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Mercado's growing pains
From The Jerusalem Post
June 25, 2000
Every Monday morning for the last six months, four or five new employees
have arrived at the Palo Alto offices of e-catalog software solutions
company Mercado Software Inc. ready to start work. Integrating them, as
Menachem Cohen, Mercado's president and chief executive officer readily
admits, is one of the biggest challenges facing the company right now.
From a staff of just 35 people six months ago, the five-year-old company now
boasts 100. By the end of this year the figure should rise to 140.
"This is even more difficult than it sounds," says Cohen, speaking by phone
from California. "First of all there are some people who preferred the
company when it was small and they had more responsibility. If you're the
only girl in class then you're the queen, but with more girls in the class
there's competition."
"Secondly you have to get organized quickly and every person coming in needs
at least three to four months of training, be they sales people, engineers,
or marketing personnel. You also have to create a whole new organization.
All of these new people must learn to work together, you have to teach the
marketing organization to work with the sales organization and for them both
to work with the engineers. It's very tough." Integrating staff, however, is
a problem of the rich and Mercado certainly seems to fall into that category
today.
The company already has 60 customers, such as Tower Records, Blockbuster
Video, Christies auction house, BellSouth, Caterpillar Corp. and Iscar, and
even boasts sales which are likely to reach several million dollars by the
end of the year. The company recently held its fourth private placement,
raising $30.5 million, and last week e-commerce analyst Forrester Research
described it as the market leader in its field.
MERCADO WAS the brainchild of Eran Palmon, a former soldier from the same
Israeli military intelligence unit that spawned Check Point Software
Technologies and Nice Systems. Palmon, who was working on his Phd. at the
time, came up with an idea about an innovative way to access data bases.
In 1995 he founded Mercado and began feasibility testing of his idea. By
late 1997 when Cohen, a former colonel in the same unit, joined the company,
the idea had been turned into a core technology that had already been
implemented and proved feasible.
"I thought the technology was brilliant," says Cohen, who studied
mathematics and computer science at university and served as senior vice
president at systems integration company the Taldor Group. "It was easy to
understand how innovative the technology was and I realized that with
something so unique I could find many good things to do." Over the following
two to three months he developed a business model around the technology,
quickly deciding that the company should move into e-commerce software
infrastructure and aim at business to business and business to consumer
companies with large and complex catalogs of products to sell via the Web.
The result is IntuiFind, a sophisticated product search engine that allows
Internet users to search for items on an e-commerce site by using layman's
language. For instance, a user might not know what the exact item he is
looking for is called, or he might not know how to spell it. Using IntuiFind
he can type in a description of the item, or an approximated or phonetic
spelling and will receive an exact match, or a list of similar items, in
return.
BY IMPROVING the online shopping experience for the customer, Cohen says the
search engine also increases revenues and business performance for the
e-commerce site.
The best example is Tower Records, Mercado's first customer, which credits
the company with a recent jump in its ranking in the online CD and video
market.
At the start of 1999 Tower, one of the largest online sellers of music and
entertainment, was not making enough purchases via its Web site and had a
customer conversion rate of just 2%, a percentage point below the online
music and video average of 3%.
The company discovered that its product search engine, particularly in the
classical music section, was not functioning well and customers looking
through the company's stock of 600,000 videos and CDs would often get a
message saying the item was not available.
After examining the market, Tower decided to implement Mercado's tool.
Using the search engine customers can now type in a few key words from a
movie, such as Pacino tango, and receive the exact match, The Scent of a
Woman in return. The search engine also ignores misspelled words.
In response Tower's conversion rates rose to 15% last Christmas, and has now
levelled off at about 5%.
"Since our deployment of the solution, the number of hits on our search page
has doubled, along with our conversion rates," Kurt Booker, Tower's online
webmaster said in a statement. Though the price of the Tower deal was not
released, normally the cost ranges from about $150,000 to $500,000. The
average deal is in the region of $250,000. Mercado sells its customers the
software licence for the product, and also offers consulting services.
