Carefully Choosing Web Investments Without Overpaying in a Frenzied
July 13, 1998
Market
By Nelson Wang
Few people have invested in the Internet as shrewdly as David Wetherell, the CEO and president of CMG Information Services. Starting with the grubstake of $70 million he got from America Online in 1994 for BookLink, an early Web browser developer, Wetherell and his team have gone on to invest in 22 different Internet companies, including major success stories like Lycos and GeoCities.
More recently, CMG has gone on to make majority investments in companies that it believes can work together synergistically, such as its recent acquisition of ad software maker Accipiter, which CMG has merged with its targeting and profiling company, Engage Technologies.
As the prices of many Internet stocks continue to surge, the shares of publicly traded CMG have risen dramatically as well, more than doubling in 1998 alone. Many investors see CMG as an easy way of investing in an Internet venture-capital or mutual fund.
Wetherell, a former software developer, talked with Internet World about some of his company's plans and his thoughts about the sector.
Internet World: What's the philosophy guiding your current investments?
David Wetherell: Initially, our focus was on capturing as many eyeballs as possible, with investments in Lycos, GeoCities, and [mapping and directory provider] Vicinity. We now think that many of the fundamental portal opportunities have come and gone. Going forward, we're focusing on e-commerce--once you have the eyeballs, what can you do with them to generate revenues? So we've invested in things like [online video store] Reel.com, which is a consumer play, Chemdex, which is a business-to-business opportunity targeting life-science products, and a number of others. The next several years will be focused on e-commerce.
IW: Will you continue to make minority investments in companies, or will you focus on wholly acquiring companies like Accipiter?
Wetherell: We almost always make minority investments in external companies. Our internal companies are wholly owned-subsidiaries or companies that we start. We invest an equal number of dollars externally and internally.
IW: With the Internet sector doing so well this year, do you worry about overpaying for companies?
Wetherell: We won't overpay. We're very cognizant of the need to assure a win-win for us and our investors. We bring a lot of value to the table and we need to be rewarded for that, and if we don't feel we are, we don't invest. Public-market multiples shouldn't be applied to private investments, although they do tend to affect valuations. We tend to invest in very early-stage companies, often with no proven business model, and they often come to us to leverage introductions to our investments or our strategic partners like Intel and Microsoft. What should matter most to [the companies we invest in] is not their valuation in the first round of financing, but when they exit. We've demonstrated that the companies we've been associated with have had extremely high exits.
IW: Your Internet Group, in which you're building a portfolio of companies that can work together synergistically, sounds a lot like the model of a Japanese keiretsu. Is it?
Wetherell: To the extent that you can make complementary investments and leverage up your prior investments, you look to do that, but it's not mandatory for us to invest in a company. But probably three-quarters of the investments we've made have fallen into that category.
IW: You recently sold some of your stake in Lycos. What's your strategy for divesting from the companies you invest in?
Wetherell: It depends on a number of factors, like the state of the public markets,and the health of the company. Sometimes companies are IPO candidates, sometimes they're acquisition candidates. Of the companies we've invested in, three have been sold to other companies, one has gone public, several others are positioned to do so. But it's not just based on profits, but what's best for the company. You hope the two coincide, but some companies make better strategic acquisitions and mergers for other companies. And they may be better for the company in the long term.
IW: There have been rumors that CMG is planning to divest its entire investment in Lycos. Is that true?
Wetherell: We have no plans to do so.
IW: How did the current focus of the company evolve?
Wetherell: We had a long-term business model with BookLink, which got derailed when they got sold. We had a pile of cash and we still believed in the path of BookLink, which was to use browsers to gather eyeballs, target people with ads, then move into e-commerce. So we started a two-pronged approach--internally to invest where there were opportunities that were not being addressed, and a venture group, where we invested in companies with a similar strategy. And we've continued on that path.
IW: Online advertising has grown rapidly, but there's a lot of competition for those ad dollars. How do you expect the companies you've invested in will be able to capture a significant portion of that money being spent?
Wetherell: One of the big things is targetability, because with better targetability you can drive up click rates and then CPMs [cost per thousand impressions]. Even without applying Engage's technologies, a good number of our sites are seeing increases in the number of advertisers and the size of their ad contracts, so the trend is very healthy already.
IW: Unlike a company that makes products or sells a service, your goal is not really to show revenue and profit growth quarter to quarter. How, then, should we look at CMG's financials?
Wetherell: We're more like a mutual fund, so you need to look at the net asset value of our holdings, rather than profits and revenues. In the early stages of a hyper-growth industry, you want to gain market share--in fact, if you're profitable early on, you're probably not maximizing your opportunity. You have to be on a clear path to profitability and have clear revenue growth, but you better be capturing eyeballs, or page views, or whatever metric you're focused on. Eventually, the Web will mature and resemble more of an earnings play.
But the Web is unique in that small companies can have a large presence because of the value of networking and the exponential growth of connections that occur with it. So the opportunity to start companies and disintermediate more traditional businesses on the Web will continue for a long time to come, longer than in other new industries.
IW: You've said that the better Internet companies can achieve profitability within three to four years. Do you still believe that?
Wetherell: That's true, but the question remains if that is what's best for the company. Depends on state of competition and other factors. It can be a lot sooner--Lycos got to profitability in two and a half years. Companies can be profitable a lot sooner, but the question is, can you scale at the same time?
IW: Can you talk about the research that goes into deciding which companies you'll invest in?
Wetherell: We look at the comparables--who are the companies in the niche, etc.? We look at the quality of the management team--how difficult are the problems they've solved from a technological standpoint, or from building the critical mass to erect barriers to entry? If they've got a first-mover advantage, how distant are their competitors, and how defensible is their position if a large company decides to get into that space? And we try to make sure the company's not in the crosshairs of companies like Microsoft.
IW: You've talked a couple of times about ensuring the long-term well-being of the companies you invest in, and that it's not just a profit-driven decision. Is your strategy to acquire a reputation for looking after companies so other companies will want to work with you?
Wetherell: Well, we do take a long-term view. And we help bring in other investors, and since it's a fast-growth industry, you do need to invest in market reach and market share, and we realize they are going to need additional funding. And it does engender a certain amount of loyalty. The tough thing for a lot of the people who came to us is that we can't invest in all of them. Since we work closely with companies, we can only work closely with so many. We have done a few deals where we've just put money in, but that's the exception.
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