Internet Capital, Venture Fund for Online Cos., to Consider IPO
Washington, July 9 (Bloomberg) -- Internet Capital Group LLC, formed by Safeguard Scientifics Inc. to invest in online businesses, filed a regulatory application as a precursor to its own initial public offering.
The investment company, based in Wayne, Pennsylvania, is essentially a venture capital firm that holds stakes in 15 Internet start-ups. In addition to Safeguard Scientifics, Internet Capital's founding shareholders include subsidiaries of Comcast Corp. and Compaq Computer Corp.
Internet Capital's specialty, helping Internet businesses develop and prosper, could bring top dollar on Wall Street right now. With shares of Internet companies spiraling up in recent months, investors may be willing to pay a premium for the ability to pick out and nurture the next Yahoo Inc. or Amazon.com Inc.
If Internet Capital went public they could raise hundreds of millions of dollars with very little dilution to the managing partners, and then they could invest that money'' in online businesses, said Fred Wilson of Flatiron Partners LLC, another Internet venture capital firm.
At present there are four or five venture capital firms in the U.S. that specialize in the online industry, according to Wilson. Only one, CMG Information Services Inc., is publicly traded, Wilson said.
Strong Demand
CMG's track record would prove tempting to someone such as Internet Capital. The mentor to Lycos Inc., CMG has seen its shares more than triple during 1998, giving the venture capital company a market capitalization of $1.6 billion.
Moreover, there is now strong demand for financing among Internet companies. While overall venture capital investment increased 34 percent last year, the amount devoted to Internet companies rose 62 percent to $1.13 billion in 1997 from $699.4 million in 1996, according to Venture Economics Information Services, a Newark, New Jersey, company that collects data on private equity.
We are looking at business plans going over our desks on a daily basis,'' said Joseph Tzeng, managing director in the Cleveland office of the Crystal Internet Venture Fund. ''There are a lot of Internet start-ups who want outside capital to help them.''
Internet Capital seeks to invest in Internet companies that engage in marketing, customer service and support, and electronic commerce. Its portfolio has a value of about $87.3 million and includes companies such as DejaNews Inc., Syncra Software Inc., Benchmarking Partners Inc., Clear Commerce Corp., and Context Integration Inc.
As part of its overall strategy, Internet Capital has created a network that enables companies in its portfolio to share knowledge and innovations. The goal of this ''flexible specialization network'' is to create more up-to-date products or services at a faster rate and lower cost than rivals.
Advice and Support
Internet Capital officers have a strong background in online businesses, according to the SEC application. For instance, Douglas Alexander, a vice president, was a co-founder of Reality Online Inc., which became a leading provider of Internet solutions to the retail brokerage industry before its sale to Reuters Holdings Plc in 1994.
The executives provide companies they invest in with management advice and operational support. ''A number of the Internet companies in the network are operated by young, less experienced entrepreneurs who need the hands-on operation advice offered by a more experienced parent,'' Internet Capital said in its SEC application.
Safeguard, also based in Wayne, Pennsylvania, provides seed money to new businesses and then helps them develop, much like a venture capital company. Safeguard has had several big successes, said Carla Cooper, an analyst at Robert W. Baird & Co.
They certainly have had some huge home runs in companies like Coherent Communications and Cambridge Technology,'' Cooper said. Shares in Coherent Communications Systems Corp. have risen 93 percent during the past 52 weeks, while shares in Cambridge Technology Partners Inc. are up 60 percent.
Rather than sell stock directly to the public, Safeguard customarily issues rights to its existing shareholders that entitle them to buy shares in a portfolio company. After 35 days, the rights begin to trade on the open market, enabling outside people to invest in the IPO company.
No Guarantee
Safeguard would most likely use the same process to issue shares in Internet Capital, said Peter Madden, a Safeguard spokesman. This would be one of the first times that Safeguard has taken a venture capital fund public rather than an operating company, Cooper said.
Of course, there is no guarantee that Safeguard will even hold an IPO for Internet Capital. The SEC application said Internet Capital is only ''considering the possibility'' of an initial public offering of its securities.
Moreover, the SEC application may take four to 12 months to wend its way through the agency, said Pierre de Saint Phalle, an attorney at Davis Polk & Wardwell who is representing Internet Capital.
The application essentially seeks assurance from the SEC that Internet Capital won't be regulated as an ''investment company'' under the Investment Company Act of 1940 after it was publicly traded. The law is designed for mutual funds and would pose difficulties for an operating company such as Internet Capital, de Saint Phalle said.
12:29:52 07/09/1998
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