B2eMarkets is something of an anomaly.

The Rockville, Md.-based company recently raised $38 million in venture capital money in a market that’s been so dry that a half-empty funding glass would be a good sign.

Yet for Ronald Holtz, the CFO for the maker of B2B supply chain software, the recent completion of the round of funding has been reassuring on two fronts. On one hand, the firm now has the capital to get it to an eventual initial public offering. No less important, the Nasdaq crash had a cleansing effect on the VC community, flushing the momentum buying hysteria from it in the same manner that it erased irrational exuberance from the public markets.

Holtz says one reason B2eMarkets got its funding was, “We’ve seen the VCs return to the fundamentals.”

During the peak of the momentum-driven tech market of 1999, venture capitalists themselves were, not unlike shareholders in the public markets, ranging far afield their traditional investment styles. Mezzanine investors were becoming early round backers, and vice versa.

Unfortunately, says Richard Waugh, one of the company’s co-founders, in 1999, the venture market had gotten so out of hand and the B2B exchange sector produced such high returns, that venture investors didn’t have the patience to listen to the company’s business plan. Waugh says some VCs he met with tried to convince him to ditch the firm’s core product line and enter the B2B exchange sector.

“We walked away from investors who wanted to change our business plan,” Waugh says. “We knew deep down that sourcing was an opportunity for companies to establish a competitive advantage. Once you knew that, the last thing you’re going to do is share that with a public exchange model.”

The latest round of funding included five venture backers, led by CIBC Capital Partners.

Hooks Johnston, a director for B2eMarkets and a consultant to FBR Technology Venture Partners, says the psychology in the venture capital market often mirrors that in public equity markets, and the current situation is no different. If anything, however, the rally the stock markets experienced in April has not sparked a revival in the VC community.

“The public and IPO markets will have to return before we’ll see a recovery in VC funding,” Johnston says. “A lot of us are focusing on our own portfolios now and making sure those companies have funding.” Early stage investing is almost completely out of the question.

FBR was part of the syndicate in the April round for B2eMarkets, and it was the lead investor in the November 1999 round that netted the company $13.5 million.

Johnston says the board determined $38 million was enough to last the company until it turns cash flow positive.

But exactly how large is the market opportunity for this young niche in the supply chain management arena?

The company cites market research from Boston-based AMR Research, which forecasts that the market will surge at a 75 percent compounded annual growth rate for the next several years, reaching $3.5 billion by 2005.

Scott Alaniz, a securities analyst with Stephens Inc. in Little Rock, Ark., is far more conservative and says the market for strategic sourcing systems should grow from $7 million last year to $250 million by 2003.

But market forecasts are by nature highly speculative and can vary widely based on the yardstick used.

Despite his conservative estimate for the total market size, Alaniz is still bullish about B2eMarket’s prospects.

For one, the strategic sourcing market is young enough to be highly fragmented. While it’s still viewed as a niche within the larger supply chain management sector, it’s taken on enough form to be broken into 18 functional categories with more than 40 companies, including such well known names as IBM, Oracle, Commerce One, SAS, i2 Technologies, and Ariba.

Alaniz says none of these firms’ products fill more than three or four of the categories he’s identified. As a result, he expects to see some consolidation as some of the larger companies broaden their product lines.

Johnston says that with adequate capital, the board now expects B2eMarkets to outlast the inevitable consolidation and make it to an IPO. It doesn’t hurt that the firm’s two biggest resellers are Accenture (formerly Andersen Consulting) and Cap Gemini Ernst & Young. Their presence lends it some credibility when calling on prospective clients.

Alaniz doesn’t expect B2eMarkets to be among the acquired targets, either. Deal values are sharply lower than they were from 18 months to two years ago at the market peak. In addition, larger companies don’t have the high stock prices to use as currency and are also reluctant to do any deals that would be dilutive to earnings. It will be costly for a big-cap tech firm whose stock is trading well off its peak to acquire a firm with a good product or a growing customer base.

Alaniz notes that B2e has a credible product and a growing customer base, as witnessed by its recent sale of a license to 3M.

Holtz joined the firm in January 2000, not long after it had closed its first institutional round of funding.

As tough as market conditions have been since then, Holtz says the determination to stick to its knitting helped B2eMarkets get its funding once the panic eased in the VC community.

“We had a strong management team and a product to bring to market,” Holtz says. “Those are the things VCs are looking for.”

In fact, the two-year-old firm with 112 employees has a story that seems all but designed specifically for financial executives.

Waugh and Orville Bailey, the firm’s president and CEO, worked together at GE Information Services on several of that firm’s E-commerce initiatives. While there, they decided there was a huge, untapped market in not just supply chain systems, but more specifically, software that codified corporate best-practices in procuring raw materials and components.

Holtz says the company’s software embeds a corporation’s best practices for procuring raw materials and components and enforces them across its entire business. Procurement officers enter their purchase orders and everything related to their purchases into the software.

“Putting everything into a software application allows me to have visibility to what people are doing in my organization,” Holtz says. “I can drill down into an operating unit. For example, I can look at the buyer in South America buying petro-chemicals and see the strategy he used for buying them.”

The level of detail allows a CFO and other members of management to determine what they’re spending on raw materials and if there are ways to cut costs from certain suppliers.

Ken Gottesman, vice president for sourcing and E-procurement with consulting firm Cap Gemini Ernst & Young, says B2eMarket’s flagship product, the Sourcing Solution, essentially automates the procurement process.

For example, many firms may use tactics such as reverse auctions to get the best terms and prices from their suppliers. Under normal circumstances, the entire negotiation might take weeks or months.

By automating the process, a corporate purchaser could slash the time to a few days, Gottesman says.

Waugh says Holtz was hired largely because he has experience in guiding a company public. From 1996 to 1999, he was CFO for RWD Technologies, a Columbia, Md.-based firm whose products include training systems for enterprise resource planning applications. The firm went public in June 1997, pricing its shares at $13 and closing the first day of trading at $18.25.

But the slowdown in the ERP market during 1999 cost RWD dearly, and the stock was barely trading at $10 when he left the firm to join B2eMarkets.

While the prospects of an IPO appeared imminent when Holtz joined B2e, last year’s Nasdaq crash changed all that.

Viewing the market now, Holtz says, “We certainly have our sights set on an IPO, but whether it’s 2002 or 2003 depends upon market conditions.”

The company’s goal is to reach an annualized revenue run rate in the $20 million to $30 million range, and Holtz also says the markets are conservative enough that an IPO will simply not get out of the starting gate if the issuer isn’t profitable. The IPOs of the class of ’99 based on a buzzword and a story are but a distant memory.

In the meantime, even with the recent cash infusion, Holtz says it’s still important to keep a lid on costs, but there has hardly been a change in strategy.

“We’re very much in an investment mode,” Holtz says, noting that the firm is still spending on product R&D. But, he adds, “We’re working very closely with our investors to scale our operations appropriately to match the growth of the business.”

For example, one of the areas where B2eMarkets can scale back spending and not appreciably suffer is by relying upon Accenture and Cap Gemini E&Y to handle implementation of its software at client sites.

“Rather than saying, ‘let’s build a huge organization,’ and then wait for the revenue to come in, we’re asking how we can get a return on our investment,” Holtz explains.

Giving the burgeoning demand for supply chain systems, Holtz is convinced the answer to the ROI question will be a pleasant one indeed.