The halo effect’s IPO is casting the business-to-business market in a flattering new light

Thanks to, the once musty trade of operating a business-to-business (B2B) portal has suddenly become fashionable – a US$1.5 billion share offering can do that to an industry. But trendiness hasn’t yet caught up with the offices of Busytrade, one of several up-and-comers out to profit from China’s 42 million small companies that Alibaba has so richly exploited.

Busytrade’s office is located on the 22nd floor of a dingy pale green building overlooking a lonely stretch of Shanghai’s Suzhou River. Signs advertising vacant office space are pasted in windows.

The firm’s founder is Jason Wan, a 34-year-old Hong Konger who’s been setting up internet businesses since his college days in New Jersey. He sold one startup,, to in 1999 and started Busytrade that same year. He found his site relegated to a rather obscure corner of the web.

“Before, you had to explain a lot of things to venture capitalists (VCs), and they still [wouldn’t] believe it,” he said.

But Alibaba’s spectacular initial public offering has made China’s B2B scene hot property.

“After this IPO, [VCs] won’t question the profitability of the market. So it’s a good thing – somebody got listed and [now] the whole B2B area is more clear.”

Venture money is now homing in on startup B2B websites. Wan himself just raised two rounds of funding from HMQ Capital, a Hong Kong-based fund, worth US$8 million, just days after Alibaba stock started trading. Funds like DFJ Dragonfund, an affiliate of Silicon Valley firm Draper Fisher Jurvetson, are also waiting to invest in B2B sites.

“We have done at least two deep dives [into B2B] in the last 12 months,” said Andy Tang, managing director of the fund. “China is fertile ground.”

Joy for all

It’s not just startups that are basking in the halo cast by’s listing. NASDAQ-listed Global Sources,’s main rival, is getting more attention. A recent Citi report raised its target price for the company from US$25 a share in May to US$45, although it’s never broken US$40 and was trading below US$30 at the time of writing.

Jason Brueschke, the Hong Kong-based analyst who wrote the report, argued that the Alibaba listing gave him fresh inputs to re-examine Global Sources. The upshot is that Global Sources looks seriously undervalued.

“Global Sources has largely been under the radar screen of investors,” he said. “But now a direct competitor has raised awareness of the opportunities in the B2B market, so its profile has been raised.”

As B2B sites come under more scrutiny, one question that’s being asked is, just how useful are they? The sites are supposed to efficiently match buyers and sellers, creating a cheap way for users to scour the market without having to get on a plane. But the reality is that buyers using a B2B site often have no way to verify a seller’s claims. Chinese factories and suppliers already have a reputation for being tricky to deal with, and this problem is magnified by the anonymity of the internet.

The portals have tried to solve this problem in the past by selling “gold” or “platinum” memberships to sellers, and checking their claims. Global Sources, for example, has 200 employees dedicated to supplier verification, according to its chief operating officer, Craig Pepples.

But free users still dominate B2B sites, which means the majority of companies listed have only been screened in the most basic way. For many users, that is just not good enough.

“More users want websites to assess suppliers upfront,” said Stefan Kracht, of Fiducia Management Consultants. “This can be achieved through official certificates and user reviews – rather than simply letting suppliers pay and register.”

Quality counts

The portals are now trying to ramp up their verification capabilities by hiring third-party vendors, like Bureau Veritas and SGS. These firms send inspectors to suppliers’ factories and their report is published for user reference. It gives details like factory size, number of employees and quality controls.

The problem is that even the stepped-up measures are relatively easy to circumvent. Zhen Shi led a team from Swiss verification firm SGS that worked on certification issues with B2B portal Made In China. He audited 500-600 suppliers over the course of the project. While most suppliers checked out fine, those who received unfavorable reports were given the option not to publish the report on Made In China. They can then request another audit when they have fixed the problems found by the inspectors.

“We do the on-site audit and if we find problems, [suppliers] can choose [if] they want to publish their reports on the website or not, because they pay the money [for the audit],” Zhen, who now works at Bureau Veritas, said.

Sellers, therefore, exercise ultimate control over the verification process, a practice which doesn’t help companies that rely on B2B sites to find suppliers. But these flaws belie a potential that has financiers reaching for their wallets. As Tang, the venture capitalist at DFJ Dragonfund, points out: “As big as Alibaba is, we may only be scratching the surface.”