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Funding the B2B Revolution

Funding the B2B Revolution April 2001 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

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Funding the B2B Revolution

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  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. Section I Introduction 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 US$30 trillion, with approximately US$12 trillion being captured by third party market places. • Of this transaction volume, e-marketplaces are expected to generate revenues in the neighborhood of US$425 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.

  5. Section I Introduction • 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.

  6. Section II Funding Independent B2B Marketplaces

  7. Section II Independent B2B Marketplaces 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

  8. Section II Independent B2B Marketplaces • 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

  9. Section II Independent B2B Marketplaces 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

  10. Section II Independent B2B Marketplaces - Funding Possible Sources of Capital Angels and Technology Venture Bricks and Incubators Partners Capital Mortar Partners M&A  Fubs Strong Bricks and      Mortar Partners     Strong Financial Partners    Consortia

  11. Section II Independent B2B Marketplaces - Liquidity Possible Sources of Liquidity Bricks and Mortar Shareholder´s Clients Financial Partners´ Network Other Third Parties Sponsors Fubs Strong Bricks and    Mortar Partners   Strong Financial Partners    Consortia

  12. Section II Independent B2Bs with strong Bricks and Mortar Equity Partners 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

  13. Section II Independent B2Bs with strong Bricks and Mortar Equity Partners 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

  14. Section II Typical Funding Cycle for an Independent B2B Company Family, Friends and Other Investors (“Angels”) Venture Capital Venture Capital IPO or other way-out VALUE OF INVESTMENT Way-Out 2nd Round 1st Round Seed Capital TIME

  15. Section II-A Seed Capital - Internet Incubators

  16. Section II-A Seed Capital - Internet Incubators 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

  17. Section II Seed Capital - Internet Incubators Selected Internet Incubators in Latin America

  18. Section II-B Venture Capital Funds

  19. Section II-B Venture Capital Funds 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. 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.

  20. Section II-B Venture Capital Funds In 2000, Venture Capital Funds invested approximately US$747 million in Brazil. The B2B sector received US$38 million, or 5.1% of this investment. In the United States, e-commerce accounted for 2.7% or US$ 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

  21. Section II-B Venture Capital Funds Financial Investors in Brazilian B2B Companies * Includes software companies Source: Brascan Research

  22. Section II-B Venture Capital Funds Latin America B2B Assets of Selected VC Funds

  23. Section II-C The Way Out - Capital Markets

  24. Section II-C The Way Out - Equity Capital Markets 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.

  25. Section II-C The Way Out - Latin America Internet IPOs Intense IPO Activity Window Shut-Down

  26. Section II-C The Way Out - Latin America Internet IPOs 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%

  27. Section II-C The Way Out - Capital Market Transactions Selected Internet Debt Capital Market Transactions in Brazil Source: CVM

  28. Section II-C The Way Out - M&A Transaction Selected Internet M&A in Latin America - Bricks and Mortar Acquirers Source: SDC

  29. Section II-D Case Studies

  30. Section II-D Case Study: Mercado Eletrônico • 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. Business Model

  31. Section II-D Case Study: Mercado Eletrônico First Mover Advantage Key Accounts Provide Critical Liquidity Key Drivers for Mercado Eletrônico´s Success Strategic Value of Shareholders Capable of Managing Growth Committed Financial Partners

  32. Section II-D Case Study: Mercado Eletrônico Seed Capital June 1994 Company established by Eduardo Nader with Seed Capital from his family. 1st Round - Venture Capital Financing December 1999 GP Investments and Opportunity acquire a minority stake. 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. 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.

  33. Section II-D Case Study: Mercado Eletrônico 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. 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. Way-Out Either through the public markets if open at the time or through sale to strategic or financial investor.

  34. Section II-D Case Study: Zip.Net 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. Netcom’s investments in the venture are later acquired by Zip.Net. Zip.Net created it’s own portal.

  35. Section II-D Case Study: Zip.Net 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.

  36. Section III Funding B2B Clicks and Mortar Consortia

  37. Section III B2B Consortia 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 region´s 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.

  38. Section III-A Consortia - Benefits of B2B Adoption

  39. Section III-A Consortia - Benefits of B2B Adoption 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.

  40. Section III-B Case Studies

  41. Section III-B B2B Consortia Case Studies • 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 US$75 million over the next three years.

  42. Section III-B B2B Consortia Case Studies • 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 US$25 million until 2003.

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