Incubators Hatch Web Profits
by J.K. Riggin
Resolution for the new millennium: start a billion-dollar Internet company.
It's easy, right? All you need is a great idea and a sexy domain name. Just put up a Web site and sell something other than books
or CDs. A few marketing gimmicks would be nice, too: get your buddies drunk and have them paint your Web address on their
chests and stand outside the Today show studios for a chat with Al Roker!
Eventually, of course, you'll want to get serious and take it to the next level. And you will need to do it fast. Business is still
business.
And then you'll need money -- lots of it. So you take your business plan down to your neighborhood venture capitalist and try not to
look discouraged after they've laughed you right out of the office. Then you find the uncle of a friend of a friend's brother-in-law
who happens to be a part-time angel investor in Internet startups, but he fails to pull the trigger because you really don't have
anything more than a great idea. But he does say it's a great idea... and he doesn't laugh.
It's just that what you need is everything that supports the great idea. You need to talk to people who have tried and failed to pull
off similar ventures. Guys with more experience. Young punks with more enthusiasm. Fellow entrepreneurs who might consider
forging strategic alliances with your company.
In other words, you need an incubator. Part venture capital, part management consulting, part general business support
services... and part Mommy. As Internet-enhanced opportunities zoom to market at an ever-increasing speed, a new generation
of business incubators are nurturing the high level of entrepreneurial activity and hyper growth necessary for young companies to
make their mark.
Historically, incubators have been touchy-feely, academic, business-wonk affairs. Attracting those who particularly enjoy giving
and getting advice (also known as geeks), these outfits traditionally have been affiliated with university business programs.
However, they tended to produce more pretty business plans than killer businesses.
And then the Internet happened. All of a sudden, Bezos, Yang, Filo and a bunch of other nobodies aged 35 and below began
popping up on the pages of Forbes and Vanity Fair as billionaires.
To help weed out the next generation of billionaires, these incubators function as a kind of market within the market, while the
traditional sources for capital and strategic hand-holding have moved on to greener pastures. VCs are moving toward bigger and
faster money. Banks are now experimenting with a fee that is assessed when you walk through the door (that's a joke... I hope).
And the management and IT consulting firms happily tell you to take a number, unless you have more than a million dollar budget.
Companies like idealab! and eCompanies take you (and your idea) in from the cold and provide you with a nest to exercise your
enterprise. That means more than a cheap desk and bandwidth; it's mentoring, introductions to strategic partners, guidance in
marketing and financing alternatives, tax and legal advice, business planning and more. And incubators are perhaps more
efficient than VCs or management consulting firms in that they're more capable of recycling "failed" ventures into new ones.
What do these companies ask in return for a suck at the teat of success? You guessed it. Equity. And with the continued
buoyancy of IPO activity, not to mention the monthly moonshots, incubators are an exciting way to participate in the IPO game.
Of course, word is getting out. Cambridge Technology Partners (CATP-NASDAQ) has been taking on water and employees have
been jumping ship for months... but a recent report that the systems integrator plans to open an incubator division drove its
battered stock up 33%. Trade magazine publisher Primedia (PRM-NYSE) recently announced that it will take equity in lieu of cash
from dot com advertisers. And consulting firms investing in startups include Andersen Consulting, Diamond Technology Partners,
KPMG and Scient (SCNT-NASDAQ).
The recent performance of both Internet Capital Group (ICGE-NASDAQ) and CMGI (CMGI-NASDAQ) has turned more than a few
heads, and now everybody's clawing for a piece of equity in a upwardly bound dot com.
Heavy synergy going on
Among the Internet jargon that actually makes sense is the B2B and B2C classification, which are basically Internet-specific
terms for business and consumer markets. B2B, or business-to-business, companies tend to favor commerce because of larger
and more frequent purchases. B2C, or business-to-consumers, companies include commerce, but also involve content and
advertising because of the greater size and diversity of the audience.
Internet Capital Group has done a brilliant job of weaving a fabric of outstanding B2B net plays, from infrastructure builders to
companies creating a new way for business buyers and sellers to interact. So much so that in early December, AT&T invested
US$50 million in ICG. The market has responded as well, driving shares up more than fifteen-fold since its August IPO.
Why the hype?
Two things. First, B2B is everybody's favorite Internet space for the future. The market research supports this, and an
AOL/Amazon/Yahoo leviathan has yet to emerge. Second, ICG has snapped off a series of successful IPO investments,
including Breakaway Solutions (BWAY-NASDAQ), US Interactive (USIT-NASDAQ) and VerticalNet (VERT-NASDAQ). ICG's stake
in these three companies alone is over US$1.7 billion.
