefore already slowing down.

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Section II
Funding Independent B2B Marketplaces
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Independent B2B Marketplaces
Section II
Independent B2Bs are currently facing a difficult
moment but those with sound growth strategies,
committed financial partners and/or bricks and
mortar shareholders are likely to succeed

• Independent B2B players are currently threatened
  by
• the higher initial liquidity of consortia
• the internet market correction, which has
  eliminated one of the most important way-outs for
  venture capital investors.
• Independent B2Bs, however, are far from doomed
  and some successful players should continue to
  emerge.
• We believe the market can be currently divided
  into three categories which reflect the different
  sources of funding for these companies

• Some players, which we have named Fubs, may never
  function as real market places and
  will find it very hard to raise additional
  capital.
• These players might provide useful databases and
  several of them may effectively transform
  themselves into ASPs

Fubs
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Independent B2B Marketplaces
Section II

• These players are usually the result of alliances
  forged between banks or Telecom companies and
  technology partners. Among their main
  advantages is that of having deep pocket
  shareholders.

Strong Bricks and Mortar Partners

• These players will benefit from sound management
  and committed financial partners, which can
  contribute among other things substantial
  capital and valuable strategic advice. The most
  successful example of this type of player in
  Brazil is Mercado Eletrônico.

Sound Management Committed Financial
Partners
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Independent B2B Marketplaces
Section II
The success of Independent B2Bs will depend on
their ability to reach critical liquidity and
obtain necessary funding
INITIAL LIQUIDITY
Consortia
Strong Bricks and Mortar Partners
Sound Management and Committed Financial Partners
Fubs
AVAILABILITY OF CAPITAL
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Independent B2B Marketplaces - Funding
Section II
Possible Sources of Capital
Technology
Angels and
Venture
Bricks and
Partners
Incubators
Capital
Mortar Partners
MA
?
Fubs
Strong Bricks and
?
?
?
?
?
Mortar Partners
?
?
?
?
Strong Financial Partners
?
?
?
Consortia
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Independent B2B Marketplaces - Liquidity
Section II
Possible Sources of Liquidity
Financial Partners Network
Bricks and Mortar Shareholders Clients
Other Third Parties
Sponsors
Fubs
Strong Bricks and
?
?
?
Mortar Partners
?
?
Strong Financial Partners
?
?
?
Consortia
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Independent B2Bs with strong Bricks and Mortar
Equity Partners
Section II
Independent B2Bs with Bricks and Mortar
shareholders can benefit from several advantages
over independent B2B marketplaces.
Key Contributions of Equity Partners
Banks
Security
Client Base
Capital
Internet Focused Technologies
Infrastructure
Technology
Telecom Companies
Technology
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Independent B2Bs with strong Bricks and Mortar
Equity Partners
Section II
Even though these players can count on their
shareholders for part of their funding needs,
they have also relied on financing of venture
capital funds that are dependant on a way-out
sometime in the future.
Selected Horizontal Marketplaces
Other Bricks and Mortar players, such as
Citibank, BankBoston, Santander, Unibanco and
Embratel, have indicated the intention to
participate in independent marketplaces
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Typical Funding Cycle for an Independent B2B
Company
Section II
Venture Capital
Venture Capital
Family, Friends and Other Investors (Angels)
IPO or other way-out
VALUE OF INVESTMENT
Way-Out
2nd Round
1st Round
Seed Capital
TIME
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Section II-A
Seed Capital - Internet Incubators
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Seed Capital - Internet Incubators
Section II-A
Internet incubators provide the companies in
their portfolio with substantial advantages over
other independent B2B players. We believe
therefore that incubators will continue to
flourish in Latin America and that their
importance as a source of Seed Capital for B2B
Companies will increase.
Real Estate Space
Technology Infrastructure
Seed Capital
Benefits of B2B Incubators
Administrative and Human Resources Services
Share Ideas Learn from One Another
Strategic Advice
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Seed Capital - Internet Incubators
Section II
Selected Internet Incubators in Latin America
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Section II-B
Venture Capital Funds
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Venture Capital Funds
Section II-B

• Before the Bubble Burst
• Investments in new Ventures rise rapidly.
• Shortened Due Diligence process - The new
  Internet Time.
• Higher minimum size investment.
• Internet focused Latin America Funds sprout
• Success of Tech IPOs
• Plenty of Seed Capital available.
• Venture Capital cycle shortened to 18 months from
  Seed Capital to IPO.
• Companies with huge losses, and small revenues
  are easily funded.

