Like many other technology-related developments, including the Internet itself, the “Internet incubator” phenomenon took root in the United States and has only recently started to catch on in Canada. But now a handful of home-grown companies are doing their best to make up for lost time, hoping to duplicate the kind of multibillion-dollar home runs that dot-com incubators south of the border have racked up in the past few years.
The Michael Jordan of this business — the one that more-recent firms look at with awe — is CMGI Corp. of Massachusetts. Founder David Weatherall has built a company with a market value of more than $25-billion (U.S.) by investing in Internet startups, some of which have become wildly successful. For example, after spending about $6-million on GeoCities, which it helped set up in 1996, CMGI made $1-billion when Yahoo bought it last year.
In 1995, the company bought 80 per cent of a search engine called Lycos for $2-million. Its 17-per-cent stake is now worth about $1-billion. NaviSite, a Web-hosting company CMGI started, went public in December at $14 and has been as high as $161 — CMGI owns 72 per cent, worth $2.7-billion. The company has used its high-flying stock to buy even more companies. It bought Web portal AltaVista for $2.3-billion and on-line ad firm Flycast for $700-million, and more recently snapped up auction site uBid.com for $400-million and e-commerce company Tallan Inc. for almost $1-billion.
Some critics, however, say CMGI’s strategy is a risky one. 3Com Corp. founder Bob Metcalfe told Business Week that “CMGI is using highly inflated stock to buy stocks that are highly inflated. . . . They’re playing with fire.” And not all incubators have CMGI’s success. idealab, run by software pioneer Bill Gross, has had fliers like GoTo.com and MP3.com, but has also seen one of its holdings — EToys — plummet to $14 from $86 and watched another, FreePC, fail to fly and eventually merge with PC maker eMachines.
That hasn’t stopped Canadian companies from jumping into this emerging industry, however. The local players include three public ones: Itemus Corp., recently emerged from the ashes of a junior mining company called Vengold; EcomPark, run by a former Yorkton Securities executive; and Exclamation Inc. There are also several funds, including Brightspark, run by Mark Skapinker and Tony Davis, founders of former fax software firm Delrina Corp.; XDL Intervest, run by Delrina founder Dennis Bennie and Second Cup founder Michael Bregman; Mosaic Ventures; and J. L. Albright.
A more recent addition to the club came from a surprising quarter. Counsel Corp., the former nursing home and pharmaceutical company owner, has built up a sizeable portfolio of Internet-based companies in the past six months or so. Counsel was an early investor (as was XDL Intervest) in Delano Technology, a provider of e-business software that went public earlier this month on the Nasdaq market. Delano started at $18 a share and zoomed as high as $50, which made Counsel’s stake worth $45-million.
Including Delano, Counsel has spent more than $45-million on technology investments since last November. Its portfolio now includes 42 per cent of VoCall Communications Corp., a telecommunications provider based in New Jersey; 40 per cent of Proscape Technologies, which sells corporate sales and marketing software; 33 per cent of New Jersey-based Impower Inc., an Internet marketing services company; and 4.6 per cent of Toronto-based Hip Interactive Corp., which sells software and video games over the Internet.
Mosaic Ventures has had a couple of success stories, including a company called Direct Hit, which Mosaic founder Vernon Lobo invested in early on, using financing from high net-worth investors such as the Chagnon family (owners of Groupe Vidéotron) and the Bronfman family.
Mosaic made a windfall profit when Direct Hit, an Internet-search technology company, was bought by search engine operator AskJeeves Inc. for $527-million last month. Mosaic put about $2-million into Direct Hit, a stake now worth more than $50-million. Mosaic also owns a stake in a U.S.-based company called Zefer Corp., which is expected to go public soon. In less than a year, from mid-1998 to 1999, Zefer went from being a Harvard MBA assignment to raising $100-million in funding, the largest such financing ever.
One of the earliest investments by J. L. Albright, run by a former investment banker and two partners, was a networking company called Isolation Systems, which was eventually sold to Shiva Corp. in 1998 for $50-million. Albright also had a stake in Inex Corp, an e-commerce firm it sold to Infospace.com for $37-million last year, and it has financed digital broadcasting company PixStream and on-line retailer GroceryGateway.com.
Exclamation Inc. was set up by the founder of website-design company CyberPlex, and its current stable of investments includes San Francisco-based Bigtree.com, an on-line office products company; Vancouver’s ThinApse Corp., which rents software on-line; an on-line gaming company called Exponential Entertainment, and Points.com, which is trying to create an Internet “portal” for loyalty-reward programs such as Air Miles. Exclamation went public on the Canadian Venture Exchange earlier this month.
Itemus, meanwhile, only just launched itself as an incubator, using the management expertise of former Hummingbird Communications executive Jim Tobin and Anthony Iantorno, a former staffer with CMGI Corp — but it says it has more than $125-million (Canadian) available that it’s willing to spend. Judging by the number of firms already chasing the dot-com boom, it looks as though the Internet startup business in Canada is heating up.