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Net Incubators Can't Stand the Heat

By Keith Regan
Nov 13, 2000 12:00 AM PT

If you think it's a bad time to be a stuck-in-the-mud dot-com, imagine holding the bag for about 70 of them.

Net Incubators Can't Stand the Heat

That's the situation that high-tech incubators Internet Capital Group (ICG) and CMGI find themselves in right now. But they best not look to me for pity.

Aggregating dozens of dot-coms seemed like a great idea when dot-coms couldn't miss, but that's exactly when it was the worst idea. If an e-commerce company needs to be incubated, that's a sure sign that something is wrong. In other words, for every healthy egg in that incubator, there were 11 weaklings making up the dozen.

If a fledgling startup couldn't fly on its own, the last thing it needed was extra time, extra money and extra access to customers. More often than not, all that incubation period did was provide a false sense of success. And how fleeting it was.

Why Incubate?

Incubators do make plenty of logical sense. If you're going to invest in a startup, why not give it every chance to succeed. That might mean providing it with office space, or access to experienced management, or even access to the customers of other companies in which you've invested.

But make no mistake. The driving force behind these incubators was greed. The CMGIs and ICGs had dreams of multiplying the potential windfall from a single dot-com over and over, and then adding value to that windfall by overlapping offerings. The incubators intended to become Internet powerhouses, with their eyes on dominance in certain segments.

The idea seemed inspired, an improvement on venture capital because the returns stood to be larger, the stakes in growing companies bigger. The incubators flew high, their stocks riding the tech wave. At least for a while.

Good Start, Bad Middle

Then it became clear that the wave was something of an illusion. Investors scratched the surface of dozens of incubating dot-coms and found the chances of profits anytime soon were slim indeed.

So then incubators started making tough decisions, ordering their charges to shape up, cut costs and get profitable. The result? Layoffs at CMGI companies like MyWay.com and Engage and promises of sweeping restructuring. And now, the same from ICG.

Ironically, the plans at both companies are to focus on a core of strong companies as a way of providing shareholder value. Novel idea, that. But why only now? The answer of course is necessity. For years, there was no need to focus efforts -- the more the better was the mantra.

Nature vs. Nurture

Now the incubators aren't about to cut all of their startups loose. They'd be all but out of business. But they also shouldn't continue to cling to the notion that by selling their services and sharing customers, they are giving companies a head start on life. The true test of longevity is whether a company can grow itself, find customers and generate revenue on its own.

It's time to take the training wheels off all of the e-commerce companies and let them try to balance on their own. If they can't, they don't deserve to be propped up any longer. No one gains from that. If e-commerce is going to grow up and mature, the companies have to do the same.

What do you think? Let's talk about it.


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