For Incubators, This Street is Paved with Stone

It looked so easy – and fun! – just a few short months ago. Scare up some investment money, hang a shingle in cyberspace and call yourself an Internet incubator. Before long, the world – in the form of a red-hot IPO market – will be beating a gold-plated path to your door.

Now Internet incubators are experiencing a different kind of beating on Wall Street. Shares of CMGI , the flagship public ‘Net incubator, are down 73% for the year through trading early Tuesday. B2B incubator specialist Internet Capital Group has plunged 82% in that same period. Neither shows any signs of recovering soon.

Then there’s Grove Strategic Ventures , or GSV, formerly known as, a floundering e-tailer (sorry for being redundant). In February, with shares trading in the $5 range, the company announced it would abandon e-tail operations and begin life anew as a venture fund for Internet start-ups.

So enthused were investors that GSVI stock since has dropped to less than 50 cents per share, and the firm in June was threatened by Nasdaq with de-listing.

In light of this recent market trend, it’s small wonder that Internet incubator divine interVentures is hesitant to take the plunge into the public market. For the seventh time since announcing IPO plans late last year, divine has delayed its launch date amid signs that the offering will flop.

What signs are those? Well, the offering has been trimmed from the initial $250 million to $136 million, while the proposed share-price range has been cut to $9-$10 from $13-$15. In addition, divine CEO Flip Filipowski recently dumped underwriter Credit Suisse First Boston in favor of Robertson Stephens.

GSV has been advised to push back its IPO until the fall, when market conditions (presumably) will be better. But I don’t think it will matter when DVIN goes public because investors no longer see incubators as can’t-miss early-stage opportunities.

Last year, when the wealth-producing potential of the Internet seemed unlimited, stocks such as CMGI and ICGE represented a bet on the future of the ‘Net. Buy shares of one or the other, and you have an instant portfolio of diversified stocks, hand-picked by real Internet investment experts.

Now the market finally appears to reading those S-1 documents from companies such as divine. Here’s what the divine filing from late last year said:

“Because we have only recently begun operating and because many of our partner companies are in the early stages of their development, we are unable to provide you with significant data upon which you can evaluate our prospects. Further, our management has not previously actively managed, operated or promoted Internet companies, and we cannot assure you that they will be able to do so effectively.”

Last year, moonshot-besotted investors were likely to interpret the above words (if they even read the prospectus) in the following manner: “This is SEC-mandated boilerplate, blah blah blah, we’ll all get rich anyway.”

Here, though, is a more accurate translation: “We offer no guarantees that divine’s management or its early-stage portfolio companies know what they’re doing. You’re taking a huge risk here.”

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