Venture capital is the promised land for publicly traded tech companies as everyone these days wants to be know as an "Internet incubator" and cash in on a hot IPO market. And who can blame them? The Internet incubator tagline is a surefire way to boost your financial standing on Wall Street.
It's no wonder why being an Internet incubator -- part mutual fund, part publicly traded venture capital firm -- is becoming so popular. CMGI (Nasdaq: CMGI), the granddaddy of Net incubators, was among ZDII's top tech stocks for 1999. And upstart Internet Capital Group (Nasdaq: ICGE) was the top performing IPO for 1999. And we'd be remiss if we didn't mention Safeguard Scientifics (NYSE: SFE), which spun off Internet Capital Group. Safeguard Scientifics hasn't exactly underperformed the market.
Internet incubators: Is CMGI the best of the bunch?
Both Safeguard and Internet Capital made out nicely from the IPO of online cattle auctioneer eMerge Interactive (Nasdaq: EMRG) Friday.
With that type of performance, a lot of companies are trying to replicate the success of CMGI and company. Creative Technology (Nasdaq: CREAF), which has invested in a bunch of start-ups, is reportedly mulling a spin-off of its venture capital arm. Creative is trying to become Korea's version of Softbank Corp., which owns stakes in Ziff Davis and ZDNet (NYSE: ZDZ), the parent of ZDII.
Softbank, which is traded in Tokyo, also owns stake in Yahoo! (Nasdaq: YHOO), E-Trade (Nasdaq: EGRP) among others.
Meanwhile, Harris & Harris Group (Nasdaq: HHGP) has had its 15 minutes of Internet incubator fame courtesy of a stake in SciQuest (Nasdaq: SQST). Harris & Harris owns 461,036 shares of SciQuest. London Pacific Group (NYSE: LDP), which has a venture capital group, also has made some noise in recent months.
Internet.com (Nasdaq: INTM) shares were saved after the company announced a venture capital fund. Internet.com went public in June priced at 14, fell to about 9 and rocketed to 74 on word of its VC plan. In press releases, Internet.com said it "continues to follow the path of CMGI and Internet Capital Group." Investors have cheered the VC move and Internet.com was able to grow its war chest via a follow-on stock offering last month.
Among established incubator players, there are no bargains to be had, but that's the price you pay for a good track record. Here's our list of top U.S. publicly-traded venture capital firms.
CMGI when finished will be among the leaders in Internet reach and marketing and own stakes of more than 100 Internet companies. It is also launching a business-to-business venture fund.
Many folks think ICG is a CMGI clone, a premise that rankles officials. Keep an eye on ICG's track record in the future -- eMerge could have been the first of a long list of IPO hits.
If you owned Safeguard shares, you could have received eMerge shares at the IPO price. CMGI has a similar program.
Internet.com has also bolstered its content with a series of acquisitions. More importantly for Internet.com shareholders is that analysts are starting to notice the recent moves. Robertson Stephens recently picked up coverage of the stock with a "buy" rating.
"We believe that Internet.com has an attractive and high-growth business model with a relatively low cost structure," said Michael Graham, an analyst at Robertson Stephens, which wasn't an underwriter for the Internet.com IPO. "We believe the acquisition and venture strategy could add significant value that is not yet accounted for in our model."
Creative topped expectations in its most recent quarter courtesy of investment gains from its VC fund.