One company started as an incubator to hatch fledgling onlinecompanies. The other invested in new and already-established Internet firms. They both had two things in common.
First, they were among the most widely praised models of the New Economy.Second, they were hit, and hit hard, by the implosion of the dot-com sector. Now, incubator Idealab and investor CMGI are in the fight of their lives to survive.
The questions facing these companies are big ones. Can Idealabgenerate enough brainstorms to survive the sluggish economy, not to mention a shareholder lawsuit? And can CMGI amount to more than the sum of its four letters and irrational exuberance?
Idealab: Slowly Climbing Up
Idealab, which launched early Internet pioneers CarsDirect and CitySearch, among others, creates startups internally and provides them with such functions as corporate finance, business development and recruiting. In exchange for its efforts, Idealab takes large equity stakes in its offspring.
But the company ran into big trouble. Idealab poured more than US$600 million into internally developed dot-coms prior to its planned initial public offering (IPO), which was pulled due to unstable market conditions. And some of the company’s earlier progeny — such as eToys, cosmetics e-tailer Eve.com and home-improvement concern HomePage.com — have long since gone to the dot-com graveyard.
These days, Idealab has about 20 companies in its portfolio, but not all ofthem are directly related to the Internet. Evolution Robotics, for example,has a new technology to make personal robots much more interactive and ableto work in real-world home environments.
In terms of financials, the company has about US$100 million in publicsecurities from the companies it created, about $300 million in cash fromnow-public companies that Idealab sold its shares in, and about $200 millionto $400 million worth of private companies in its portfolio, founder and president Bill Gross told the E-Commerce Times.
Riding Out the Crash
After the stock market imploded in 2000, Idealabimplemented a plan to turn around its business, Gross said. The company carried out many of the usual cutbacks in personnel and offices, but it also pledged to launch fewer companies than before — three or four per year is an informal goal now, compared with 10 per year before the crash. Idealab’s portfolio companies made cutbacks as well, and they faced new ground rules established by their parent: They had to be profitable before they were considered for an IPO, and they had to have a “very large technological impact” on business.
The move away from pure-play Internet companies was also part of theturnaround plan. “When we started Idealab in 1996, the kinds of companiesthat could get easily funded were Internet companies,” Gross said. “So when theInternet market crashed in 2000, we said we should do Internet companies ifwe can do an Internet idea, like Overture, but we shouldn’t limit ourselvesto Internet companies — we should do great ideas.”
Gross credits his company’s plan for creating a strong capital base and lowexpense rate, as well as for creating and maintaining new companies that aregrowing in value and making an impact on the marketplace. He thinks the pieces are now in place for Idealab to succeed and generate positive returns for its shareholders.
Trouble from Within
But despite Gross’ grand plans, a group of minority shareholders this monthfiled the latest in a string of lawsuits against Idealab, claiming that Gross and other company officers and directors misappropriated corporate assets for personal purposes. Previous lawsuits have been dismissed because of a lack of evidence, but plaintiffs now claim they have the documentation they need.
Gross called the legal filing a “nuisance suit that will go away soon.” Hecharacterized the action as a negotiation tactic being used by some shareholders to recoup their money from the company’s last investment round. For his part, Gross said he wants to give all of his shareholders their money back in the form of positive returns on investment.
CMGI: On a Comeback?
CMGI is different fromIdealab. After beginning life as a database and literature fulfillmentcompany, founder David Wetherell made huge sums of cash from Internetinvestments in the mid- to late 1990s. Like Idealab, though, the company took a huge hit as a result of the crash of 2000.
By December 2001, the company was wrestling with questions aboutits very survival, CMGI president and CEO George McMillan told theE-Commerce Times. Could it pare back fast enough to survive? Could it keep hold of its cash? Could it keep its employees for a turnaround itdesperately needed?
To move past this crisis point, the company took drastic steps. Last August, in a high-profile retreat, it withdrew from a stadium-naming pact with the New England Patriots for a new facility near Boston.
Today, the situation is much different and brighter, McMillan said. CMGI is concerned with building on its new core businesses, re-investing in those businesses as well as new ones, and maximizing cash flow and operating income once it reaches breakeven.
The company says it will reach that goal on a pro-forma operating basis in its third fiscal quarter ending April 30th, following an anticipated pro-forma operating loss of $10 million to $15 million in its second quarter. It expects second-quarter revenue in the $150 million to $155 million range, and estimatesit will have $169 million in cash, cash equivalents and marketable securities at the end of Q2.
From Net Investor to Operating Company
Probably the biggest mission for CMGI was to transform itself froma concern that invested solely in Internet firms to a business that more closelyresembles an operating company by “building a highly disciplined, clearly streamlinedoperating culture run by division heads who had experience runningbusinesses,” McMillan said.
As part of the turnaround plan, McMillan said he had to set criteria onwhich businesses to keep and which to sell, focusing on far fewer businesses in the process. CMGI also narrowed its attention, primarily concentratingon e-business and supply chain management, plus a limited subset of enterprise software and services firms, including AltaVista.
“We’re running this business tightly and running our companies well,whether they’re sexy or not,” he said. “We’ve always been long on sexappeal. Right now, what’s sexy is cash positive.”
Another quality that is attractive to the company and its shareholders is profitability,which is CMGI’s number one goal, CFO and treasurer Thomas Oberdorf told theE-Commerce Times. To that end, Oberdorf has cut a lot of debt through several measures, including canceling the stadium deal.
Not So Fast
Although both companies’ head honchos are quick to praise their own turnaroundplans and chances for success, at least one analyst thinks they do not have a lot to crow about. IDC research manager Jonathan Gaw told the E-Commerce Times that CMGI and Idealab have similar problems.
“Their portfolio companies aren’t performing particularly well,” he said.”They’re both facing all sorts of investor lawsuits — that can’t help. Bothof them have taken hits to their brand name, and they’re losing employees.”
Gaw said the companies in CMGI’s portfolio are “second-run” firmslike AltaVista, which “had itsmoment, but the moment is gone,” and uBid.Also, CMGI has had limited success in the past with its investments, he added. “With that history in mind, how do you attract new investors?”
Idealab’s big problem, he said, is the same thing that Gross tagged as the company’s new strength: It has branched out beyond the Internet space. “The problem iswhen you start to do that, you’ve diluted the message you’ve got for yourinvestors,” Gaw said. For example, he noted, investors who buy into an international fund do not want to see their money sunk into domestic firms. “That’s not why they bought the fund.”
It’s the Economics
Looking into the future, however, Gaw said CMGI and Idealab are not necessarilyheaded toward the dot-com landfill. “If they can make it to next year, witha better economy and maybe investors loosening up a bit, maybe some of theircompanies will do a little bit better,” he noted.
He also was quick to point out that it only takes one or two portfoliosuccesses out of, say, 10 firms for a company like CMGI or Idealab to eke out a profit. “So it is just a function of coming across the right one –betting on the right horse.”
Indeed, that is one element CMGI and Idealab are counting on for their success. The world may have changed, but these two companies are not sitting still. If they can find the right recipefor investment, they may have a future — and it may even be bright.