I know that Mike Machi kindly posted the first portion of this article back on May 4 when it was available online. However, the hardcopy version from Upside just hit the streets (or at least my mailbox) today in the June issue. Given that there are a lot of "guttenbergers" who don't read online, this could give us a small bump(?)
Here's the full article and a link as well. There are some great sidebars that give some concise and useful stats (esp. for CMGI newbies).
upside.com
Cool thing is that they call it part of their “Hot 100” Special Report. (And you have to see the crotch shot cover…)
CMGI Breaks the Bank
May 04, 1999
by Norm Alster
How did a company with roots in direct marketing and fulfillment services become a star VC investor and incubator of Net startups?
Since Peter Mills sees roughly a thousand new business plans a month, he was in no great hurry to study the proposal he received from David Bohnett. As managing partner of Andover, Mass.-based CMGI Inc.'s Internet investment and development unit, @Ventures LP, Mills knows he can pick and choose among the many hopefuls seeking venture funding for the latest Internet brainstorm.
Bohnett, for his part, had already pitched his plan to 50 other venture capitalists. "I was shopping it everywhere," he recalls. When he did not hear from CMGI, Bohnett placed a call to Mills, who confessed he had not yet looked at the plan. But Mills told Bohnett: "Give me the 30-second pitch." That's just how long it took Bohnett to convince Mills he had something special in GeoCities, a venture that would help users create Web sites and form online communities with others with shared interests. "In that 30 seconds, he hooked me," recalls Mills.
In January 1996, CMGI made an initial investment of $1 million.
But who really hooked whom? When Yahoo Inc. of Santa Clara, Calif., announced in January it would purchase Marina del Rey, Calif.-based GeoCities in what was then a nearly $5 billion stock deal, CMGI--holder of roughly 28 percent of GeoCities' stock--was the biggest winner. It's safe to say that the $5.9 million CMGI invested over the years was nothing short of a venture killing. CMGI holds more than 8.7 million GeoCities shares, which, following the acquisition by Yahoo, were worth about $1 billion as of late March.
And GeoCities isn't the only instance where CMGI executives placed a swift, decisive and visionary bet on the Internet's future. They've also developed and cashed in big-time on their $2 million investment in Lycos Inc. of Waltham, Mass. No matter who winds up buying Lycos, which has already received a bid from New York-based USA Networks Inc., CMGI's 8.1 million Lycos shares are worth at least $700 million. CMGI has also rapidly developed and sold other Web ventures.
Its sale of PlanetAll.com Inc., Cambridge, Mass., to Amazon.com Inc. of Seattle produced a $19.1 million gain. Its sale of online video retailer Reel.com Inc. of Emeryville, Calif., to Wilsonville, Ore.-based Hollywood Entertainment Corp. produced a $23 million gain.
CMGI appears to have pioneered an Internet business model ideally suited to the economics of the industry. Let others try to justify lavish market values with minute operating earnings. CMGI flourishes on its sale of richly valued assets. With Internet profits scarce and assets dear, that clearly has been the way to go.
And as an incubator of Internet assets, CMGI is unique. Some of its businesses were internally developed and are still wholly owned and operated. In other firms, CMGI is essentially a venture capital investor, with stakes ranging from less than 10 percent to more than 50 percent. With more than 30 holdings, CMGI has a hand in just about every type of Net business--everything from search engines to e-mail management, investor bulletin boards, Web site hosting and furniture "e-tailing."
With at least half a dozen CMGI firms marching toward IPOs in the coming year, the market has decided that Mills and CMGI Chairman, President and CEO David Wetherell likely have some other jewels in their portfolio. That's why CMGI, with less than $100 million in fiscal 1998 revenue (year ending July 31), boasts a market value that recently topped $8 billion.
Though CMGI in its entirety looks like a road map of the Internet's future, its current revenue stream is actually dominated by non-Internet businesses. In the second quarter ended Jan. 31, 1999, about $34 million of $39 million net revenue came from such prosaic operations as mailing mutual fund prospectuses and--get this--packing Cisco Systems Inc. routers into cardboard boxes. CMGI, which was founded in 1986 and went public in 1994, has still not quite outgrown its roots in direct marketing and fulfillment services. Net income was $14.1 million, or 30 cents per share. But sales of stock holdings in Lycos and Amazon.com, along with proceeds from issuing some GeoCities shares, produced almost $56 million, dwarfing operations revenue.
Meanwhile, none of CMGI's Internet businesses are yet profitable. Irrelevant, of course. The genius of the CMGI model is that it conforms perfectly with investor expectations--lots of concept plays, or what U.S. Federal Reserve Board Chairman Alan Greenspan might call "lottery tickets." And if it's lottery tickets the investing public wants, CMGI can churn them out indefinitely.
CMGI's balky acronymic name (which the company keeps tweaking to little effect--no one seems quite sure whether it's CMG or CMGI) has thus far doomed any hopes of establishing a consumer identity like, say, Yahoo or Amazon.com. But Microsoft Corp. and Intel Corp., each of which holds just under 5 percent of CMGI stock, have duly observed CMGI's company-building prowess. Tokyo-based Sumitomo Corp. also holds 2.6 percent of the company.
