Excellent RedHerring article on ICGE from last month......................
Capitalizing on B2B
ICG's successful public offering
raises important questions about the
future of business-to-business
e-commerce.
By Alex Gove
Red Herring magazine
From the November 1999 issue
Quick: name a recent initial public offering of a
business-to-business electronic-commerce company.
It's not easy. The public markets have been more
interested in business-to-consumer startups than in
business-to-business companies. But in August, the
Internet Capital Group (Nasdaq: ICGE) (ICG), an
operating company that holds large stakes in 35
startup business-to-business e-commerce companies,
went public at a valuation of $5.4 billion on revenues
of only $3.1 million.
Analysts predict that
business-to-business e-commerce
growth will soon surpass that of
retail e-commerce. But if you
believe Kenneth Fox, a cofounder
and the managing director of
ICG, the race to develop new
business-to-business companies
may be over before it has even
begun. "We care about only one
thing -- attaining market leadership for our companies,"
Mr. Fox says.
Based in San Francisco and Philadelphia (with satellite
offices in Boston and Seattle), ICG now plays in 18
business-to-business markets, but it eventually plans to
own bets in 50 of them. According to the company,
these 50 markets represent about 70 percent of the
United States' gross domestic product.
Even so, it is "pretty ballsy" for
ICG to say it will dominate entire
business-to-business vertical
markets, says Varda Lief, a
senior analyst at the IT
consultancy Forrester Research
(Nasdaq: FORR): "A lot of
industries are not virgin anymore. I would be
hard-pressed to identify a sector where someone is not
planning something."
ICG's successful IPO is proof that the investment
community is beginning to realize the appeal of
business-to-business e-commerce. Forrester predicts
that, in the United States, it will become a $1.3 trillion
market by 2003. Although IDC, another IT
consultancy, is slightly less optimistic -- pegging this
figure at $633.7 billion -- the firm's Anna Giraldo
estimates that the market's compound annual growth
rate from 1998 to 2003 will be 11 percent greater than
that of business-to-consumer e-commerce.
Over the years, venture capitalists have invested in
their share of business-to-business deals, but none
have focused on the niche to the same degree as ICG.
Back in 1995, Walter Buckley and Mr. Fox, who
were principals at Safeguard Scientifics (NYSE: SFE),
another operating company that invests in startups,
decided to back new business-to-business companies.
They were particularly interested in them because they
thought the Internet could significantly reduce a
business's transaction costs, which include everything
from procurement to customer support. They also
believed that their "first-mover advantage" would be
more valuable here than in a business-to-consumer
market, because businesses do not change suppliers
over small differences in price. The costs involved in
switching are simply too high, Mr. Fox explains.
JUST A STAGE
Operating companies that invest in a variety of startups
are not new -- other examples are Thermo Electron
(NYSE: TMO) and CMGI (Nasdaq: CMGI). Mr.
Buckley (now ICG's CEO) and Mr. Fox thought this
structure would be particularly useful for
business-to-business e-commerce because it would
allow their company to be stage independent: instead
of confining itself to seed rounds or mezzanine rounds
of funding, it could use its public-company listing to
invest in rounds ranging anywhere from a million to a
billion dollars.
Because of the Investment Company Act of 1940,
public companies like ICG or CMGI that own stakes
in startups can't hold more than 40 percent of their
assets in minority investments. The Securities and
Exchange Commission does not want companies that
are essentially mutual funds to pretend that they are
operating companies. But Mr. Buckley and Mr. Fox
both thought that an operating company could grow
startups more quickly than a venture firm could
because the startups could tap into a common services
infrastructure that includes recruiting services and
expertise in back-office systems or knowledge of
corporate "best practices."
SHAKE YOUR MARKET MAKER
ICG's founders have gone a long way toward realizing
their vision. Prior to its public offering, which raised
$212 million, the company shelled out $129 million in
acquisitions in the first half of this year -- a 260 percent
increase over all of 1998. And although ICG was able
to claim only $3.1 million in revenues when it went
public, in the first quarter of 1999 the revenues of its
collected companies (including the period before ICG
took a stake in the companies) amounted to $45.4
million, an increase of 176 percent over the same
period last year. (ICG's share of this amount is
approximately 23 percent.) To date, only one of ICG's
35 portfolio companies -- VerticalNet (Nasdaq:
VERT), an online publisher of newsletters for different
industries -- has gone public, but ICG claims that two
other companies will file shortly.
As for ICG's portfolio, it is designed to be
complementary. Eighteen companies in the ICG stable
are "infrastructure services providers." One example is
CommerceQuest, which designs a communications
technology that allows buyers and suppliers in any
industry to talk to each other regardless of which
communications protocol they are using. The others
are "market makers" like VerticalNet and
e-Chemicals, which provides chemical companies with
a marketplace for business and helps them with
fulfillment and logistics. ICG claims that its
infrastructure companies will not only help grow its
market makers but will also provide financial stability
to ICG as a whole, since service companies' revenues
are generally more stable than those of market makers.
ICG's portfolio companies seem comfortable with the
arrangement. In the chemicals industry, ICG owns 42
percent of Commerx, a startup that -- under the name
PlasticsNet.com -- enables the plastics industry's
20,000 buyers and 5,000 suppliers to use the Web to
trade products like resin. Commerx estimates that it
reduces the cost of a chemicals transaction by 10 to
30 percent, a substantial savings in what is estimated to
be a $370 billion market. According to Nick Stojka, a
company cofounder, Commerx has achieved these
goals in large part thanks to its relationship with ICG.
Initially, Mr. Stojka says, Commerx had to "think
through" the public status of ICG, including the risks
involved in divulging its strategy in ICG's prospectus.
But Commerx was impressed by ICG's focus. "With
other VC firms, it's hard to get a partner's time," Mr.
Stojka says. "But because ICG is organized as a
corporation, we have at least two primary contacts
there whom we can leverage."
UNCOVERED BAZAARS
ICG faces several challenges. From a strategic
perspective, according to Ms. Lief, "Nobody is going
to own a market. Buyers don't want to trade one
monopoly for another. You don't use the Net because
you want to restrict your choices." She does not buy
ICG's argument that companies will be reluctant to hop
between markets or service companies. As for its
financial stability, if the market for IPOs tanks, ICG
will have to deal with a large number of illiquid
investments in its portfolio.
Mr. Fox agrees that business-to-business e-commerce
is a huge sector, but he says ICG's ability to participate
in many different transaction sizes, as well as its
exclusive focus on the segment, will give it an
advantage in identifying both leading companies and
promising startups. Mr. Buckley admits that his
company is at the mercy of the IPO markets but
claims, "Capital is not the issue. There is no lack of
private capital to keep these companies growing. On
the positive side, if the market closes down, we will
acquire bigger stakes in our companies." This could be
a problem if ICG's investors suddenly take flight;
unlike private equity investors, day traders are not
committed to keeping their money in one place. But
Mr. Buckley says that even in a bad market, ICG can
rely on its strategic shareholders -- which currently
include Comcast (Nasdaq: CMCSK), Compaq
Computer (NYSE: CPQ), Safeguard Scientifics, GE
Capital, and IBM (NYSE: IBM) -- for funds.
ICG's success will depend on the business processes
that lie at the root of the U.S. economy and the
world's. The company will no doubt face a great deal
of competition in the industries in which it plays. But it
has already anticipated and answered many questions
about e-commerce in a very short time.
|
