Everybody Wants to Get Into the Venture Act Dave Marino-Nachison (TMF Braden)
December 22, 1999
Hotcha! Enthralled by the never-say-down stocks of e-incubators CMGI (Nasdaq: CMGI) and Internet Capital Group (Nasdaq: ICGE), companies are flocking to the Internet venture business like Kleenex salesmen to The Schnoz himself. As a result, there are about as many ways for investors to play the sector as there are comic bits in which Jimmy Durante butchers the English language.
Best known are the big-dollar pure plays such as CMGI and Internet Capital Group. Let's throw Safeguard Scientifics (NYSE: SFE) into the mix as well, since it's a stock we've written about quite a bit.
But there are plenty of other ways to get involved, and the attraction is obvious. Companies in the venture business hope the cash they use to get new businesses rolling will eventually pay off many times over when they sell shares in those companies either to the public or to other interested parties. The practice, in theory, lets venture capitalists with new enterprises running low revenues and long losses rack up earnings out the wazoo even as their assets are just establishing their footing (see this old CMGI article for more).
What investors are essentially paying for here, though, is not so much a company and its operations but a management that has a sense for how, where, and when to allocate capital, evaluate business models, and gauge market sentiment. It's a different sort of risk than many investors are accustomed to, though the potential rewards are significant to say the least. But today's movement of venture companies to the public markets means investors can get a piece of the action with ease. Two of today's hot stocks highlight the interest in these opportunities.
Shares of Harris & Harris Group (Nasdaq: HHGP) jumped more than 40% today. The stock has risen rapidly over the last several weeks as the company has kept investors abreast of developments at its 12-company suite of investments, which includes stakes in online scientific equipment marketplace operator SciQuest.com (Nasdaq: SQST) and e-business software company Silknet Software (Nasdaq: SILK).
Hoping for a pop is Wit Capital (Nasdaq: WITC), which we covered in November when it bought SoundView Technology to bolster its research offerings. Investors are also watching everything from Winfield Capital (Nasdaq: WCAP) and FrontLine Capital (Nasdaq: RSII) -- formerly Reckson Services Indus. -- to lightly traded over-the-counter stocks like Cozmoz.com.
But venture capital isn't just the province of venture capitalists, as many companies have decided they want to cash in on the market's enthusiasm for fast-growth start-up businesses in a move not only to fire up revenues through investment-for-business partnerships but to reclaim investors' attention during bullish times.
Telecom billing and customer management systems developer Intasys Corp. (Nasdaq: INTA), meanwhile, rose nearly 30% today as its recently launched "incubator" division celebrated the first IPO filing of its investments: interWAVE Communications, a compact wireless systems developer, which filed to raise more than $86 million by selling 7.5 million shares to the public. Intasys owns 715,000 shares of the company, plus warrants to buy another 715,000 for a buck apiece.
Intasys is anything but alone in branching out. Just this month, we've noted in Foolish news columns how embattled information technology consultant Cambridge Technology Partners (Nasdaq: CATP) plans an initiative to build and fund start-up application service provider companies or e-business firms with eyes toward taking them public. And IT services giant EDS (NYSE: EDS) said even more recently it will establish a $1.5 billion fund for investing in Internet and business-to-business companies.
Individual investors trying to profit from the recent flood of money into new enterprises through publicly traded venture investors or companies with investment arms have a bevy of factors to consider as they need assets not only a company as a whole but its assets and its ability to develop them into viable businesses -- at least long enough to sell the shares. A good place to get started is always the Fool's message board: Nico's Internet Nook might be a good place to look for more information.
Nico's Internet Nook
Fool Plate Special, 11/1/99: "Wit Capital Buys Soundview"
Fool on the Hill, 4/20/99: "My Way to Connect"