Dreaming Big In A Period of Caution

Thanks to last month’s dual corrections in the Internet stock market and
the recent trend toward less spectacular ‘Net IPO debuts, the common
wisdom these days is that investors are no longer willing to blindly
hitch their wagon to any company sporting an “e-” prefix or “.com”
suffix.

This latest bout of alleged sobriety among cyber-investors, however, has
failed to dissuade several companies with short track records and
minimal revenues from pursuing bold plans to raise millions through a
public offering of stock.

Two of the most ambitious recent bids come from E2Enet.com and Internet
Capital Group (ICG), each of which would like to become, in their own
fashion, the next CMGI.

While its current roster of portfolio companies include an online
auction network, a gift-giving e-commerce site and an urban online
entertainment network, E2Enet.com, as the name implies, really wants to
fund start-ups engaged in business-to-business e-commerce. For its money
and advice, E2Enet.com will grab at least 25% of a company and a board
seat.

While disclosing neither how many shares it wants to sell nor a proposed
price range, E2Enet.com’s S-1 filing from Monday reveals that that
company hopes to raise $172.5 million with its IPO (trading on Nasdaq
under the symbol ETOE).

That makes it one of the largest Internet offerings of the spring,
exceeded only by Rhythms NetConnections, which raised $197 million when
it went public on April 27, and ICG, which filed on May 11 to raise $211
million.

While ambition is admirable, E2Enet.com appears to be heading for the
public trough exceedingly early. Here’s how the company, which has all
of nine employees, sums up the situation in its S-1 documents: “Our
strategy may not be successful because we have no track record.”

Not exactly a siren song for Internet investors purportedly in the cool
grip of rationality and reason, but an accurate statement nonetheless,
for E2Enet.com began operations only last September and has zero
revenues to date. (In fact, none of the four companies it has a stake in
are open for business yet, so they too show no income.)

What E2Enet.com really wants is to create a venture capital fund using
stock proceeds, rather than starting a venture fund in the traditional
way by soliciting large institutional investors such as college and
retirement funds.

If you’re E2Enet.com, that’s a reasonable strategy. If you’re an
investor, on the other hand, you’re being asked to speculate based on no
real data. A tough sell, especially when you can invest in dozens of
other Internet companies that, if not yet making a profit, have proven
they can execute on a business plan (if not turn a profit).

BT Alex. Brown is the sole underwriter for E2Enet.com’s IPO.

At least Internet Capital Group has some revenue — $3.1 million in
1998, nearly 300% better than the previous year’s $792,000.
Unfortunately, that money comes primarily from ICG’s shares in
VerticalNet, despite its having holdings in nearly 30 companies. Among
those in ICG’s portfolio are Bidcom, Deja.com and Arbinet.

Venture capital firms often espouse the virtues of synergy among their
portfolio companies – Kleiner Perkins Caufield & Byers refers to it as
“keiretsu” – but ICG appears to aspire to something more lasting and
complex. The company’s goal is to integrate its portfolio companies – or
“partners” – into a collaborative network of business-to-business
product and services vendors.

That’s a tough trick to pull off, because in the gold rush atmosphere of
the Internet, companies are averse to being locked into long-term
relationships. Flexibility rules on the ‘Net, and there’s no reason to
assume that a company like BidCom, which does construction project
planning, will want to use transaction processing software supplied by
ClearCommerce, another ICG company, if it can get a better deal
elsewhere.

ICG plans to trade on Nasdaq under the symbol ICGE. Lead underwriter isMerrill Lynch.


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