Venture capital investors and rivals have also taken note. When CMGI sought outside investors for its third @Ventures portfolio, it was able to raise $272 million--far more than expected. And in California's clubby citadel of venture capital, the wizards of Menlo Park have come to respect these New England interlopers.
"The fact that they put two in the bag [GeoCities and Lycos] is very impressive," says Tod Francis, a general partner with Trinity Ventures of Menlo Park. Even more impressive to Francis is that CMGI bet early on GeoCities and Lycos, well before such Web business concepts had been validated. "They made some plays that were not obvious," says Francis. "It's much harder taking the risk when the CMGI guys did."
Because of its success with Lycos and GeoCities and its stream of potential revenue from upcoming IPOs, CMGI's stock has for many months been among the market's Net favorites. Investors are betting that CMGI will benefit in the coming months from the public offering or sale of many of its wholly or majority-owned units.
But as perfect a vehicle as CMGI is for exploiting Internet opportunities to enrich its shareholders, it is every bit as perfect for enriching its own executives. Indeed, on @Ventures III--its newest portfolio--a group of seven CMGI executives stand to make just about as much by themselves as the entire company. Because outside investors (including Microsoft, Paul Allen's Vulcan Ventures Inc. and King World Productions Inc.) put up most of the $272 million raised, CMGI will realize only about 20 percent of any future capital gains. But the seven executives--including CEO Wetherell, Mills and CFO and Executive VP Andrew Hajducky III--will personally divvy up just under 19 percent of the winnings in management fees.
A former partner with Ernst & Young LLP, the self-confident Hajducky argues that all this has happened before. Didn't the Carnegies and Mellons make at least as much during the Gilded Age? "This [new business environment] is one of the major events you'll see in modern times," he argues. Even semiconductor technology must take a backseat to online ingenuity: "To me, [the opportunities of the Internet] are bigger than [those created when the computer industry went] from vacuum tubes to chips."
Which begs the question: Are these guys supersmart or superlucky? Probably, like most who've hitched their stars to the Net, a little of both.
Inclined to give full credit to CMGI management is Albany, N.Y-based First Albany Corp. Senior VP Ullas Naik, who describes CMGI CEO Wetherell as a "visionary." Certainly, before many took the Net seriously, Wetherell was talking about the potential for community sites like GeoCities.
A lesser-known example of Wetherell's prescience is CMGI's Andover-based Planet Direct Corp. subsidiary. A few years ago, Wetherell guessed that Internet service providers (ISPs) would need localized content to stay in business and compete with the likes of America Online. For that reason, he invested in Planet Direct, which has since signed up more than 600 ISPs that now offer Planet Direct as their primary portal site. In a December 1998 report on CMGI, analyst Naik estimated that CMGI's stake in Planet Direct, likely to go public within a year, would be worth $400 million after the IPO.
Perhaps Mills says it best: "There's a lot of instinct in this."
The surest evidence of CMGI executives' keen instincts may well be the corollary they derived from "the network is the computer" Scott McNealyism. (McNealy is chairman and CEO of Sun Microsystems Inc., Palo Alto, Calif.) Recognizing the compounding value proposition in building critical mass on the Net, they've focused on investing in Web sites that become ever more valuable to users as their numbers increase. CMGI calls these "viral" sites.
"A viral site grows in interest and intensity as it gains users," explains Bill White, president of marketing and strategic operations for CMGI's Internet Group, which includes wholly and majority-owned businesses. E-mail, bulletin boards and personal page builders like GeoCities all fill the bill. "More users beget more content begets more users," White evangelizes.
But CMGI's most viral network may actually be its own portfolio. At GeoCities, neighborhoods like Bourbon Street, Nashville and Wall Street gain value as new "homesteaders" add insight and content. In much the same way, CMGI is a real-world network of Web entrepreneurs who benefit from a common base of institutional knowledge. With the integration of each new online business, that base is broadened and deepened.
"What [we] do is make introductions and make deals happen," notes White. For GeoCities founder and Chairman Bohnett, for example, "The early introduction to Lycos was important." By putting banner ads on each other's sites, says Bohnett, both firms were able to boost their site traffic.
Basically, CMGI knows just about everything that's being planned for the Net. "They have a great deal flow. They see a lot of stuff," explains Michael Barach, president and CEO of MotherNature.com Inc., an Acton, Mass.-based online retailer of vitamins and health foods in which CMGI has a 17 percent stake. CMGI was able to direct Barach to another of its holdings--Asimba Inc., Mountain View, Calif.--which posts dedicated content for runners. Barach is currently negotiating a deal with Asimba that would create links between the two sites, perhaps guiding runners to specific products sold at MotherNature.com.
Aware of such intramural benefits, young firms are often eager to line up CMGI as an investor. "It's a tremendous endorsement [that] helps open doors," enthuses Andrew Brooks, president and CEO of Furniture.com Inc. in Worcester, Mass., in which CMGI is a second-round investor.