• Today
• Public Markets closed
• Increase in Internet failures
• Longer Due Diligence and more thorough valuation
  process.
• More investments in later stage deals and less
  capital available for start-ups.
• VCs more judicious with investments since limited
  partners are refusing to put money in smaller VC
  funds and scaling back investments in general.
• VCs looking for alternative way-outs.
• Back to traditional valuation methodologies and
  importance of profit.

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Venture Capital Funds
Section II-B
In 2000, Venture Capital Funds invested
approximately US747 million in Brazil. The B2B
sector received US38 million, or 5.1 of this
investment. In the United States, e-commerce
accounted for 2.7 or US 1.9 billion of the US
69 billion invested by Venture Capital Funds
Venture Capital Funds Investments in Brazil in
2000
Figures in US mm
Source Fundação Getúlio Vargas
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Venture Capital Funds
Section II-B
Financial Investors in Brazilian B2B Companies
Includes software companies Source Brascan
Research
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Venture Capital Funds
Section II-B
Latin America B2B Assets of Selected VC Funds
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Section II-C
The Way Out - Capital Markets
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The Way Out - Equity Capital Markets
Section II-C
After the Internet bubble burst in April of 2000,
the odds of bringing any Internet company public
are nil.
Second Drop Lower expectations for the
Technology sector.
First Drop Lehman Brothers analyst estimate of
unfunded near-term cash flow for Amazon.com.
Second Phase Downgrade in Internet valuations.
Return to traditional valuation methodologies.
NASDAQ Index
First Phase High growth expectations for
Internet companies. Utilization of unusual
metrics to value companies.
Current Phase Massive Internet failures. Capital
Markets shut down for Internet companies.
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The Way Out - Latin America Internet IPOs
Section II-C
Intense IPO Activity
Window Shut-Down
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The Way Out - Latin America Internet IPOs
Section II-C
Public equity financing for B2B companies is
currently unthinkable given the dismal
performance of Latin America internet stocks.
(ADR)
Price Performance since IPO -79
Price Performance since IPO -94
Price Performance since IPO -84
Price Performance since IPO -47
Price Performance since IPO -86
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The Way Out - Capital Market Transactions
Section II-C
Selected Internet Debt Capital Market
Transactions in Brazil
Source CVM
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The Way Out - MA Transaction
Section II-C
Selected Internet MA in Latin America - Bricks
and Mortar Acquirers
Source SDC
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Section II-D
Case Studies
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Case Study Mercado Eletrônico
Section II-D
Business Model

• The Company was established in 1994 and began
  operations as a real -world outsourcer for the
  purchase of indirect goods
• In January 2000, Mercado Eletrônico began its
  Internet operations, maintaining its client base
  by gradually driving it to the Internet.
• The instant liquidity achieved through this
  strategy was critical for the success of its
  online marketplace.
• Mercado Eletrônico has focused on the buyer side,
  attracting suppliers thanks to the significant
  purchasing power of its accounts, consisting
  mainly of medium and large companies.
• Recently, the company leveraged on its success
  and purchasing expertise to
• Secure contracts to manage all of the indirect
  goods purchases for certain clients.
• Create vertical e-markets in specific sectors
  where it has key accounts
• Position itself as manager of B2B marketplaces
  formed by third parties, such as consortias.

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Case Study Mercado Eletrônico
Section II-D
First Mover Advantage
Key Accounts Provide Critical Liquidity
Key Drivers for Mercado Eletrônicos Success
Strategic Value of Shareholders
Capable of Managing Growth
Committed Financial Partners
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Case Study Mercado Eletrônico
Section II-D
Seed Capital June 1994 Company established by
Eduardo Nader with Seed Capital from his family.
Tentative 2nd Round - Venture Capital
Financing Mercado Eletrônico approaches new
investors. Despite March Nasdaq crash company
finds several interessed parties. Company decides
not to pursue funding because of low valuations
and limited strategic and technological
contribution of interested parties.
1st Round - Venture Capital Financing December
1999 GP Investments and Opportunity acquire a
minority stake.
Slow Growth Management focused on maintaining
positive cash flow and profitability.
Professionalization of Company Company grows
rapidly gaining new customers, upgrading
technology and becoming dominant player. Cash
flow and Profits temporarily negative.
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Case Study Mercado Eletrônico
Section II-D
Next Steps - Access debt Markets As company turns
EBITDA positive and required coverage ratios are
achieved, Mercado Eletrônico will be able to
access the domestic and international public debt
markets.
Company Continues to grow reaching 310 buyers,
17,000 suppliers and 60 employees.
Way-Out Either through the public markets if open
at the time or through sale to strategic or
financial investor.
2nd Round - Venture Capital Financing February
2001 Additional capital contributed by GP
Investments and Opportunity, financing the
company until its break-even. In February, the
company had revenues of R 500.000.
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Case Study Zip.Net
Section II-D
Seed Capital February 1996 Company named Zip.Net
is established by Marcus de Moraes with Seed
Capital from his family. The company begins
offering telecom services for the corporate market
Zip.Net starts to offer free e-mail accounts for
individuals.
1st Round Financing November 1996 Zip.Net
establishes a strategic partnership with Netcom.
Netcoms investments in the venture are later
acquired by Zip.Net.
Zip.Net created its own portal.
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Case Study Zip.Net
Section II-D
Way-Out February 2001 PT Multimidia, acquired
19 of UOL, one of the most successful portals in
Brazil, for US 100 million and subsequently
merged Zip.Net and UOL. Folha, already a
shareholder of UOL at the time, injected
additional capital of US 100 million in the
combined entity.
2nd Round Financing November 1999 Unibanco
acquires a 10 stake in Zip.Net for US 15
million.
Way-Out February 2000 PT Multimidia, a
subsidiary of Portugal Telecom, acquires 100 of
Zip.Net for US 315 million and injected US 50
million as additional capital. Zip.Net begins to
provide content to the entire Portuguese
community.
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Section III
Funding B2B Clicks and Mortar Consortia
37
B2B Consortia
Section III
Consortia will play an important role in the
development of the B2B industry in Latin America