AT AN early stage of its development Mercado decided to focus initially on
the US market. As a result at the start of 1999 the company moved its
headquarters from Tel Aviv, where research and development is still carried
out, to Palo Alto. It also opened sales offices in Minneapolis and Dallas.
Once the company has some leverage in the US, Cohen said the company will
next target Europe - it already has European headquarters in London - and
then Latin America where sales have already begun.
Financially Mercado has received solid backing from a number of prominent
venture capital companies. The company's first investor was Efi Arazi, the
founder of Scitex and Electronics Fuel Imaging, who is now chairman of the
board.
Since then the company has held three other private placements ranging in
size from $5m., to $12m., to the latest sum of $30.5m. In the recent round
the company's evaluation stood at $150m.
The biggest shareholder in the company is Polaris. Other investors include
Walden, Eucalyptus, Mofet, Israel Seed Ltd. Partners, Chase Capital
Partners, Hambrecht and Quist, Wisepeck and Greer. New investors who joined
the latest round are Harborvest Partners from Boston, which invested $15m.,
and Star.
Cohen said the latest round of investment is highly significant for Mercado
and the company plans to use the money primarily to expand its marketing and
sales organization and to target the US market.
"We are now one of the market leaders in this field and we need to invest a
lot in growing the company and to capitalize on the opportunity. You can't
let the competitors chase you and at some point in time pass you just
because you take it easy," says Cohen.
"Our plan is to generate $40m. in sales by the end of 2001. We are building
the infrastructure for us to be able to do that."
AS FAR as competitors go, Mercado has two that stand out, both based in the
US. The first, Verity Inc., is a public company with a market capitalization
of $1.35 billion. Its customers include big names such as Cisco, Compaq,
AT&T;, Ernst and Young and Siemens.
The second is Requisite which has already filed for an initial public
offering. The offering has been delayed because of poor market conditions
but Cohen says the company is likely to go public before the end of the
year.
Another potential competitor is Altavista, which announced a similar product
a few weeks ago. Cohen calls them a "competitor on paper." Despite the
presence of real competition, particularly in the form of Verity, Cohen is
confident that Mercado, which is actually more expensive than its rivals,
can continue to stay on top because in head-to-head in deals, Mercado has
often won.
"We beat Verity with Blockbuster, Christies, and Tower," says Cohen.
"Quite simply we offer a better product. The technological superiority is
clear and meaningful enough for customers to choose it. The only reason why
a relatively small Israeli start-up can beat bigger US competitors is
because the technology is superior."
"Blockbuster is a very conservative organization as is Christies," he
continues. "They'd rather buy from a public company than an Israeli
start-up, that's a truism for every other space. But those people had a real
problem and we offered a real solution."
"Even the most conservative organizations take us seriously because they are
looking for the best solution and if that happens to be owned by a small
Israeli start-up then they go for it. We are not the only Israeli start-up
that has managed to win deals above US competitors." Despite this, he admits
that some companies are put off by Mercado's relatively small stature while
others, inevitably, are put off by the hefty price tag and the company's
complex installation process.
ONE THING is clear, however, at the rate Mercado is growing it is unlikely
to remain a small company for long. Cohen hints, for instance, that large
deals with world leading companies will be announced soon.
At an off-site meeting recently management discussed their vision for the
future. By 2004 the plan is to turn Mercado into a strong, independent
company with between 400 to 500 employees and $150m. in sales.
If all goes well it will be a public company, though Cohen insists the
company is not aiming at an offering in the near future despite recent press
reports suggesting the opposite. "We have enough cash to choose the right
time to go public," he says. "There are enough companies under pressure to
go public because they need the money and they are already standing in line.
We won't join until the line is shorter. As far as sales are concerned we
are meeting our numbers and can wait for market conditions to be ripe."
By 2004, Cohen hopes, Mercado will be the standard tool in the market place.
"We hope that we will be offering the suite of products that is basically a
must for any high-end e-commerce sites, B2B or B2C companies. We want to be
like Check Point. If someone wants to buy a firewall they order it from
Check Point. In the future if they want an e-commerce search tool, they'll
buy it from us."
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