As its Internet acreage expands, CMGI also benefits from cross-pollination. Rooted in 30 wide-flung Internet ventures representing software, infrastructure, content, community and e-commerce, CMGI is always getting leads from within its network on interesting new companies. Leads from within the CMGI network are, according to Mills, some of the best he gets.
Beyond personal interaction and brainstorming, there's room for considerable collaboration between CMGI holdings. That's because the core CMGI holdings (those founded and still wholly or majority-owned by CMGI) grew organically out of need. "Every Web site has to be hosted somewhere, so why not start a Web hosting company?" explains CFO Hajducky. So NaviSite Inc., also in Andover, was created to host several CMGI Web sites along with external customers. Similarly, CMGI has created several units to address opportunities in advertising. "If every Web site is going to have advertising, why not have an advertising network, as well as advertising profiling and marketing?" Hajducky adds.
If CMGI has a core technology that weaves through its patchwork portfolio, it's the ability to track computer users through their every browser click. Wholly owned Andover-based subsidiary Engage Technologies Inc. holds a repository of more than 30 million browser profiles. Consumer profiles is the name of the game as advertisers seek to pinpoint their flashing banner messages to likely buyers.
Many of the profiles in the Engage repository come from visitors to other CMGI-owned sites. Engage is a likely IPO candidate in the coming year, and last December First Albany's Naik valued CMGI's post-IPO stake in Engage at $400 million.
Naik also reckoned that other major values are buried in CMGI's portfolio. Planet Direct, as noted, could be worth $400 million post-IPO. And Naik valued NaviSite, the Web site hosting service, at $250 million. Both firms are wholly owned by CMGI. In some of its other promising ventures--like Ancestry.com Inc. of Orem, Utah, which tracks genealogy, and Andover-based Raging Bull Inc., a bulletin board site for investors--CMGI holds only minority stakes.
CMGI has focused on three types of Web investments: content (e.g., Lycos), community (e.g., GeoCities) and electronic commerce. A bit of a latecomer to e-commerce, the company now seems determined to make up for lost time. Some observers believe CMGI's next blockbuster could come from its e-commerce portfolio, which could produce four IPOs in the next two years. MotherNature.com, Furniture.com and TicketsLive Corp., Dewitt, N.Y., are all geared to consumer e-commerce. Chemdex Corp. is a Palo Alto business-to-business commerce site selling research supplies to labs and medical institutions.
How soon might these go public? The most conservative assessment comes from CMGI CEO Wetherell, who lists only Chemdex among 12 CMGI firms that are "candidates" for IPOs in the next two years. But MotherNature's Barach indicates his venture could this year reach the million-dollar-a-quarter revenue run rate he'd like to see before doing an IPO.
IPO successes are important to CMGI for more than their investment returns; venture capital is no different from other enterprises--success breeds success. CMGI's track record helps it in several ways. For one thing, Mills and his cohorts on the venture side get to see the best deals. For another, they can often negotiate the best terms for their deals. "Many companies don't mind selling to CMGI at very low valuations," says Naik.
Such young firms, aware of the success of GeoCities and Lycos, often take less to be part of the CMGI family. Naik cites the case of Magnitude Network LLC of Chicago, which develops Internet broadcast sites for radio stations. Naik says that Magnitude Network is not all that far behind Dallas-based Broadcast.com Inc., for which Yahoo in April announced it would pay $5.7 billion. And yet CMGI was able to buy 92 percent of Magnitude for just $25 million. Though it may not have received top dollar, "Magnitude Network is getting a powerful partner," says Naik regarding the deal. With its foot in the door on a discount pass, CMGI now plans to invest over $100 million to build an Internet broadcasting company.
The CMGI discount
Mothernature.com CEO Barach knows what it's like to negotiate with CMGI. With some pride, Barach claims to have negotiated favorable terms from the company. But others, he insists, leave a lot of equity on the table. "They often get a 20 percent to 30 percent discount," says Barach of CMGI. "That's what they try to get."
Tough negotiating on terms has endeared CMGI to its fellow investors, none of whom want to see prices for private startups bid up. "CMGI has had to overcome the reputation of being the new guy on the block [who's] throwing money around. That's initially how we looked at them," says David Cowan, a general partner with Bessemer Venture Partners in Menlo Park, which has coinvested with CMGI on some deals. But, he adds: "We have come to respect their practice."
Many corporate venture investors, Cowan says, "throw their money against the wall, see what sticks and then lose interest." But CMGI has shown willingness to invest management time and focus on its ventures. And it has also shown "a discipline for exercising due diligence, for negotiating reasonable deals as opposed to just jumping in," he says.
What may be most impressive about CMGI is its balance. Unlike many Internet companies, CMGI is no Johnny One-note. Immersed and invested in so many different sectors of the emerging Internet economy, CMGI should survive the kind of brutal competition that will eventually sink some of today's hottest one-idea Web ventures.
Meanwhile, as both a buyer and seller of Internet assets, CMGI is more immune than most to any deflation of Internet asset values. Sure, such devaluation could ice plans for the public offerings CMGI relies on for capital. But there would also be benefits, reasons the self-assured Hajducky: "When the IPO market turns down, you can find more attractive VC valuations." |