• Latin America is witnessing a rapid development
  of online exchanges by consortia composed of some
  of the regions most powerful corporations.
• Funding is provided by the members of the
  consortia and usually also by one or more venture
  capital firms.
• These consortia can be either vertical
  (Estrutura.net) for the procurement of direct
  productions goods or horizontal (Agrega.com) for
  purchasing indirect goods.
• One the key advantages of these consortia
  relative to independent B2B companies, is the
  instant liquidity provided by the collective
  muscle of its shareholders.
• Consortia also differentiate themselves because
  of the technical information and know-how these
  incumbents can add to online trading.
• The main disadvantage that we identify in this
  B2B model is that it might force companies to
  share information about their operations with
  competitors.
• We believe, however, the economic benefits to be
  attained by consortia members should pay for
  costs and most any other risks associated with
  going online.

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Section III-A
Consortia - Benefits of B2B Adoption
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Consortia - Benefits of B2B Adoption
Section III-A
We believe corporations will be willing to invest
heavily in the formation of B2B platforms given
the significant benefits to be obtained
Increase in Sales

• Broad customer base will increase and diversify
  sales

• Lower process costs through elimination of
  inefficient overhead
• - Lower order entry costs
• - Lower customer service costs
• Margin improvement also driven by demand
  aggregation and greater competition resulting
  from larger supplier base.
• B2B appeal is greater for more fragmented
  sectors greater scope for gains from higher
  bargaining power and reduction of labor force.

Higher Margins
Higher Return on Invested Capital

• Unlock value through sale of used and obsolete
  capital equipment and excess inventory

Benefits Amplified in Latin America

• The overwhelming majority of transactions is not
  conducted in any kind of electronic platform.
• Lower systems integration costs given incipient
  nature of electronic procurement and resource
  planning in the region.

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Section III-B
Case Studies
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B2B Consortia Case Studies
Section III-B

• Estrutura.net is a vertical B2B portal that
  combines the market leaders of the Brazilian
  construction industry.
• Equity partners
• - Bricks and Mortar players Votorantim, Tigre,
  Docol and Pirelli Cabos.
• - Private Funds Votorantim Venture Capital and
  Bradespar.
• Investments amount to approximately US 20
  million.

• Latinexus is a horizontal B2B marketplace for
  Latin America comprised of 4 equity partners.
• Equity partners
• - Bricks and Mortar players Votorantim, Cemex
  and Alfa.
• - Private Funds Votorantim Venture Capital and
  Bradespar.
• - Latinexus is seeking further investment from 20
  of the largest companies in Mexico, Brazil,
  Argentina, Chile, Colombia and Venezuela.
• The partners expect to invest at least US75
  million over the next three years.

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B2B Consortia Case Studies
Section III-B

• Agrega is a horizontal B2B marketplace.
• Equity partners
• - Bricks and Mortar players Souza Cruz and
  Ambev
• Seed capital was US 5 million.
• The shareholders aim to obtain economies of US
  10 million over the next 6 months.

• Clicon is a B2B marketplace established by the
  Brazilian Martins Group, the biggest distribution
  company in Latin America.
• Equity partners
• - Bricks and Mortar player Martins Group
• - Private Funds Garantia Participações (GP) and
  Opportunity
• The partners expect to invest at least US25
  million until 2003.