CMGI, on the other hand, plays more to the B2C crowd. With a widely distributed network of 45 Internet companies that rivals
Asia's Softbank in terms of breadth, CMGI's audience reach is surpassed only by AOL and Yahoo. The company's successes
include the 1996 Lycos (LCOS-NASDAQ) IPO, double-dipping on GeoCities (1998 IPO and 1999 acquisition by Yahoo) and the
1999 Critical Path (CPTH-NASDAQ) IPO and acquisition of Flycast (FCST-NASDAQ) Internet advertising network. CMGI's stock
has been a rough ride up and down into the summer and fall, but holiday shopping season has seen CMGI emerge as a
consumer dot com darling.
As both ICG and CMGI continue to grow (and figure out how to justify their lofty valuations), the space again opens up for those
companies who can best pay attention to and nurture the bleeding edge. Following are a few snap shots of incubators that are
making waves today, and may very well arrive with IPOs of their own through 2000.
The Prodigy expands
Among the new breed of Internet-blessed incubators, idealab! has set the tone. Idealab! already has spawned more than two
dozen companies, including several billion-dollar concerns, like eToys (ETYS-NASDAQ), Goto.com (GOTO-NASDAQ) and
CitySearch (TMCS-NASDAQ). Next in line is the highly anticipated Free-PC (just merged with E-Machines, which had its IPO in
registration).
What's next? The Pasadena, Ca.-based incubator is branching out with a new office in, of all places, Silicon Valley. Although the
company has made no overtures to an IPO itself (its holdings to date are nearly as impressive as those of ICG or CMGI), the
performance of those two issues should make an offering hard to resist.
Mr. eDisney and Big Sky
Down by the sea in Santa Monica, two of the Internet's brighter stars -- Jake Winebaum and Sky Dayton -- are putting together a
similar operation in eCompanies. Winebaum comes to eCompanies from Disney, where he ran all Internet activities, including
Disney.com, ABC.com, ABCNEWS.com, and ESPN.com. Don't forget Disney's acquisitions of Paul Allen's Starwave and the
Infoseek search engine. Dayton founded Earthlink (ELNK-NASDAQ), which bought Mindspring earlier this year and became the
Internet's biggest consumer ISP, after America Online (AOL-NASDAQ).
The company recently made a splash when it paid more than US$7 million for the domain name "business.com," set to be the
name for a new B2B portal. In less than a year, eCompanies has managed to pull together a roster of intriguing startups which
should produce a few IPO contenders. And as its founders both seem to know their way around a prospectus, an eCompanies
IPO is not unlikely by the end of the year.
Dead plants for everyone
The best venture capitalists love dead plants in their customers' offices -- it's a crude yet telling indication that money and
attention are being focused on the company's product and marketing instead of trivial distractions.
With MeVC.com, you too can grow to appreciate the site of dead plants, because the company is launching a US$500 million
mutual fund in a venture capitalist firm's holdings. Venture capital firm Draper Fisher Jurvetson of Redwood City, Ca., invests
about US$1 billion in six funds and recently has been generating better than 100 percent annual returns for its institutional
investors. Through Internet startup meVC.com, the rest of us can get a piece of the action. MeVC.com has raised more than
US$5 million from former BankAmerica CEO Dick Rosenberg and Draper Fisher Jurvetson, and has been hiring senior talent
from Montgomery Securities, GT Global and Charles Schwab.
The company hopes to headline a new chapter in our ever more liquid Internet economy. Up until now, US$40 billion venture
capital business has been restricted to wealthy insiders. MeVC.com plans to change that with a minimum investment in the new
fund of US$5,000. But this ain't Fidelity, Janus or Magellen. Besides the risk of venture investments, there's also a stiff price to get
in on the ground floor, as appraised by DFJ's rocket scientists: two and-a-half percent of capital contributions and 20 percent of
any profits.
Spreading the wealth
Foundry Networks. Akamai Technologies. VA Linux. Freemarkets.com. Over and over we hear the minions bleat, "How can I get
in on the ground floor?"
By turns cruel, unfair, yet always ruthlessly efficient, the market also is mysterious in her wisdom. The market's answers seldom
seem obvious until long after the fact. As Mother Theresa said, the best way to make God laugh is tell him your plans.
It's not online dutch auction-style access that will distribute IPO shares to the masses. That's too inefficient. Look for the
incubators that help those IPOs come into being to also serve as the prime intermediaries through which the Joneses will ride the
IPO wave of prosperity |
