From: Jeff Bone (email@example.com)
Date: Mon Oct 30 2000 - 12:59:01 PPET
Oh, the humanity!
Rohit Khare wrote:
> >"There is a method to our madness," Mr. Wetherell said. "There
> >aren't a lot of incubators with $1.5 billion in revenue."
> Nor with so many billions in losses... but at least I'd like to think
> David isn't so stupid as to flush Scout Electromedia...!
> Incubator, Stinkubator, as Adam sez...
> October 30, 2000
> Net Incubators Face Hard Times
> By LAURA M. HOLSON
> Call them instigators. Or catalysts or accelerators. Just please
> don't call a company that hatches Internet companies an "incubator"
> Now that the fiery crash of Internet stocks has many investors
> cursing dot-coms as the devil's spawn, the investment companies that
> hatch dot-coms consider incubator a tainted term.
> "It's like if your name was Monica before the Clinton scandal, it was
> fine; but it's not now," said Bill Gross, chairman and chief
> executive of Idealab, a Pasadena, Calif., company that was the first
> and best-known, um, I-word.
> Mr. Gross knows the ignominy. Twelve days ago, tired and dragged down
> by a cold, he canceled a much-anticipated initial public stock
> offering for Idealab, warning that tough times were ahead. Two days
> later, Eve.com, one of the largest beauty sites on the Web and a
> company that Idealab had fostered, said it was shuttering its doors
> and laying off most of its 164 employees. And last week, Scout
> Electromedia, another company Idealab invested in, went out of
> For an entire segment of the technology-financing industry, Idealab's
> string of bad news has been a chilling sign of the times. If Mr.
> Gross is losing faith in the incubator approach these days, who else
> might hope to make it work?
> "It's pretty clear by pulling the offering they admitted what
> everyone knew all along," said David Dusenbury, a research analyst in
> Credit Suisse First Boston's technology group. "There is no market
> for incubators right now."
> It was five years ago that Mr. Gross, already wealthy from the sale
> of his software company Knowledge Adventure, conceived and executed
> the idea of a technology incubator. The notion was to offer shelter
> and succor for new Internet-related businesses intent on getting
> quickly to market. By providing office space and administrative
> support, marketing and public relations in return for an equity stake
> in each of its wards, Idealab was offering much more than venture
> capital firms - which typically dispense only money and advice.
> Mr. Gross's concept was widely imitated as other entrepreneurs and
> financiers watched fledglings like CitySearch (which later merged
> with Ticketmaster Online) emerge from the Idealab hatchery and show
> signs of taking flight. In 1999, when Idealab spinoffs produced some
> of the year's hottest stock offerings, like the e-tailer eToys and
> the Web search company GoTo.com, Mr. Gross seemed to be sitting on a
> nest of golden eggs.
> Now, though, with the stocks of eToys and GoTo.com trading at a
> fraction of last year's highs, the business model that Mr. Gross
> cultivated is being called into question. Within two days of
> Idealab's Oct. 18 announcement, Garage.com, which provides financing
> and other services for high-technology start-ups, announced that it,
> too, would delay its initial stock offering.
> And publicly traded investment companies like CMGI and the Internet
> Capital Group, which have managed and nurtured Internet start-ups but
> bristle at the I-word, have seen their own stock prices plummet.
> CMGI's shares, which touched a high of $164.75 in January, closed on
> Friday at $16.75. Internet Capital, which traded at $212 last
> December, ended last week at $12.
> CMGI's chairman, David Wetherell, is as insistent that his company
> will ride out the current turbulence as he is adamant that CMGI is
> not and never has been an incubator. It is, according to the Web
> site, a "leading global Internet operating and development company."
> "There is a method to our madness," Mr. Wetherell said. "There aren't
> a lot of incubators with $1.5 billion in revenue."
> In any case, whatever they may be called, there are now some 400
> companies, all pursuing a business similar in many ways to Mr.
> Gross's Idealab. And some analysts and academics are predicting that
> within a year, fully half these companies will be out of business.
> "The success of Idealab portfolio companies was noteworthy but was
> not proof that the incubator model works," said Dave Witherow, chief
> executive of Venture One Economics in San Francisco, which tracks the
> venture capital industry. "It proves the challenges and suggests that
> the model itself is not so simple."
> But like many of his peers, Mr. Gross contends that there is nothing
> wrong with the business plan. Idealab has spun off 55 companies over
> the years, company executives said. About 50 are still in business,
> while the rest have failed. It is currently incubating 12 companies
> and will continue to create new ones.
> "It's a mistake to read too much over all into this," Mr. Gross said
> of the recent gloomy announcements. Investors are now focused on
> profitability, he said, and any layoffs at the companies Idealab
> backs are simply a reflection of that concern. Besides, he added,
> Idealab spends only about $72 million a year and recently raised $1
> billion in a round of financing.
> "I need to show people I can create value in bad times," he said.
> "When people see what we can do, then they will come back."
> Of the $1 billion raised, two-thirds has already been spent, said
> Howard Lee Morgan, Idealab's vice chairman. Much of that money went
> toward buying larger stakes in companies in which Idealab has already
> invested, but needed to increase ownership so it could retain
> control, including CarsDirect.com. As for the remaining $300 million
> or so, "we have enough money for the next two to three years," Mr.
