Hmmm curious, I got in again! Ok here is the text:
Stockformation Commentary
By Jordan Ferguson
Internet incubators
01/24/00
Want to bet on the future of the Internet, but unsure of which dot com to invest your money in? Why not try an
Internet incubator company which has interests in numerous web based businesses. Internet incubator
companies generally finance a collection of startups, offer them advice and expertise and rush them to market
as quickly as possible, ideally spinning them off in a wildly successful IPO. The group of companies under the
this umbrella, typically enjoy relationships together and rely on each other for synergy. The benefit to investors
is twofold. The shareholder of these " new millennium conglomerates" (Jason Pontin, Red Herring) benefit from
a company's ability to diversify risk across a number of investments, as well as the market's willingness to
pay a healthy premium for the future value of those investments. The original incubator business model is
followed by companies such as eCompanies, who are "making companies the way Henry Ford made cars"
(Jake Winebaum, eCompanies CEO). A variation on this model is offered by the best known of all incubator
companies, CMGI CMGI who have now taken to controlling their startups after their IPO's. Investors like the
incubator model so much that CMGI's stock has appreciated faster than any other publicly traded company in
the 1990's apart from Dell DELL.
So what are the options open to the Canadian investor? You could either take out a second mortgage in order
buy a few shares of CMGI or Internet Capital Group ICGE, or you can look closer to home at companies such
as Ecompark EKP.V which are following the same model but have, as yet received far less attention from
investors. Ecompark have harnessed the expertise of the Canadian Internet legend, Don Tapscott, whom Al
Gore has described as "one of the world's leading cyber gurus". At Ecompark, the first first phase of the
incubation process typically consists of a financial commitment of up to about $500,000 in exchange for a
stake of up to 40% of the partner company. Ecompark enjoys interests in such companies as Petopia.com (
which is expected to have an IPO in the near future), and StorageOne.com which is an online distributor of
high quality data storage products. Incubator companies often serve as a quick fix for nervous bricks and
mortar companies who do not have the in-house expertise in order to establish an effective web presence.
Ecompark's relationship with SamsCD.com is a case in point : the web savvy incubator, in this case
Ecompark, invested $1 million, some shares and a lot of know how, in exchange for 20% of this web site
which will leverage off the brand awareness that Sam the Record Man has already established. SamsCD.com
will become a publicly traded company on the CDNX through a reverse takeover of a Vancouver based shell
company. If this debut is marked with all the fervour of a dot com IPO, then Ecompark shareholders will
doubtless benefit. The stock price erupted on Friday, closing at $2.05 before giving back 10% of that, to close
at $1.84 on Monday. Although one cannot say with certainty that the stock price will continue to increase, it is
likely to be volatile, as it is inextricably linked to the fates of Petopia.com, SamsCD.com and probably many
more future e commerce ventures.
Another contender is WSi Interactive WIZ.V, which also models itself on CMGI and has divided its revenue into
four streams; consulting, tools, databases and a network of sites. The company was originally formed as the
result of a series of mergers between three companies - Western Shores Inc, Medianet Inc and Targetpacks
Corp. The company plans to develop some thirty additional web business concepts over the next eighteen
months. WSi's stock has also enjoyed a spot on the CDNX most active list for some time as investors wrestle
with the idea of incubator companies.
Whatever your take on the concept, it is important to remember that the enormous valuations which investors
afford to these stocks are really reliant on the continuation of the current investment climate and the market's
seemingly insatiable appetite for potential. But the music has not yet stopped, with $13 billion in private equity
flowing into startups in the third quarter of 1999 alone. Investors are currently using the one plus one equals
three method of valuation with incubators. If you decide to ride the wave, just make sure that you are not the
last one to realize the error of this arithmetic . |
