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The incubators
A new breed of financiers is pouring capital and expertise into developing companies, hoping to hatch the next golden technology stock
Kim Hanson
Financial Post
Illustration showing American and Canadian dollars breaking out of an egg.
The run-up in high-tech stocks has generated more excitement -- and anxiety -- among investors than at any time before. A few years ago, only an investment banker would have known what an initial public offering was; today IPO is a household word.
An offshoot of this remarkable market activity is the emergence of a new kind of public animal, the Web incubator. Like a chicken that lays eggs, they hatch new companies. They hope the heavy amounts of capital and expertise they pour into firms in their early days will guarantee a "golden egg."
U.S. investors are hungry to invest in Web incubators, finding the risk amply rewarded.
Take CMGI Inc., the granddaddy of Internet incubators, with a market cap of $37.5-billion (US). CMGI's share price has gone up nearly 82,000% since it went public in 1994. A purchase of 100 shares at a cost of $800 (US) in 1994 would have netted investors a gain of $621,000 (US).
Based in Andover, Mass., CMGI has become an Internet powerhouse, investing in the likes of Lycos Inc., which now has a market cap of $6.5-billion (US).
A publicly traded Canadian heavyweight has still to emerge. But the public launch of three Web incubators and the expectation of more to come suggest investors may soon have several more vehicles for their speculative money.
EcomPark Inc. is the first incubator in Canada to go public and has had a good run since its spring IPO. In April, 1999, it was capitalized at $1-million; today its market cap has grown to $460-million. One of EcomPark's primary assets is ZConnexx, which runs the yellowpage.net site and has signed up more than 38,000 small businesses in the United States since its inception in June. EcomPark helped Zconnexx get started with $250,000 (US) in seed money. Its stake is now worth more than $21-million.
Exclamation Inc., a new listing on the Canadian Venture Exchange, says its focus on developing ideas in-house allows it to retain about 90% of every new firm, as opposed to the typical 20% to 40% stake.
Itemus Inc. is one of many miners transformed into an Internet stock. Its management is made up of well-known executives in the Internet space, including Jim Tobin, former president of Hummingbird Communications Ltd.; Mark Maybank, Internet analyst at Yorkton Securities Inc.; and Tony Iantorno, a former executive at CMGI. Itemus has about $70-million in marketable securities, from the liquidation of mining assets, and has accumulated stakes in about 20 companies focused on wireless technology and software that collaborate voice, fax, and video over the Internet.
So, how do you know which incubator to invest in? Tracey De Leeuw, Yorkton Securities' new chief e-commerce strategist, says investing in an incubator mitigates risk. "They are now going to put their money in a pool and rely on the incubator's executive management team to determine which companies are most likely to succeed. As opposed to investing in just one, they'll actually be investing in several." She offers investors five tips in picking an incubator.
- Look at the track record. For example, although not public, venture firm XDL Capital Corp. scored a handsome return on its 29% stake in Delano Technology Corp. In its Nasdaq debut, Toronto-based Delano shares soared from an offering price of $18 to an intraday peak of $64.
- Consider whether the incubator is going to invest only in companies that specialize in business-to-business or business-to-consumer services.
- Look at the incubator's ability to take companies public and gauge how they attract business partners to do this. Incubation is just one stage of development. The start-up will need two or more rounds of financing before it goes public; then it will need to build a relationship with an investment bank to take on IPO plans.
- Consider whether the incubator is focused on building new ideas or on building new technology, or -- ideally -- a combination of both. "If you are [just] a technical incubator, that is not enough," says Ms. De Leeuw. Some take entrepreneurs with a great idea and build technology to support their business plans.
- Pick stocks that suits your investment style. Investing in an incubator is largely a case of buy and hold. Day traders are probably not as excited about holding these stocks as long-term investors are because they may not see any returns on their money in a year or more.
PUBLICLY TRADED CANADIAN INCUBATORS:
In Canadian dollars
Company Ticker Share price Market cap Head office Key holdings (Mar. 3 close) (-million)
EcomPark Inc. EKP/CDNX $3.90 $460 Toronto Petopia.com, ZConnexx,SamtheRecordMan.com
Mount Linux, WiredMerchant.com
Exclamation International Inc. XI/CDNX $4.25 $119 Toronto Bigtree.com, ThinOffice.com, Points.com
Itemus Inc. (previously Vengold) VEN/TSE $3.49 $506 Vancouver Not disclosed. Company has stakes in about
20 companies, and has put money into 12-15 of them
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