> Morgan said.
> According to Morten T. Hansen, an assistant professor of business
> administration at Harvard Business School, the median first round of
> financing for a start-up at an incubator is $690,000. But that does
> not take into account the additional money burned if a company has to
> stay under incubation longer than planned (say, for a third or fourth
> round of financing) or if jittery investors demand that an incubator
> commit money of its own as a show of confidence.
> "You can go through money quickly," Mr. Hansen said. "For the average
> incubator, that is expensive depending on how many ideas fail."
> In the old, time-honored approach to starting a business, start-up
> expenses used to be paid for by the entrepreneur (remember all those
> stories about plucky young companies financed on the founder's credit
> card?), or by a venture capitalist.
> But after the notion of "Internet time" caught on and made the old
> evolutionary approach to entrepreneurship seem as quaint as carbon
> paper and Dictaphones, incubators popped up as the sort of place
> where entrepreneurs could hatch their embryonic ideas while getting
> instant access to technical experts, marketing strategists and
> executive recruiters until their businesses matured and could thrive
> on their own.
> Of course, none of this came free.
> Generally, like some venture capitalists, incubators command a 25
> percent to 40 percent stake in a company, according to a study
> conducted by Mr. Hansen and his colleagues. And many of the
> incubators in the study required a fee along with an equity stake.
> Idealab, for its part, generates most of its own ideas so it is able
> to keep a larger equity stake than in cases where an entrepreneur
> brings an idea to the incubator.
> Innovative as the concept might have been in the early going, Mr.
> Hansen said that by now more than 8 of 10 incubators are providing
> the same basic services, like public relations and accounting. "It is
> a commodity," he said.
> Of the 400 or so incubators in existence today, he said, at least
> half have never hatched a company and will probably fail in the next
> 12 months. "They have no viability," he said, citing inexperience as
> a widespread problem.
> Another criticism voiced by several analysts is that some incubators
> that were formed more recently have focused too much on the Internet
> fashion of the moment. Often mentioned in this regard is the Internet
> Capital Group, which specializes in the business-to-business
> e-commerce market. As that sector has fallen out of favor, so have
> the companies that Internet Capital invested in - like Breakaway
> Solutions, a provider of e-business products, and Onvia.com, a
> marketplace to help small businesses buy and sell services and
> products. Shares in both companies have tumbled more than 90 percent
> since reaching 52-week highs. And Internet Capital has also suffered
> from the collapse of its own share price, making it difficult to use
> its stock as currency for acquisitions.
> "The size of the opportunity hasn't decreased," said Ken Fox, co-
> founder of Internet Capital. "But building companies is hard, and the
> Internet didn't make it any easier."
> In Idealab's case, it may have focused too much on Internet companies
> aiming their products or services at the consumer market.
> Idealab's portfolio of companies lets you buy almost anything on the
> Web - from pet products and cookware to bridal wear and cosmetics.
> But analysts say the failure of the beauty site Eve.com, which had
> almost all the makings of a winner - lots of traffic, $1 million in
> monthly sales and name recognition, but no profit - could foreshadow
> doom for the rest.
> "We crushed everyone in the market and it wasn't enough," Mr. Gross
> said. He said that in the future, Idealab would not limit the types
> of companies it would create or invest in.
> Mr. Hansen of Harvard contends that perhaps the most valuable service
> incubators can provide start-ups is access to a network of business
> relationships with more established companies. Some incubators
> already do that, he said, pointing to Hotbank, a Mountain View,
> Calif., company managed by Softbank Venture Capital, an affiliate of
> the big Japanese investment company Softbank.
> Hotbank gives entrepreneurs access not only to the usual incubator
> services, he said, but also to Softbank's roster of partners,
> including Yahoo and Cisco Systems. But only about one in four
> incubators are able to provide this kind of relationship network, Mr.
> Hansen said.
> In various ways, some incubators have begun to adapt to the new, less
> hospitable financial climate. Ecompanies, an incubator set up last
> year by Sky Dayton, founder of Earthlink, and Jake Winebaum, the
> former chairman of Disney's Internet unit, had trouble last summer
> raising a new round of financing. So it has formed a partnership with
> Sprint to develop wireless communications ideas. And last month,
> Ecompanies sold a stake in itself to Evercore Partners, a
> long-established, New York-based investment bank that was an adviser
> in the Viacom-CBS merger and has traditionally put money in
> old-economy ventures.
> In the meantime, Mr. Wetherell's company, CMGI, has put the brakes on
> acquisitions and is concentrating on consolidating what it already
> owns. In the last few years, CMGI has acquired 34 companies and
> started eight others, Mr. Wetherell said. But by next July, he
> intends to whittle those holdings down to 15 companies.
> Idealab's Mr. Gross acknowledges that he has learned hard lessons
> these last few months. "We've become very self-reflective," he said.
> "Maybe it was hubris to think it was easy."
> He said Idealab would no longer acquire other companies, a strategy
> he said had not paid off for his company anyway. But it is
> conceivable that, if he regains investor confidence, Mr. Gross would
> consider trying to take Idealab public again though he would probably
> not call it an incubator.
> "I believe I can take an `idea generator' public," he said. "Just not
> in this market."
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