The Day Ahead: Sizing up the Internet incubators

And who can blame them? The Internet incubator tagline is a surefire way to boost your financial standing on Wall Street.

It's no wonder why being an Internet incubator -- part mutual fund, part publicly traded venture capital firm -- is becoming so popular. CMGI, the granddaddy of Net incubators, was among ZDII's top tech stocks for 1999. And upstart Internet Capital Group was the top performing IPO for 1999. And we'd be remiss if we didn't mention Safeguard Scientifics, which spun off Internet Capital Group. Safeguard Scientifics hasn't exactly underperformed the market.

Both Safeguard and Internet Capital made out nicely from the IPO of online cattle auctioneer eMerge Interactive Friday.

With that type of performance, a lot of companies are trying to replicate the success of CMGI and company. Creative Technology, which has invested in a bunch of start-ups, is reportedly mulling a spin-off of its venture capital arm. Creative is trying to become Korea's version of Softbank, which owns stakes in Ziff Davis and ZDNet, the parent of ZDII.

Softbank, which is traded in Tokyo, also owns stake in Yahoo!, E-Trade among others.

Meanwhile, Harris & Harris Group has had its 15 minutes of Internet incubator fame courtesy of a stake in SciQuest. Harris & Harris owns 461,036 shares of SciQuest. London Pacific Group, which has a venture capital group, also has made some noise in recent months.

Internet.com shares were saved after the company announced a venture capital fund. Internet.com went public in June priced at 14, fell to about 9 and rocketed to 74 on word of its VC plan. In press releases, Internet.com said it "continues to follow the path of CMGI and Internet Capital Group." Investors have cheered the VC move and Internet.com was able to grow its war chest via a follow-on stock offering last month.

Among established incubator players, there are no bargains to be had, but that's the price you pay for a good track record. Here's our list of top US publicly-traded venture capital firms.

1. CMGI -- Yes it's pricey. And yes it's basically the old kid on the Internet incubator block, but it's hard to argue with the track record. Recent hits include SilkNet and Engage Technologies and old hits include Lycos and Geocities. In addition, the company will soon be launching an IPO for AltaVista and has acquired a string of Internet marketing companies that were recently handed off to Engage. CMGI when finished will be among the leaders in Internet reach and marketing and own stakes of more than 100 Internet companies. It is also launching a business-to-business venture fund.

2. Internet Capital Group -- It's the new kid on the publicly traded VC block, but it is still impressive. ICG is focused on business-to-business e-commerce. With 45 business-to-business e-commerce partner companies, ICG is a player. It owns stakes in VerticalNet, Breakaway Solutions and US Interactive. Also profited when MatchLogic sold out to Excite and Tradex Technologies sold out to Ariba. May become the premier Internet incubator stock if CMGI morphs too much into an operating company. Many folks think ICG is a CMGI clone, a premise that rankles officials. Keep an eye on ICG's track record in the future -- eMerge could have been the first of a long list of IPO hits.

3. Safeguard Scientifics -- It's the IT incubator that owns a stake in ICG, the Internet incubator. There's a lot of incubating going on. Safeguard (chart) owns 14 percent of ICG and 13 percent of Cambridge Technology Partners among others. Safeguard also has a solid stable of private companies that may go public. If you owned Safeguard shares, you could have received eMerge shares at the IPO price. CMGI has a similar program.

4. Internet.com -- The company, which competes with ZDNet on the content side of its business, has made a lot of investments, but hasn't brought anything public yet. Recent investments include LatinVision.com, B2BExplorer.com, LawBooks.com, Foodservice.com and Howstuffworks.com. The company said it is focusing on early stage business-to-business company. Internet.com ranks lower on our list because it's too early to determine the pay-off from any of its investments. Internet.com has also bolstered its content with a series of acquisitions. More importantly for Internet.com shareholders is that analysts are starting to notice the recent moves. Robertson Stephens recently picked up coverage of the stock with a "buy" rating.

"We believe that Internet.com has an attractive and high-growth business model with a relatively low cost structure," said Michael Graham, an analyst at Robertson Stephens, which wasn't an underwriter for the Internet.com IPO. "We believe the acquisition and venture strategy could add significant value that is not yet accounted for in our model."

5. Creative Technology -- Given the company's track record, investors should tread lightly here. But the company has invested in some key startups such as Sino.com, a Chinese portal, Hifi.com, an e-tailer, Mediaring.com, a Singapore-based Internet telephony provider. Mediaring went public in November and trades on the Singapore Stock Exchange. If Creative Technology follows through with a VC unit spin-off, look for shares to surge from its current price. Creative topped expectations in its most recent quarter courtesy of investment gains from its VC fund.

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